Reading Time: 8 minutesI’ve been thinking about money a lot lately, not as in “How much do I have” or “How much more do I need”, but rather about currency, and how countries can debase the value of their currency, and what endgame is like in a hyperinflationary spiral. So for this month’s article, let’s take a practical look at recent events to get a sense of what the future might look like.
Specifically, let’s imagine that you and I have a friend named Mary. She’s employed in sales, and she’s very good at her job. In 2019, she was making $200,000 per year, and a competitor offered her $300,000, and she accepted the job. Let’s see what’s happened to Mary since then.
For starters, let’s look at her income level. She initially got a 50 percent raise, which she was pretty happy about. But since 2019, the value of the dollars she’s being paid has eroded by about 30 percent. This means that, in terms of 2019 dollars, she’s only making $210,000 dollars per year now, a measly 5 percent raise. No wonder she has this funny feeling of unease, a sense that even though from an objective level she’s being paid big bucks now, things just don’t feel quite as good as they did when she got the raise.
Even worse, when she was making the 200K, after deductions she was in a 24 percent marginal tax bracket. But now, at 300K, she finds herself in the 33 percent bracket, meaning that after taxes she actually has less spending power than she did when she was making 200K at her old job. That’s what happens when inflation and redistributive tax policies conspire to diminish your discretionary spending capacity.
Fortunately, Mary has been killing it in the stock market. In 2019, the value of her investment account was just over 2 million dollars. But now, with the Dow, the NASDAQ, and the S&P 500 all at record levels, she has amassed an amazing 2.8 million dollars! Mary is now a millionaire almost 3 times over!
Except when we convert the 2.8 million to 2019 dollars, the value of her investment portfolio is actually less than it was 5 years ago. And even worse, when Mary sells her investments to convert them into spendable dollars, she’s going to owe an additional 160,000 in capital gains taxes. So that wonderful nest egg she originally created by saving hard and investing wisely is now actually worth $150,000 less than it was in 2019.
And then there’s that $258,000 house Mary was thinking about buying back in 2019. At the time, it seemed pretty expensive (although it was actually priced precisely at the average selling price for a house in America that year), so she passed on it, and when she took the new job with the big raise, it had already sold. But now it’s back on the market, once again at the average selling price for a house in the first quarter of 2024. But this time, the price is $384,500. And now, instead of a 3.5 percent mortgage, she’s looking at a 7 percent mortgage. So with 20 percent down, her interest expense alone will be almost $1,500 more per month ($11,000 per year from the extra 3.5 percent on $320,000, plus $7,000 per year on the extra 100K in house price) than it would have been had she bought the house in 2019.
Poor Mary. She’s having trouble understanding why things seem so depressing, even though she’s succeeding at her job and she’s making more money than she had ever dreamed possible.
And what of her friend Susan? Susan and her husband Bill were making a combined $200,000 per year in 2019, and really haven’t had much for raises over the past 5 years. They used to have extra money for things like a nice vacation every year, but now they don’t, and they’re having trouble saving for retirement and their kids’ college educations.
Finally, let’s take a look at Tom, who owns a jewelry store. In 2019, Tom’s store broke 2 million dollars for the first time. And then the following Spring, Covid hit, and for about 6 weeks Tom was scared to death about his business. But then when he reopened, it started to rain money, and month after month, Tom’s store set new records, ultimately climbing to an astonishing 3 million dollars in sales in 2023. But now, things are starting to feel a little weird. Tom has noticed that the costs of everything his store consumes, from payroll to rent to utilities to insurance, have all gone up dramatically. While simultaneously, far and away the important revenue stream in Tom’s store – diamonds – have actually declined in price, resulting from the dynamics of LGD. So as Tom’s best customers suddenly feel a reluctance to spend, and Tom’s average unit engagement ring sale drops by 30 percent, his company is starting to have cash flow problems.
These are all imaginary scenarios, but I am pretty confident that they reflect what’s actually happening in our country. So now, as the federal deficit increases by 1 trillion dollars every 90 days, the debt service exceeds 1 trillion dollars per year (an annual expense higher than the defense budget!), and over half of the 33 trillion dollars in federal debt has to be renewed in the next five years at dramatically higher rates because nobody thought to term it out while rates were still low, we have quite a mess on our hands.
It has been said that hard times make strong men, strong men make good times, good times make weak men, and weak men make bad times. What we’re seeing, I suspect, is the product of weak men in charge. And if you wonder just how catastrophic a hyperinflationary spiral can be, just ask the Germans who installed Hitler, or the Venezuelans who ate their pets when the food supply chain collapsed.
I originally wrote a version of this article about the origins of the macroeconomic mess, but upon reading it thought its tone might be a little too professorial, so I rewrote it using the imaginary examples above for illustration. But since the original article does offer an intellectually honest historical appraisal of the root causes, I’m including a QR code so you can access it if you would like a review of the events leading up to this mess. And a word of warning: if you’re likely to be triggered by a conservative view of monetary policy, this one might not be something you’ll want to read.
Class Dismissed!
The post Applied Marketing 101: Are the Macroeconomic Chickens Now Coming Home to Roost? appeared first on Southern Jewelry News.
from Southern Jewelry News https://ift.tt/jqgf9Gp