My life often seems to be dominated by paper. Breathing Color, Canon, Red River, Lexjet, and more. There’s some of the paper in my life. I buy it, print on it, and the final results hold more value than the original cost of the paper.
There’s a lot of other paper in my life. Money, bills, insurance. They’re all about paper too.
Insurance is my least favorite of all the paper in my life. I spend a large percentage of my monthly income on health insurance and vehicle insurance (my airsteam insurance has been pricey too).
I buy this insurance in case something happens. Getting sick again, reckless drivers, helicopters falling out of the sky…. The good stuff. Frankly, insurance has little value until the moment you need it.
From my standpoint my printing papers have a ton of value. The insurance paper not so much. And the paper in my wallet? Yeah, that’s losing value faster than ever before in my life.
S&P, Inflation, & What it all means to me
Last weeks downgrade of treasuries has made many friends ask “what does it mean?”. Well, it means my prints on canvas have more value than the cash you spent to get them! Buy my canvases now!
Why is it so many people contact a photographer / Airstream dweller about the state of our economy? Former economist is part of the reason. The other part is I’ve told friends for some time we’re not close to done with our economic issues.
Seriously, last week’s downgrade means that someone has finally acknowledged the dangerous track we’ve been on for decades. Frankly, ever since Greenspan coined the “irrational exuberance” phrase in 1996 I’ve had a very skeptical view of our economy. Specifically, the shaky foundation of paper backing paper.
You’ve probably heard or read that inflation isn’t so bad. What you’ve heard is untrue. Inflation is out there. It’s hiding in plain sight, yet nobody will acknowledge it. The entire housing market run up of the 90’s and early 2000’s has not been cleared away. For example, my previous home cost $130K at the time of purchase. 9 years later it was assessed at more than 3 times the value. We had done no improvements on the home, gold was not discovered in the back yard, and nothing else could point to the value bump except for one thing. Inflation in the housing market. That inflation was caused due to loose lending practices, allowing people to borrow more than they could afford. And those people bid houses up beyond their fair market value. Period.
Inflation also occurred in the stock market. With easy access to loans, credit card cash, etc, folks went “investing” willy nilly in the market. You’ve heard of day traders. It goes beyond just those guys. Companies were valued well above their productive abilities. People poured money into the companies not because of what they produced, but more on the hope that the gamble would pay off in a higher stock price tomorrow. The markets have become nothing more than a casino. Folks used to invest long term, get dividends, and hold stock for decades. Now folks are in and out. Waiting for the ticker to go up, and they cash out. Production has nothing to do with it.
A simple inflation example
If you’re uncertain about what inflation is, I’ll give you a quick and simple example. Let’s make a fake economy with 6 people in it. The economy only has one product. A pizza. The pizza has 6 slices. Each member of the economy has $1 to their name. So, an economy with 6 people, $6, and 6 slices. Simple world. Each person can buy one slice for $1.
Now, let’s introduce monetary growth. The money supply can be grown by extending credit, printing more bills, raising debt ceilings….you name it. Let’s pretend in this simple economy that we still have the same number of people, and slices. But let’s say the Federal Reserve and the Treasury think it would be fun to grow the money supply by 100%. Everyone now has $2 to their name. It doesn’t change how much pizza there is though. Everybody can still buy a slice, but the price is now $2.
Having more money in an economy doesn’t mean production goes up. Some folks believe (Keynsians) that if you spend more it will cause production to grow over time. They see spending as a creator of new product. But if production doesn’t grow and we have more money, we have an inflationary scenario.
Here’s where it gets ugly. Let’s play in the pretend economy. Let’s say the money supply doubled. $12 as before. But let’s say that 3 of the people in the economy get the extra money (bailouts, loans, etc). The other 3 don’t. The guys with the extra money will have more to bid on pizza with. 3 people (the little guys) have $1 each, and the other 3 folks have $3 each. The folks with $1 have no change at bidding on a full slice any longer. Remember, there’s only 6 slices. Those folks with the $1 each? Yeah, the value of their money was obliterated by the creation of money without growth in product. They now have 1/3 the buying power due to the money supply expansion.
Granted, this is a severe over simplification, but you might understand inflation a little more. As more dollars are printed the value of the dollars in your pocket diminishes. And just so you know. Our government is printing like crazy. The Fed’s low interest rates make the money supply grow further. And each action taken means holding your dollars long term guarantees you nothing but loss in purchasing power.
What is the value of a dollar?
Good question. We have no peg or gauge any longer to tell us that. We went off the gold standard completely the year I was born. The value of the dollar seems to be dependent on whether or not we repay our debts. And with the downgrade the message being sent is, “We’re spending like drunken sailors, printing money at will, and seem to have no interest in stopping.” Maybe if we print enough dollars we’ll get out of debt. Heh, yeah.
Try this tomorrow. Get yourself a Post It Note. I suggest yellow, as I like yellow post it notes. Get the ones without lines on them. Now, do the following. Write, “Pay to the order of myself, $10,000.” Bring it to your bank and see if they let you deposit it. Most likely they won’t. Now, if you were the Federal Government that post it would be as good as gold (not really).
The dollar is backed by our debt, treasury bills to be precise (true true, not kidding). And our debt is backed by our dollar. True true again, I wouldn’t make this up. Now I want to know, does this sound sensible at all?
So what can we do?
Simple suggestion. Invest in art! Specifically, pop on by the shop and pick up a nice canvas of mine, or one of Ian’s, or anything from our other artists in the shop. Bottom line, I’ll take a physical asset any day over a rapidly declining dollar. Unlike the feds, I know that I should limit printing on any of the items I sell because rarity adds value. Printing like a maniac devalues everything, art or finance.
Of course, you could always spend your money on getting gassed. The hangover in the morning will be less destructive than the economic hangover we’re heading for…….
P.S. I really recommend stopping by EconStories.tv and watch the “Fight of the Century” video. Pay close attention. We live in a Keynesian economy right now, no denying it. See what you think about economic arguments set to rap….. 😉
The value of a dollar, using the cpi as a deflator, is down 25% since 2000. That’s a mere 11 years. It’s down over 95% since the Federal Reserve Act of 1913. Sound like an “asset” you’d like to invest in??
BTW the word Dollar initially meant 1/8 ounce of silver. Today silver is $37/oz.
The current method of calculating CPI is bogus. It has been since the 90’s. The dollar is down much further since 2000, but fortunately the econometricians who calculate it have amazingly fun ways to mask inflation further. Hedonic price modeling has really tossed a hand grenade into knowing true inflation numbers. Mathematically though it’s a fun exercise.