As we all know the Corona is wrecking havoc on all of our lives and transforming the world before our eyes.
For many people, the mass unemployment and their own personal vulnerability came sharply into focus in a very unwelcome way. 26 million Americans have applied for unemployment benefits in the last month alone and that is not counting the problems brewing higher up the food chain. As workers have no funds, landlords are left trying to pay mortgages without rents (even worse if they were using short term rental services like Airbnb) and as businesses go bankrupt, the same occurs for shopping malls, office buildings, retail spaces, restaurants, coffee shops etc. This goes up the ladder to the next level and hits lenders with defaults and around and around we go.
My point is not in any way to be negative. Nobody could possibly have foreseen this kind of Black Swan event. It has significantly impacted and forever changed our world. But I want to take a step behind the the trauma on the surface and have a look at how this is all likely going to play out behind the curtain.
A few days ago, we were discussing this in the PROJECT FREEDOM group chat. I want to share with you the stuff I was saying there. This is the easiest way I know of to understand what inflation is and why it is 100% impossible to avoid it in our present situation.
As I mentioned earlier, and as we all know too well in personal experience, this kind of event has a more devastating effect as it climbs up through the economy. People will be quick to slam the government for bailing out the banks in the 2008 crises but they ignore the very real point that the entire economy benefitted from the stability and they had no other options but to do it.
Stability is vital to the economy. It is the key ingredient that makes people invest in starting new businesses, or building up their businesses to the next level or parking their money in someone else's business. Remove the stability and the entire house of cards falls over and you have capital flight...essentially people take their money out of the local economy send it elsewhere. This is a terribly bad thing when people loose confidence in a currency and flee for safety elsewhere.
In order to create Stability, Trump must make it appear that the government is handling things and that the economy is getting back on track. The government has no choice but to always convince investors "don't worry we have things under control and now is a great time to invest in American businesses etc etc".
Enter the Stimulus Package. $2 TRILLION was initially set aside to get the US through and then another $500 BILLION was just agreed to now. This is just the US but all other countries have no choice but to follow suit. As we already discussed, they have to get funds into the hands of people and businesses so they can pay rent, buy food, pay workers, etc etc to help stem it from flowing up the ladder to landlords, leasing companies, banks and then the government themselves (people cannot pay taxes with no money).
STAY WITH ME HERE....so we know the government has to do what it is doing but now let's look at the effect this has:
Suppose I have a company and I decide to call it Apple and my company is worth $1 TRILLION dollars. The value of the company is a combination of its hard assets (land, buildings, etc), soft assets (patents, goodwill, R&D, trade agreements, etc) liquid assets (cash in the bank), expenses, debt obligations. This is essentially what is referred to as the Market Cap of the company. Investors have agreed that my company is worth $1 TRILLION and if there are 100 BILLION shares issued then the cost of each share is $10 (value/shares issued).
So what do you suppose happens then I decide to double the amount of shares? My current investors are not stupid. They know that my company has the exact same revenue, profit margin, hard & soft assets, and liquid assets. They know my company is worth $1 TRILLION. I can create as many shares as I want but they are simply a fraction of the total value. This is known as diluting shares.
A country is essentially a business. Yes there are some differences but there are far more similarities. The value of the US economy is agreed upon by investors and it is based on things much the same as a company. Its "profits" are its tax base and its health is generally gauged, among other things, by things like unemployment and GDP (Gross Domestic Product = The total money that was spent by people and businesses on stuff inside its economy). The country has expenses, it has debt obligations, etc. So if the economy is tanked and its corporate and personal tax bases are both tanking then it is safe to say that its revenue (tax income and loosely correlated with GDP) will be down, therefore the value of this "company" also is going down.
Ah, but you say the key difference is that the government can just print more money when it gets into a bind and that is different than a company. Well, sadly, its pretty much the same. Prior to 1971, the US currency was backed by gold so when you bought a dollar it was a share essentially in the gold reserves of the country. The government could not print more money than it had gold. But after 1971, the currency became tied instead to the US economy so your dollar bill is essentially a share of the US economy.
So what happens when a country prints $2.5 TRILLION (and we are very early in the Corona crisis so expect this to double or triple)? Well, essentially it has a very similar effect to creating more shares of a company. If the value of the company stays the same then the additional shares merely divide the same value between more shares. Double the number of shares, the value of the company is the same, the price per share halves.
This is ofcourse overly simplistic but this is known as inflation. The government can print as much paper as it want