An interesting conversation on wealth and inflation came up today with a client, and I ran some very simple numbers to illustrate some of the challenges we face and of course, what we might have to do about it in order to improve our conditions, at least personally. It started with a conversation about wealth gaps and they asked about the wealth of an Australian billionaire - her wealth has changed from 13B in April 2020, to 23B in April 2021 - that is a 75% upward shift.
This isn't uncommon in the 0.1% however, as the majority of the handouts and the restrictions have worked in their favor, transferring massive amounts of wealth into their pockets through various channels. But while maybe not as extreme, it isn't uncommon in the top 10 to 20 percent either, as they are invested and investments are performing well. This means that there is a massive amount of disposable income that is looking for wealth-generative homes. This pushes up for example, the cost of housing, which drives inflation and living costs upward too.
Visualizing the problem
But, lets have a look at some illustrative numbers.
For example, my client earns about 40K euros a year and last year, got a 1.5% raise, which is around what he has got most years, but I will use 2%. Assuming that he needs all of this to maintain his current standards of lifestyle, we can play a bit. The inflation rate in Finland is currently 2.5% - but I will use 5% as it is easier to calculate and it doesn't matter, as this is example only. And, since this has changed by 10% in the last month, it might not be too far away from 5% in a year from now anyway. Inflation means the purchasing power of his income is decreasing.
Rough example 1
Year0
40,000
This is all used to live.
Year1
40,000
Raise 2% = 800€
Inflation 5% = - 2000
He has a 1200€ gap next year.
How does he close that gap?
Let's say he decides not to take his wife on their yearly week trip to Estonia.
Fixed. But there is a lifestyle change.
Year2
40,800
Raise 2% = 816€
Inflation 5% = -2100
He has a 1284€ gap and has to give up the trip, plus find 84€
Year3
41,616
Raise 2% = 832€
Inflation 5% = -2205
He has a 1373€ gap and has to give up the trip and find 173€
While the 2% earnings compound over the years, so too does inflation. If the trip was 1200 to start with, it is now almost 1400€. This means that while in year 0 he could afford the trip, by year 3, the payrise only covers about half a trip. It only gets worse. So this isn't looking good and because prices keep increasing, the more years it goes, he is going to have to be moving more and more funds from his "trip bank" to cover daily needs, making what was their yearly getaway, into a pipedream.
An Alternative Perspective
However, if we run the same numbers under another scenario, where instead of his income alone, there was some kind of investment stream coming in. For instance, if he had 50,000 returning 10% a year. Again, numbers are rough and I am excluding the capital gains tax, again because this is illustrative only.
Rough example 2
Year0
40,000
Investment (50K) return = 5000€
This is all used to live.
Year1
40,000
Raise 2% = 800€
Inflation 5% = - 2000
Investment (55K) return = 5500€
He has a 1200€ gap next year and closes it with the investment return and goes on the trip. The rest (4300) is rolled into the investment.
Year2
40,800
Raise 2% = 816€
Inflation 5% = -2100
Investment (59,300K) return = 5930
He has a 1284€ gap closed with the Investment return, rolls 4646 back in.
Year3
41,616
Raise 2% = 832€
Inflation 5% = -2205
Investment (63,946K) return = 6395
He has a 1373€ gap and after closing with investment return, will have 5022 to roll in.
So, after the same amount of time, without changing lifestyle and with a payrise 2/5th the size of the inflation rate, he has been able to keep his lifestyle and increase his investment portfolio by almost 14,000 dollars. Which is by this stage, about 10 years worth of trips to Estonia with his wife. However, he doesn't have to use this, as the return he is getting each year is covering about 4x the trip - so maybe they go to Spain for a month instead some years.
Extrapolation and Compound Effects
As you can see, over the space of a decade or two, the difference between the person in scenario 1 and 2 will be quite extreme, all things remaining equal. One is going to be continually crushed between the vice of the economy, feeling every turn, the other is going to increasingly have more economic freedom, allowing them more opportunity to spend more. And here in lies the problem.
Those with investments that can do similar to this example not only can cover their lifestyle, but they can expand their lifestyle too, which increases inflation also. This means that those at the other end will increasingly have their lifestyles affected negatively, and have less opportunity to invest and own to earn. This means that they have to rent more, take on more debt, cut back more and ultimately, push their wealth into the pockets at the top, worsening the problem.
