Do you remember the early 1980s? I do. It was an odd time. Right before Reagan's policies kicked in and saved the United States, we hit a period of inflation that was both strange and unprecedented. Almost overnight, everything doubled in expense. Seemingly without anyone noticing, everything changed and a new normal appeared and everybody acted like nothing had happened. I think we're going through that again.
Normal inflation is a couple percentage points a year. What was $1 this year becomes $1.03 next year and $1.08 the next. Ho hum. In a bad year, $1 become $1.25 and people complain. In the 1930s in Germany, inflation was insane and 1 deutschmark became 10,000 overnight... and the system collapsed. But in the 1970s, something stranger happened. Overnight, $1 became $3 and no one noticed. The price of a cheap car went from $3,000 to $15,000 within months. Middle class houses went from $80,000 to $200,000. Food items went from $0.10 to $0.99. And then inflation stopped. Even stranger, nobody noticed. Everyone just took it as the new normal and moved on with the new numbers as if these had always been the prices for things.
Part of the reason no one cared was that wages went up with the change in prices. In fact, wages doubled from the late 1970s to the mid-1980s and Reagan created massive numbers of new high-paying jobs (like defense jobs) which took people to new income brackets. Still, it was funny not to hear people in shock about what X cost only a few months ago. I think the effect ultimately was what you see when people come into money: they stop caring what things cost. With everyone suddenly richer, they didn't care that everything was no more expensive.
I think we're in that kind of moment again. Housing prices have doubled in the past half-decade with a 25% rise last year alone. Food has more than doubled. Everything is getting crazy expensive. How expensive? Consider the Big Max index, my favorite indicator of inflation between countries. The Big Mac index assumes that McDonalds does three things: (1) sources locally, (2) obtains goods and supplies from a broad cross-section of society, and (3) drives vicious bargains. Thus, what it pays is a good indication of what living costs locally. And what it charges between countries is a great comparison of the actual cost of things. Thus, you can find out what a currency is really worth by comparing the prices of Big Macs in the different countries.
This works just as well looking backwards in time as it does across countries. The cost of a Big Mac meal was around $7 just 5-7 years ago. Now it's $11. Expect it to be $12-13 by the end of the year. If the $15 minimum wage hits, expect McDonalds to add another $1-$3 surchage. That's basically a doubling. And don't forget about shrinkflation. The media has finally discovered this, that products are getting smaller but being kept in the same packages even as prices rise. That means inflation is even worse than the dollars indicate. (As an aside, I'm pretty sure McDonalds has cut 1-3 ounces out of their drinks, which works out to tens of millions of ounces saved a day.)
People are noticing the inflation and the shrinkflation (though less so) but no one seems to realize the scope. The government is taking about 6%. Most people talk about 1-2 items in isolaton. But few have put it all together. The entire US market just jumped up double what it had been.
Now comes the catch... salaries have not kept up.
Liberals have been pushing the $15 minimum wage, but that only affects a tiny number of people and no one above them is getting pushed up equally. Lots of good liberals are quite pissed to find out that their teenagers are suddenly making nearly as much as they are after decades of work. People I know at big established firms are getting the usual 3-4%. Social Security might get as high as 6%.
That 6% is a catch too. Because the government says there is 6% inflation, few companies will give more than that as a cost of living raise, even if the real number is 200%. This is bad. Why?
First, it means that workers get screwed. Your real wages are about to get crushed because your raise will never keep up with inflation. Sure, your company will be more competitive because you just got cheaper, but you are the one paying for their luck.
Secondly, this means that things like investments and loans are all priced wrong and if you end up on the wrong side, you will get destroyed. If you own a long term investment, it probably just lost a lot of value.
Third, it means everyone's standard of living is about to drop as things become massively more expensive. Middle and lower middle class wages will not be able to buy homes.
Fourth, it means retirees are going to get crushed.
Fifth, it means we all need to rethink the cost of things. It means we need to adjust mentally to what things should cost, what is too much, and what is not too much. It means not knowing what you can really afford at the moment. It makes budgetting super hard -- it's going to be a bit like going to a foreign country where the prices seem all right until you realize that the currency difference make them all kind of screwy and you don't really know if you're being raped or not.
