An interesting conversation on wealth and inflation came up today with a client, and I ran some very simple numbers to illustrate some of the challenges we face and of course, what we might have to do about it in order to improve our conditions, at least personally. It started with a conversation about wealth gaps and they asked about the wealth of an Australian billionaire - her wealth has changed from 13B in April 2020, to 23B in April 2021 - that is a 75% upward shift.
This isn't uncommon in the 0.1% however, as the majority of the handouts and the restrictions have worked in their favor, transferring massive amounts of wealth into their pockets through various channels. But while maybe not as extreme, it isn't uncommon in the top 10 to 20 percent either, as they are invested and investments are performing well. This means that there is a massive amount of disposable income that is looking for wealth-generative homes. This pushes up for example, the cost of housing, which drives inflation and living costs upward too.
Visualizing the problem
But, lets have a look at some illustrative numbers.
For example, my client earns about 40K euros a year and last year, got a 1.5% raise, which is around what he has got most years, but I will use 2%. Assuming that he needs all of this to maintain his current standards of lifestyle, we can play a bit. The inflation rate in Finland is currently 2.5% - but I will use 5% as it is easier to calculate and it doesn't matter, as this is example only. And, since this has changed by 10% in the last month, it might not be too far away from 5% in a year from now anyway. Inflation means the purchasing power of his income is decreasing.
Rough example 1
Year0
40,000
This is all used to live.
Year1
40,000
Raise 2% = 800€
Inflation 5% = - 2000
He has a 1200€ gap next year.
How does he close that gap?
Let's say he decides not to take his wife on their yearly week trip to Estonia.
Fixed. But there is a lifestyle change.
Year2
40,800
Raise 2% = 816€
Inflation 5% = -2100
He has a 1284€ gap and has to give up the trip, plus find 84€
Year3
41,616
Raise 2% = 832€
Inflation 5% = -2205
He has a 1373€ gap and has to give up the trip and find 173€
While the 2% earnings compound over the years, so too does inflation. If the trip was 1200 to start with, it is now almost 1400€. This means that while in year 0 he could afford the trip, by year 3, the payrise only covers about half a trip. It only gets worse. So this isn't looking good and because prices keep increasing, the more years it goes, he is going to have to be moving more and more funds from his "trip bank" to cover daily needs, making what was their yearly getaway, into a pipedream.
An Alternative Perspective
However, if we run the same numbers under another scenario, where instead of his income alone, there was some kind of investment stream coming in. For instance, if he had 50,000 returning 10% a year. Again, numbers are rough and I am excluding the capital gains tax, again because this is illustrative only.
Rough example 2
Year0
40,000
Investment (50K) return = 5000€
This is all used to live.
Year1
40,000
Raise 2% = 800€
Inflation 5% = - 2000
Investment (55K) return = 5500€
He has a 1200€ gap next year and closes it with the investment return and goes on the trip. The rest (4300) is rolled into the investment.
Year2
40,800
Raise 2% = 816€
Inflation 5% = -2100
Investment (59,300K) return = 5930
He has a 1284€ gap closed with the Investment return, rolls 4646 back in.
Year3
41,616
Raise 2% = 832€
Inflation 5% = -2205
Investment (63,946K) return = 6395
He has a 1373€ gap and after closing with investment return, will have 5022 to roll in.
So, after the same amount of time, without changing lifestyle and with a payrise 2/5th the size of the inflation rate, he has been able to keep his lifestyle and increase his investment portfolio by almost 14,000 dollars. Which is by this stage, about 10 years worth of trips to Estonia with his wife. However, he doesn't have to use this, as the return he is getting each year is covering about 4x the trip - so maybe they go to Spain for a month instead some years.
Extrapolation and Compound Effects
As you can see, over the space of a decade or two, the difference between the person in scenario 1 and 2 will be quite extreme, all things remaining equal. One is going to be continually crushed between the vice of the economy, feeling every turn, the other is going to increasingly have more economic freedom, allowing them more opportunity to spend more. And here in lies the problem.
