Many in America are rejoicing over Congress' new $2.3 Trillion omnibus spending bill which includes $900 Billion for COVID relief. Some are upset that the direct stimulus payments will only be $600.00 per person, but it also included a renewal of the extra $300.00 per week for those on unemployment. Yet some of us are watching this, and other world markets, and seeing the end result beyond just the lockdowns (especially pertinent given the London airport lockdowns), the business closings, and "free" stuff. Eventually the piper must be paid, and the longer we wait, the worse it gets.
Most larger economies will use some degree of what's called "quantative-easing" to monetize the debit to make it easier to pay off. This, in a more common vernacular, is called inflation. They'll devalue the money so that the money is easier to pay back. In other words, if we devalue one dollar so that it is now worth 50 cents, then paying back a two dollar debt is easy. You can read more about their plan in this article from Pharmaceutical Technology. The problem is that this plan also has some long term side effects that many people aren't considering.
Many people already have a hard time keeping their wages in line with inflation. Some people are lucky enough to get a 1-2% Cost of Living Adjustment (COLA) each ear, and many don't even get that. So every year the money you make devalues at 3-4% and you only get a 1-2% adjustment to compensate for it. In other words, you're losing about 1-3% each year of your actual buying power by not keeping up with inflation. Yet what if the inflation rate rises by more though "easing?" What then?
Well, most companies that survived the shutdowns and lockdowns didn't do so well, so you can expect that those COLAs aren't going to happen for some time. They have profitability and financial stability to regain after all. So you'll be losing the entire 3-4% per year, and that's BEFORE "easing."
Now let's say that the Federal Reserve (FED) decides that we can handle a 2% easing per year to cover all of this debt, that means that your inflation rate would be 5-6% per year with no COLA to account for it. Yet that's all just jive to most people, so let's see it in action shall we?
Tom makes $30,000.00 per year, and his wife Marie makes $35,000.00 per year. Now $65,000.00 isn't a ton of money for a full household income, yet we want to display the principle, it gets much worse the higher up the scale you go.
In 2021, things are allowed to return to normal and we add easing, so let's say it's a 3% total inflation with easing. No COLAs, so this year Tom and Marie lost $1,950.00 in buying power. They still made $65,000.00, but because of inflation, it was only worth $63,050.00.
In 2022, we have a more normal year, and inflation is back at 3% plus the 2% easing, that means it's a 5% inflation rate. Now, we have to use the $63,050.00 since we're tracking buying power not dollar for dollar, but this year, Tom and Marie lost ANOTHER $3,152.50 in buying power and are down to $59,897.50 in buying power versus their original.
In 2023, there's a really good market year, and the company's performance even lets them give a COLA. So inflation was 4%, and easing was 2%, yet there was a 1% COLA. So the effective inflation effect on their wages was 5%. 5% of $59,897.50 is $2,994.88. Yep, you guessed it, that's ANOTHER loss. So now his effective buying power is $56,902.62 versus the original.
So they're now making $65,650.00, but they can only buy $56,902.62 worth of things with it to compare dollar to dollar buying power. Now Tom and Marie are both looking for new jobs that pay more because they've lost almost $10,000.00 per year in buying power, or almost $1,000.00 per month in income. Any wonder why people are struggling to keep up with rental prices?
You see, money is NEVER free, and you end up paying for it somewhere, but this is how politicians hide the prices of what they're doing from you. It just get's eaten up in inflationary costs and you never see it, you just wonder why you can't afford things anymore. Well, this is why.
It's similar to how corporations repackage products to raise the prices without raising the prices. The price is the same, but the box is thinner, there's more air (for "protection"), AND they up the number of cheaper additives on top of that to devalue the product while still charging you the same price. Most just wonder why they seem to be going through the cereal faster than they used to.
We'll all end up paying for this, sadly, it will likely have a long term impact on our economy and will hinder our attempts to make things better for the average person. You'd better forget the "Fight for Fifteen," it needs to be at least twenty to keep up with the inflation that's coming.
So cheer if you want, but remember, you and I will be paying this bill. We'll just never know how much the payments are without doing all the math.