This is why there is an increasing wealth gap and the current economic conditions have for decades encouraged the system to do precisely this. It might not be as extreme as this scenario between two positions though, because there are so many people who are in scenario 1, and so few in scenario 2, but as time progresses, those in scenario 2 increase their lead at an increasing rate, with the opposite happening at the lower end of the scale.
The inflation rate is sitting around 4% in Australia at the moment.
A Practical View
An Australia teacher earns 70K a year.
This means that next year, they will have an inflation cost of around $2800.
From the same article, the average person has 15,000 in savings and investments. Being very generous, let's give them a 2% payrise (I don't know what they get o average year on year) so next year they will earn 71400 and lets say that *all of their money is invested and will get 10% on it. That adds 1500 dollars (before capital gains). That means, that together, they will get on average, 2900 dollars gain, to cover the 2800 inflation cost. They are up 100 in the year.
But, this is the mid-range of the scale and it is an average based on totals. 1/5th have less than 100o in the bank, another 1/6th have less than 5000 and another 1/7th have less than 10K. This means that 50% of Australians households (more than one person) have a combined savings of less than 10,000 dollars in the bank, and, they definitely aren't getting 10% even on that amount.
I just found this for one school district from yesterday:
source
The inflation rate is 3.8% and rising. That means at current rate alone, their salary increase of 9.86% is still almost 2% below the 11.4% that will be seen in the next 3 years. Winning!
Economy Turned Down
This economy is broken and it bolts are falling off it all over the place, yet, they keep trying to patch it up and give a sunny outlook, as if this is the only way things can be. It is not, but, no government or business is going to do anything about the increasing wealth gap issues, because it is not in their best interest to do so. Firstly, poor people don't spend as much, but having them renting and debt-burdened is good for the other end of the economy and increases the ROI on all of those investments.
But, they do vote, so to combat the negative repercussions, they are able to "help" the lower end by giving them handouts to keep them voting positively, whilst knowing that the money they give, is going to end up in the pockets of the corporations anyway, and they will take their tax cut on that too. They also know that doing this drives up inflation through spending and currency dilution, and that the money they are handing out is future tax money, meaning that the debt is going to have to be paid off, by the very people they handed it out to and they caused to be in a worse-off position for it.
Rebel with a Cause and the Means
As I have said many times before, the current economy is the fastest wealth transfer from poor to rich ever and, due to the way the economy is structured, it is only going to get worse. The economy is eating itself to the point where the lower end is going to increasingly get crushed to the point that they rebel, as they are tired of missing their holiday, cutting back on their beer, buying a cheaper cheese, quitting their gym membership, skipping a daily meal and .... eventually, revolts.
That revolution is ramping up now and while it is still in the early stages, more and more are going to start looking to participate to earn because they can't hold their lifestyle or make any headway into comfort. But, once they are in the new economic mechanisms, they will increasingly find that they have more opportunity o add value in order to generate value and in time, they start to make more than they need to spend, slowly reversing the trends. However, they aren't reversing the trend of the current economy, they are replacing the current economy with a new one.
It is no wonder that governments and corporations are scrambling now, because they risk losing their exponential cashcow economy that favors less and less with every moment it exists. More and more people are rebelling and while some are taking to the streets in protest, the ones that are really going to make the difference will be those who take to themselves off the streets and onto the blockchains and decentralized environments to find new ways to generate wealth, that doesn't require giving the majority of it to the top 0.1%.
Make no mistake. This is a revolution.
Taraz
[ Gen1: Hive ]
Posted Using LeoFinance Beta
Most people I know didn't get a raise for some time. Good thing is (?) we are now working from home so we can save some money on commuting - in my case it really saves the day.
Out of curiosity I checked APR on my bank's savings account/bonds - it is laughable ~1%, and they are bold enough to say that "you watch your savings grow" (when inflation rate is higher)
So I decided to put fraction of my savings into crypto and get good APR there - if it works (and it should) I will get more money than if I use all my savings in the bank
I just checked my APR...its rather dismal...went down a lot, because it was higher than 100% earlier, but still better than your bank I say :)
Also a good reason not to give a payrise. Also, people are working longer hours from home, so the companies can provide equipment "for free" and take over homes and turn them into offices at near no cost, while giving up office space that they have to pay for.
