Listening to the Fed chair speak today has helped me organize this thought I have had for awhile.
We know that USD and all fiat currencies are inflationary, but many people do not understand to what degree when you account for deflation.
We live in a deflationary world. Deflation defined here as: Over time it takes less capital and man hours to produce the same amount of goods. We become more efficient as production techniques and technology advances.
A great example is computers. A highly deflationary product, every two years or so the amount of computing power you get for the same price doubles. In this example the product gets far better, now let’s look at something that stays the same. A loaf of bread.
You take a single loaf of sliced white bread, in 1930 it would have cost about $0.09, and today that same loaf would cost you about $2.05. Now we look at this and ask “did the bread become 20x more valuable? Or did the money become 20x less valuable?”
Unfortunately this is not the whole story. Now to get to my point, let’s use this easy example.
Let’s say a loaf of bread cost $1.00, then a year Later it cost $1.02. You might think there was 2% inflation. My though here is that it’s far more than that because of the deflationary progress made by society.
Let’s say the money supply was fixed and we go back to the first year.
The bread cost $1.00. The next year the bread SHOULD cost $0.98 due to an increase in efficiency.
Nominal inflation is only half the story. We are being robbed far more the most realize. Prices go up 2% PLUS another 2% for a total of 4% loss in buying power to account for the natural deflationary tendencies of society.
We are getting robbed on two fronts!