Why is Inflation Bad for an Economy: Enriching Few, Robbing Many

Why is Inflation Bad for an Economy? Feeding the Rich at the Expense of the Poor

June 12, 2024

The Evil of Inflation: A Robber of the Working Class

Inflation, a subtle yet destructive force, creeps into the lives of everyday hardworking people, silently robbing them of their hard-earned money. It is a tax designed not by legislatures but by the greedy hands of central bankers and their cohorts in the financial industry. While inflation affects everyone, the poor and middle class bear the brunt of its wrath, for they spend a significant portion of their income on necessities.

Imagine a hardworking father, let’s call him John, who works tirelessly to provide for his family. A construction worker, John sees his weekly paycheck buy less and less at the grocery store. The cost of food has been steadily rising, and he has to choose between buying fresh produce and paying the electricity bill. He notices that the prices of staple items seem to be creeping up week by week, yet his wages remain stagnant. John is confused and frustrated, feeling like he is running on a treadmill, working harder but getting nowhere. Little does he know that inflation, the silent thief, is to blame.

This scenario plays out in households across the country. Inflation is insidious because it erodes the purchasing power of money over time. Each currency unit buys fewer goods and services as the general price level rises. The poor and lower-middle class, who rely on every dollar earned to make ends meet, are hit the hardest. They spend a more significant proportion of their income on essentials such as food, transportation, and housing, all of which tend to increase in price during inflationary periods.

Experts agree that inflation is a regressive tax disproportionately affecting the less fortunate. Renowned economist and Nobel laureate Milton Friedman once said, “Inflation is one form of taxation that can be imposed without legislation.” Another esteemed economist, Thomas Sowell, noted, “There are no greater bastions of privilege in the world today than the central banks, including the Federal Reserve. Through them, the financial aristocracy has been able to shift the cost of its improvidence and extravagance onto others in the form of inflation.”

Sowell mentions the financial aristocracy, which includes greedy bankers and financiers who benefit from inflation. They know that as prices rise, the real value of debt decreases. These bankers have easy access to credit and can borrow money at low interest rates and invest in assets that will appreciate inflation, such as stocks and real estate. By the time prices rose, they had already made their profits and moved on, leaving the working class holding the bag.

Fighting the Disease: Investing in Stocks and Commodities

While inflation may seem like an unbeatable enemy, there are ways for the average person to fight back and protect their purchasing power. One way is to invest in the stock market, which has historically outperformed inflation over the long term. By owning stocks, individuals can grow their wealth and generate returns that surpass the rate at which prices are rising.

Take, for example, the Great Inflation of the 1970s, when prices rose sharply and the purchasing power of money declined significantly. Those who invested in the stock market during this time would have seen their investments soar. From 1970 to 1980, the S&P 500 index nearly tripled, providing a return of over 140%. This far outpaced the rate of inflation, which averaged 7.3% during the same period.

Commodities, such as gold, silver, and oil, also offer a hedge against inflation. These tangible assets tend to increase in value during inflationary periods because their supply is limited and essential for industrial production and consumer goods. For example, gold is often seen as a safe haven asset, as investors flock to it during economic uncertainty. In the 1970s, the price of gold surged, reaching a peak in 1980, as investors sought to protect their wealth from the eroding effects of inflation.

However, investing in commodities comes with its own set of challenges. Unlike stocks, which can be held for the long term, commodities are subject to cyclical trends. This means there are periods of boom and bust, and investors must be mindful of when to buy and sell. For example, the oil price boom of the 1970s eventually led to a bust in the 1980s as supply increased and demand slowed. Those who bought oil during the cycle’s peak would have suffered significant losses.

Mastering the Art of Investing: Mass Psychology and Technical Analysis

Investors can use mass psychology to their advantage to enhance returns and time the market effectively. This involves understanding the emotions that drive the market and acting contrary to the masses. As legendary investor Warren Buffett once said, “Be fearful when others are greedy and greedy when others are fearful.”

For example, during the 2008 financial crisis, the masses were panicking, selling off stocks as they feared a prolonged recession. However, this presented a buying opportunity for those who recognized that the market had overreacted. Those who bought stocks during this period of mass panic would have seen significant gains as the market recovered and reached new highs in subsequent years.

Technical analysis, the study of historical price data and market indicators, can also be used to fine-tune investment decisions. Investors can identify trends and spot entry and exit points by examining long-term charts and critical indicators such as moving averages and relative strength. For instance, during the dot-com bubble of the late 1990s, a simple look at the long-term charts of tech stocks would have revealed unsustainable parabolic price movements.

Combining mass psychology and technical analysis can lead to even more powerful insights. In the run-up to the 2000 market crash, for instance, mass euphoria was evident as everyone, from taxi drivers to grandmothers, was giving stock tips. At the same time, technical indicators were flashing warning signs, with the NASDAQ index deviating far above its long-term moving average. This combination of factors signalled that a market correction was imminent.

Conclusion: Fighting the Silent Tax

Inflation is a silent tax that robs the poor and enriches the greedy. Central bankers and the financial industry use it to transfer wealth from hardworking people to the privileged few. However, by understanding the nature of inflation and the tools available to combat it, individuals can fight back and protect their purchasing power.

Investing in stocks and commodities offers a way to stay ahead of inflation and grow one’s wealth. By combining mass psychology and technical analysis, investors can further enhance their returns and time the market effectively. Remembering inflation is a stealthy enemy, and staying vigilant and informed is critical to safeguarding one’s financial future.

In the words of economist Henry Hazlitt, “Inflation is the one form of robbery that can be carried out on a massive scale and yet be generally accepted.” We must recognize this robbery for what it is and take the necessary steps to protect ourselves and our communities from its detrimental effects.