Money in the bank is losing about 4% a year around the world - more in some places.
A couple % into crypto over the next six months will likely earn you more than the rest in interest :)
exactly. to be honest I used to gather crypto dust from faucets (btc, dash, bch, doge) on my way back from work and after a year of dumb clicking I swear to God I got more than interest in the bank
😎
Lol, isn't it funny that you make more from the commute, than your bank?
I find it really depressing to be honest 😎 they just exploit us
Now add $10K and open a hive account. Blog. Put $5K in Splinterlands, play-earn-stake, and have fun. :)
I will write about this tonight :)
Absolutely, feel free to use your numbers and my numbers to show representation of two end member spectrum. Maybe Ash's numbers to get a mid-case.
Remember when we were poor?
That was funny.
:D
Shhh. I am still poor!
I imagine why govt need to print money in the time of Web 3.0 internet revolution where as blockchain digital platform adoption can solve the problem and make it clean financial economy where no need to worry about forged cash bills and wastage of billion papers for printing.
Why not simply use Hive blockchain or create their own and make it more eco friendly financial system .in this way we atleast save trees and fight global warming too.
Inflation will be nothing like a major issue and system will work so smoothly like how the Hive blockchain successfully running blockchain where finance, communication, game, art and culture are significantly running from many years and interesting part is that Hive is also inflationary crypto but still its growth and success is achieving new milestone every year.
THe problem with government tokens is, they need usage to be valuable - will people trust them after all that has happened? Many will unfortunately. I would far rather have the majority of tokens decentralized completely and valued by use case and community.
We are getting poor day by day in my country. The inflation rate is not true, thus the interest rate is - in fact. Investing in anything rather than local currency would save the value of our money.
It is a pity that currently, we are so tied to the places we live economically, as if there is no other way. It is part of the trap.
History is getting ready to repeat itself. I look forward to the show.
!PIZZA
Yes it is, I think we are seeing it happen the last decade or so, and it will continue. THe smart ones are not taking to the streets and complaining to an authority for better economic conditions though.
Yep like you said, the smart ones are going to move to blockchains and DeFi.
Said by many “everyone is responsible for their own financial situation”. The poor do not invest, do not looking for options to fill the gap, while the options are out there everyday. I’m not saying its easy, actually its hard because act needed, but lasiness is conforting for many, and much more easier to complain and sorrow, rather take some risk and try out new possibities.
It is hard for people to get over the mental and emotional hurdles required to invest - especially when they don't have much to invest with.
magnificent read! 🤩🤩
Thanks! :)
I think investing in assets such as real estate or land will keep your capital from inflation
Also gold, but I don't like it at the moment
Although this inflation rate does not worry much, compared to many countries in the world where the inflation rate reaches 10% or more
It depends when you buy. In Australia for example, there is quite a bubble in the housing market going on, because of what I described above. Investors have pushed the price up massively, so it will eventually burst. However, if looking to hold very long, rents tend not to crash.
Dear @tarazkp,
Currently, countries around the world in East Asia, including China, are placing restrictions on individuals' owning and trading of virtual currencies.
Do you believe that the revolution you claim through cryptocurrency and blockchain can happen in East Asia?
In East Asia, there are many people, like me, who do not know the method and purpose of trading cryptocurrency.
Most of them think that cryptocurrencies are a speculative commodity that makes it easy to get rich.
Yes I do think so. But, as always, it is up to the people in things like this. From an economic perspective, if the rest of the world starts making significant amounts of wealth, do you suspect that the Asian governments won't want a piece?
Asia is on of the most active places and while speculative driven by the gambling culture that seems so pervasive, it can mature.
Dang, teachers make more than I do and I run the tech department for the whole district! That is just ridiculous. The thing about inflation is the fact that it creeps up on you and you don't really notice it in most cases. It can be easy to just ignore it and then when it is too late you find yourself in a predicament. It takes a lot of planning and understanding on the front end to be successful.
