Inflation for high schoolers

View 750 Sunday, November 11, 2012

VETERANS DAY

Given the results of the election, continued inflation is inevitable, increased inflation is highly probable, and hyperinflation becomes more likely. There are some principles and preparations that must be studied and learned. We will be looking at those in future. Surviving inflation requires a different approach from surviving war or natural disaster, but there are some common measures.

In addition, there will be inflations of taxes. At first these will fall only on the very wealthy, but since those cannot raise the needed revenues to pay for entitlements there will be desperate searches for new revenue. Inflation is not an option for state and local governments, so you may expect a multiplication of taxes and fees. Traditionally the “sin” taxes – tobacco, marijuana, alcohol – will be raised. That will result in more black market competition with the tax collectors, which will lead to greater need for “law enforcement” – including tax collectors and revenuers.

The pressure to raise federal taxed in order to “fight the deficit” will be high, but the federal government does have the inflation option; state and local governments can’t inflate the currency, but they can try to get in on the federal government’s printing press money by devising more and more schemes to federalize state, county, and local “infrastructure” expenses.

We will need to look at ways to avoid – not evade – rising state and local taxes another time. The obvious way is to migrate to states that are more devoted to frugality than entitlement benefits, but do not underestimate the pressure that will be put on those states to federalize their rising costs: inflation hits everyone, and governments are generally less efficient than private companies and thus tend to meet rising costs by increasing revenue. When you can’t get more out of the locals you must go shopping in Washington. States will compete on their lobbying capabilities. More on this another time.

Musing about inflation.

It has been some years since I seriously tackled this problem. When I was an editor of SURVIVE, runaway inflation was not high on the list of probable disasters. The most important one in expected value terms was nuclear war, and my assessment of that was that the best way to survive a nuclear war was not to have one. For various reasons we didn’t have that war.

We didn’t have other disasters such as a massive solar flare or some other global power outage.

The Cold War ended. Prosperity and progress seemed inevitable – recall that there was a serious prediction of The End of History – and the survivalist movement dwindled to a tiny remnant. There is still a finite but not easily quantified probability of a huge disaster, and some people do prepare for such things. Those interested might find Lloyd Tackitt’s A DISTANT EDEN (available on Amazon in print or Kindle edition) worth reading: it’s a novel that goes into some details and suggests more techniques, and does a pretty good job of showing just how vast such a disaster might be.

Now, however, with the re-election of Mr. Obama (and given his post election speeches) increased inflation seems inevitable, and the wise will pay some attention to preparing for it. We’ll look into such matters in the next few weeks.

The most important principle to understand is that inflation is a tax on savings and fixed incomes. Savings accounts already lose money – the interest rates are far lower than the costs of inflation. Many financial advisors do not seem to understand the inflation problem: for those with substantial sums to invest should look for financial advice, but do understand that many financial advisors are stock and bond salespeople and make most of their living by steering their clients into buying certain funds and investments. Sometimes that is a good idea, but one wants to be careful.

A second principle is that you want to be able to accumulate things that you will need. This is technically known as hoarding, and there will be many who will discourage you from doing that. One thing you know you will need is food. Hoarding food requires some preparation. Canned food has a finite life. Fruits and grains are vulnerable to rats and rot. One may not have insect and rodent proof storage facilities, but in times of inflation many neighbors will begin to save by eliminating their pest control services, which will increase the risk of pest destruction of your hoards. If you are thinking of building or improving your house, insect and rodent proofing is a major consideration.

Current rises in food prices, particularly storable goods, have not been much (or any) higher than interest rates, so storage of edible goods would not have been a great idea for the past couple of years, but we are now guaranteed four more years of current policies, some of which will certainly impact the cost of maize and other consumer edibles.

These are the kinds of things one needs to think of. Obviously there are many different people in many different situations, and the same tactics will not be optimum for all. There are general principles. One is that you will have to eat, and food prices will tend to rise in inflationary times. Price controls will limit the supply. In a time of rising prices, hoarding of durable consumables is generally a good financial idea, but those who do it will be blackguarded and sometimes robbed with government approval.

It’s time to take Sable for a walk – she very much enjoys our walks although they have to be shorter now – so I’ll leave this here.

Inflation is coming. It has appeared to be kept under control, but as the deficit rises and spending continues, there will first be moves to increase revenue, then to pay for entitlements with printed money. Printing money keeps the expenditures going, but entitlements don’t usually work to grow the economy. Austerity doesn’t stimulate an economy either.

And at some point people will notice that there is a lot more money chasing the same goods, and the prices will rise.

Be prepared.

More about this another time, but Sixty Minutes tonight had a segment on jobs available: thousands in Nevada, in manufacturing. But they can’t fill them. Job applicants don’t show up on time, can’t write a grammatical sentence, don’t seem to understand the elements of skilled labor. They don’t know simple arithmetic.

My wife points out that most of this comes from people not learning to read. I’ve told this before, but my mother was a first grade teacher in rural Florida in the 1920’s. I asked her if any of her pupils left first grade without learning to read.  She said a few did, but they didn’t learn anything else, either – that is, it was expected that any child of normal intelligence would learn to read in first grade. It was expected that the teacher would see to that. There were no learned theories on why kids did not learn to read. It was just expected that they would, and that the teachers would teach them.

Of course in those ancient times the pupils were expected to learn the beginnings of the Addition tables.  I think the Times Tables came in second and third grade, but I’m not sure. What I do know is that modern schools with their well educated teachers who hold credentials do not seem to be able to do what my mother with her two year certificate from Florida Normal was expected to do.

And I don’t know of any school district in California that expects all the children to learn to read in first grade. We know it’s possible. Why don’t we insist on it?