Thoughts?
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Normal inflation is a couple percentage points a year. What was $1 this year becomes $1.03 next year and $1.08 the next. Ho hum. In a bad year, $1 become $1.25 and people complain. In the 1930s in Germany, inflation was insane and 1 deutschmark became 10,000 overnight... and the system collapsed. But in the 1970s, something stranger happened. Overnight, $1 became $3 and no one noticed. The price of a cheap car went from $3,000 to $15,000 within months. Middle class houses went from $80,000 to $200,000. Food items went from $0.10 to $0.99. And then inflation stopped. Even stranger, nobody noticed. Everyone just took it as the new normal and moved on with the new numbers as if these had always been the prices for things.
Part of the reason no one cared was that wages went up with the change in prices. In fact, wages doubled from the late 1970s to the mid-1980s and Reagan created massive numbers of new high-paying jobs (like defense jobs) which took people to new income brackets. Still, it was funny not to hear people in shock about what X cost only a few months ago. I think the effect ultimately was what you see when people come into money: they stop caring what things cost. With everyone suddenly richer, they didn't care that everything was no more expensive.
I think we're in that kind of moment again. Housing prices have doubled in the past half-decade with a 25% rise last year alone. Food has more than doubled. Everything is getting crazy expensive. How expensive? Consider the Big Max index, my favorite indicator of inflation between countries. The Big Mac index assumes that McDonalds does three things: (1) sources locally, (2) obtains goods and supplies from a broad cross-section of society, and (3) drives vicious bargains. Thus, what it pays is a good indication of what living costs locally. And what it charges between countries is a great comparison of the actual cost of things. Thus, you can find out what a currency is really worth by comparing the prices of Big Macs in the different countries.
This works just as well looking backwards in time as it does across countries. The cost of a Big Mac meal was around $7 just 5-7 years ago. Now it's $11. Expect it to be $12-13 by the end of the year. If the $15 minimum wage hits, expect McDonalds to add another $1-$3 surchage. That's basically a doubling. And don't forget about shrinkflation. The media has finally discovered this, that products are getting smaller but being kept in the same packages even as prices rise. That means inflation is even worse than the dollars indicate. (As an aside, I'm pretty sure McDonalds has cut 1-3 ounces out of their drinks, which works out to tens of millions of ounces saved a day.)
People are noticing the inflation and the shrinkflation (though less so) but no one seems to realize the scope. The government is taking about 6%. Most people talk about 1-2 items in isolaton. But few have put it all together. The entire US market just jumped up double what it had been.
Now comes the catch... salaries have not kept up.
Liberals have been pushing the $15 minimum wage, but that only affects a tiny number of people and no one above them is getting pushed up equally. Lots of good liberals are quite pissed to find out that their teenagers are suddenly making nearly as much as they are after decades of work. People I know at big established firms are getting the usual 3-4%. Social Security might get as high as 6%.
That 6% is a catch too. Because the government says there is 6% inflation, few companies will give more than that as a cost of living raise, even if the real number is 200%. This is bad. Why?
First, it means that workers get screwed. Your real wages are about to get crushed because your raise will never keep up with inflation. Sure, your company will be more competitive because you just got cheaper, but you are the one paying for their luck.
Secondly, this means that things like investments and loans are all priced wrong and if you end up on the wrong side, you will get destroyed. If you own a long term investment, it probably just lost a lot of value.
Third, it means everyone's standard of living is about to drop as things become massively more expensive. Middle and lower middle class wages will not be able to buy homes.
Fourth, it means retirees are going to get crushed.
Fifth, it means we all need to rethink the cost of things. It means we need to adjust mentally to what things should cost, what is too much, and what is not too much. It means not knowing what you can really afford at the moment. It makes budgetting super hard -- it's going to be a bit like going to a foreign country where the prices seem all right until you realize that the currency difference make them all kind of screwy and you don't really know if you're being raped or not.
Thoughts?