Posted Using LeoFinance Beta
That is Australian dollars btw., so about 52K USD
Most people don't have a sense of compound interest (none of us naturally), so it is easy not to get the real "feel" for how much it affects us.
Crypto is a silent protest and a revolution.
Posted Using LeoFinance Beta
Yep.
'...all of their money is invested and will get 10% on it.' :D Who the hell gets 10%, outside of Crypto
Some do, many over the last year and a half (because they bought the March dips). One friend was saying his investments got 40% over the last year since he bought the dip. He laughed at me when I said I bought some Bitcoin for my birthday at the same dip. The couple hundred € I spent is about 1300% up :D
The worst case Euro disaster might be in Finland. Compared to Scandinavian economies with their own currencies, the real inflation has been horrible.
1999 one could buy a carton of milk for 1mk, exchange rate to Euro became 6:1, now a liter of milk costs about 1,2€. So the actual purchasing power has decreased close to 20% a year.
Same has happened to Spain, for example. Many services are bankrupted, so it is hard to imagine ever returning to the time before the Great Reset.
Marks were before my time here, but in the first few years, a lot of people I know were still calculating prices in it. A lot of small prices got inflated very fast from what I hear. However, there have also been some benefits for Finland too I assume.
I think the biggest issue here at the moment is wage stagnation and people increasing their personal debt to maintain lifestyle.
The monetary system itself is the big problem mathematically, but physically they have pretty much ended decentralized food production. Services are bombarded with regulations leaving only multinational corporations left.
Was born close to the Arctic Circle, witnessed small farms being shut down and services escaping elsewhere. If the resources do not exist, the paycheck is the least of worries. Also the government taxes even the neighbor help, so they made living inside the system almost impossible.
I have heard of many people who are claiming EU rebates on farming land that they don't use and the like. There is a lot of weirdness going on with it, but overall - no wars likely. With a different kind of economy in place, one that doesn't rely on borders and nations in the same way, this is possible without the centralization.
The EU has skipped paying farmers their benefits many times, so there are no more small farms left. Also the requirements and directives are so twisted, that family farms are required to be companies, which makes food production centralized.
Also Finland has no trade borders, the products going in an out are controlled and taxed by the EU. Russia used to be the main trade partner, but now it has pretty much halted.
Being part of the United States of Europe has very few benefits, but many problems. There are no more Government-owned companies or infrastructure left, privatization has taken over. Surprisingly, there are still many small businesses and farms functioning in Spain.
Why? What is the difference?
I suppose majority is cultural difference. Finnish people are usually pretty quiet and reserved, while Spanish people have close family and friend connections, also with the community.
Also people are less authority-obedient down south. The government has not helped the people before, so promises are not taken seriously. Banning singing and dancing in the streets got rid of most of the culture, hopefully it will return someday.
Surely the farming is way easier with warmer weather conditions, in Finland you get one harvest a year. So the food will not be the problem in Spain, in Finland it might become pretty scarce.
So also the paycheck does not matter, if there is nothing to buy. Tiny economy like Finland seems to get the short end of the stick.
Any system created by humans (or even apes) is only stable until the imbalance is too pressing. As long as we keep the means to resist, we'll be doing it at some point.
There's no such thing as a revolution without bloodshed in the 21st century, remember that as well. The old elites will die or lose the will to fight at some point - naturally.
It is going to be bloody in some areas for sure, but as you said (and I mentioned yesterday in a post), people die and that wealth in the top is soon to be in a new grouping of hands over the next decade, some of those very crypto friendly.
But, the last few years in the US are a goo indicator of economic frustration getting to boiling point.
I have to visit Finland this month, ..some people to meet in Helsinki. How cold is the Winter already up there? I might need to buy a new coat.
Not too bad at all and will likely be around 5 in Helsinki - just make sure you dress for the wind. It can be cold and wet.
Lovely, cold & wet at 5 degrees celsius :D
Up north, you would be in deep snow by then :)
^ This. The US is definitely one of the places where it will get bloody. The people here are on edge.
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Some big changes are coming. I wonder at those who can't see that.
We will see whether we need to have had our money in a safer place, or will have to learn without money entirely, or something in between. I have no idea. I'm trying to stay on my toes.