Inflation is a Tax on the Middle Class
AND Delusion is what keeps the system going.
They call it taxation without representation. Inflation is largely a monetary phenomenon. It's a direct result of the increase in the money supply. However, it does not affect all of us equally.
Some benefit from it, they call this the Cantillion Effect. If new money is printed, whoever gets to spend it first when it comes into circulation gets the most out of it. This usually happens to be the rich. As it goes around, it continues to lose its value.
The rich invest in assets that rise faster than inflation or at least that inflate at the same rate as the money supply. They put their money in the stock market, which is a leading indicator of the economy in general and inflation in particular. They buy up houses in prime areas. House prices rise up faster to match inflation. That’s why they say property shields you from inflation.
Because of the Cantillion Effect, the rich actually get richer in a moderately inflationary environment. They only worry about hyperinflation. They get the mulla first and spend it on whatever hard assets they desire. They slowly and gradually eat the pie that belongs to the middle class.
The poor have nothing to invest in. They have no savings. They live hand to mouth. What earned is spent in the same month or the same day, which is especially true for casual labor. They don't get to watch their money lose value because they have no money.
However, in a hyper-inflationary environment, wages are slow to adjust upwards in order to keep pace with inflation. That is how the poor lose out. But there is a lower bound to poverty. The lowest boundary is probably death by hunger and starvation. A realistic boundary is just above that level.
Inflation does not really drive poor people deeper below the lower bound. At the lower bound, they cannot sink any lower. That's it. No matter how much you inflate the currency, those at the bottom remain at the bottom.
The middle class has got some savings. they have some money balances. Some of their monies are saved in the bank. They also contribute to medical aid and pension funds which are hammered by inflation. The middle class essentially pays the taxes. The wealth that belongs to the middle class is transferred to the rich.
The middle class gets destroyed. Slowly, one family after another. Hyperinflation makes it happen so fast but moderate inflation is the real killer because people don't notice it. At a rate of 2% per year, inflation eats the middle class slowly. It's too small to complain about, but after a while, people just wonder why they are working harder but not winning.
The bifurcation of society is the end result. As the middle class gets crushed down to join the poor, the richer remain at the top. Society becomes two extremes characterized by a small class of ultra-wealthy elite and the rest of society that is poor. It becomes dystopian.
The bifurcation only happens because inflation, regardless of what rate, is a tax on the middle class. Given enough time, it will eventually destroy all of the middle class. In the absence of upward class mobility, members of the society lose hope. The poor have no hope of becoming rich. Those who were once in the middle class have no hopes of ever getting back there or becoming rich. Without hope, there is no basis to believe in an economic system.
Some will still keep a certain dose of delusion, which can be easily misidentified as hope (a serious case of mistaken identity).
Countless millennials still have high hopes of working hard, saving money for a downpayment on a 20-year mortgage on a house. The actual chances of doing that successfully have diminished significantly to an extent that maybe 5 out of 100 millennials would be able to pull that off.
The probability of successfully saving for a down-payment is low but easy to assess. The probability of successfully meeting the payments for the next 20 years is very hard to assess but is generally bearish rather than bullish because technology is eating the world and chances of losing the job and not being able to find another one is increasing every day.
Maintaining high hopes in an event that has a 5% chance of being successful is equivalent to delusion. But because there are still those 5 lucky persons that will make it, the 95 keep on feeding themselves with higher and higher doses of delusion, endeavoring to sneak into the five.
Delusion is what keeps the system going. Without it, the system will disintegrate. The poor will eat the rich.
If we stop deluding, we stop grinding and demand change.
Sidenote example: Consider Zimbabwe, a country with a per capita GDP of $1,463. The country has an expansive population pyramid with a median age of 18 years. How many young people chase the dream of earning above $140,000 per year (i.e 100X the per capita GDP)? What are the actual probabilities of achieving that?
You cannot advise people to give up.
Delusion is what keeps the system going.
Ciao!
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