Those with investments that can do similar to this example not only can cover their lifestyle, but they can expand their lifestyle too, which increases inflation also. This means that those at the other end will increasingly have their lifestyles affected negatively, and have less opportunity to invest and own to earn. This means that they have to rent more, take on more debt, cut back more and ultimately, push their wealth into the pockets at the top, worsening the problem.
This is why there is an increasing wealth gap and the current economic conditions have for decades encouraged the system to do precisely this. It might not be as extreme as this scenario between two positions though, because there are so many people who are in scenario 1, and so few in scenario 2, but as time progresses, those in scenario 2 increase their lead at an increasing rate, with the opposite happening at the lower end of the scale.
The inflation rate is sitting around 4% in Australia at the moment.
A Practical View
An Australia teacher earns 70K a year.
This means that next year, they will have an inflation cost of around $2800.
From the same article, the average person has 15,000 in savings and investments. Being very generous, let's give them a 2% payrise (I don't know what they get o average year on year) so next year they will earn 71400 and lets say that *all of their money is invested and will get 10% on it. That adds 1500 dollars (before capital gains). That means, that together, they will get on average, 2900 dollars gain, to cover the 2800 inflation cost. They are up 100 in the year.
But, this is the mid-range of the scale and it is an average based on totals. 1/5th have less than 100o in the bank, another 1/6th have less than 5000 and another 1/7th have less than 10K. This means that 50% of Australians households (more than one person) have a combined savings of less than 10,000 dollars in the bank, and, they definitely aren't getting 10% even on that amount.
I just found this for one school district from yesterday:
source
The inflation rate is 3.8% and rising. That means at current rate alone, their salary increase of 9.86% is still almost 2% below the 11.4% that will be seen in the next 3 years. Winning!
Economy Turned Down
This economy is broken and it bolts are falling off it all over the place, yet, they keep trying to patch it up and give a sunny outlook, as if this is the only way things can be. It is not, but, no government or business is going to do anything about the increasing wealth gap issues, because it is not in their best interest to do so. Firstly, poor people don't spend as much, but having them renting and debt-burdened is good for the other end of the economy and increases the ROI on all of those investments.
But, they do vote, so to combat the negative repercussions, they are able to "help" the lower end by giving them handouts to keep them voting positively, whilst knowing that the money they give, is going to end up in the pockets of the corporations anyway, and they will take their tax cut on that too. They also know that doing this drives up inflation through spending and currency dilution, and that the money they are handing out is future tax money, meaning that the debt is going to have to be paid off, by the very people they handed it out to and they caused to be in a worse-off position for it.
Rebel with a Cause and the Means
As I have said many times before, the current economy is the fastest wealth transfer from poor to rich ever and, due to the way the economy is structured, it is only going to get worse. The economy is eating itself to the point where the lower end is going to increasingly get crushed to the point that they rebel, as they are tired of missing their holiday, cutting back on their beer, buying a cheaper cheese, quitting their gym membership, skipping a daily meal and .... eventually, revolts.
That revolution is ramping up now and while it is still in the early stages, more and more are going to start looking to participate to earn because they can't hold their lifestyle or make any headway into comfort. But, once they are in the new economic mechanisms, they will increasingly find that they have more opportunity o add value in order to generate value and in time, they start to make more than they need to spend, slowly reversing the trends. However, they aren't reversing the trend of the current economy, they are replacing the current economy with a new one.
It is no wonder that governments and corporations are scrambling now, because they risk losing their exponential cashcow economy that favors less and less with every moment it exists. More and more people are rebelling and while some are taking to the streets in protest, the ones that are really going to make the difference will be those who take to themselves off the streets and onto the blockchains and decentralized environments to find new ways to generate wealth, that doesn't require giving the majority of it to the top 0.1%.
Make no mistake. This is a revolution.
Taraz
[ Gen1: Hive ]