CHAPTER 1: "Everything is more Expensive"
This post is Chaper 1 of the book I’m writing. You can read the Introduction here
We can only see how everything became more expensive only when we look back in time. This phenomenon of everything becoming more expensive is called inflation.
We accept inflation without even asking why there is inflation in the first place. Maybe it’s because we also assume that our salaries also increase with inflation.
But the reality is that our salaries can’t keep up with inflation.
It gets harder and harder to keep up with the everyday rise in cost of living. Groceries, rent, housing, transportation, tuition etc. become more expensive.
No matter how hard we work, it feels like our salaries can’t keep up with the rise in cost of living.
$100 today won’t buy you the same things it used to buy 5 years ago.
🤔Do we need Inflation?
Inflation is calculated by the change in Consumer Price Index(CPI).
CPI includes a basket of goods like food, transportation, housing and others. The prices of these goods are calculated monthly. The yearly increase in percentage is what the government publishes as CPI Inflation.
If the inflation is 2% for a year, it means that prices cost 2% more this year compared to a year ago.
Many private companies use CPI inflation as a guide on how much salary increase to give their employees.
But CPI inflation is not a perfect measure of the real increase in cost of living.
Not all people use or consume the same things that are included in the computation of CPI.
A person that still lives with his parents will have a different inflation to someone that rents. A person who owns a car has different inflation to someone that use public transportation or someone that works from home. A person who eats beef and eggs will have different inflation to someone who eats noodles.
CPI inflation is not a perfect measure of the true increase in cost of living. But that’s not the problem that we need to solve in order to have a better financial life.
“The problem in the first place is why is everything becoming more expensive? “
In theory, prices should decrease because of technology. The things we buy should have lower prices because they are becoming easier to produce thanks to advancements in technology.
Smartphones are now cheaper because of more advanced technology and automation. It reduces the human labor needed in making phones therefore making the product cheaper.
In farming, it takes more time and labor using carabao than using a tractor.
In a perfect world, prices of everything should be decreasing rather than increasing. Today it seems that we are nowhere near that kind of future.
Everything is getting more expensive instead of getting cheaper.
💸You can't save money today
Maybe you are saving money to buy a house, saving for a wedding, starting a family or just want to save your money .
But saving money today means you are guaranteed to lose money because of inflation.
$100 today won’t buy the same amount of groceries in the next 5 years.
It’s not only food that costs more. Almost everything becomes more expensive over time.
I had friends who were saving money for their wedding, by the time they reach their savings goals, they aren't able to have the wedding right away because prices have increased. They had to wait longer to save more money to pay for the wedding.
If you are saving money to buy a house in cash, it’s guaranteed that by the time you reach the amount you need. You are likely to need more money because housing prices have increased. That’s why it’s normal to take on 20 to 30 years of housing loan to buy a house, we have no choice but to take loans because we can’t afford to buy a house just by saving. We are force to be debt slaves.
When we save cash, we lose money by inflation.
🕵️♂️The truth about Inflation
Have you ever wondered why prices of things increase?
We’re so used to inflation because we grew up experiencing it but we haven’t stopped and think about why there is inflation.
We know it, we feel it. But we can’t explain why there is inflation.
A product will increase in price if it becomes better or bigger. But the apple we eat today is the same apple 5 years ago. It’s the same with fish, pork, beef or eggs. They did not become bigger or better. But somehow, they became more expensive.
In fact, some of the products we buy became smaller but more expensive, this is called shrinkflation.
🏷️Everything is becoming expensive
Inflation is not a natural phenomenon like gravity or the sunrise and sunset .
Inflation doesn’t happen on its own.
Just like what we learn in school, for every effect there is a cause. But in school, they didn’t teach what is the cause of inflation. This was perhaps to hide the real reason why we have inflation.
Inflation is a result of something happening. It’s the effect of a cause.
What’s the reason or cause of inflation?
The true reason why we have inflation is because they increase the money supply.
Cause: increase in money supply
Effect: inflation
Increase in money supply and inflation are economic terms. I hate using these terms because they sound too academic.
I like to use words that are relatable and easy to understand, so I like to rephrase the above cause and effect to simpler words:
What really it is:
Cause: money printing
Effect: everything becoming more expensive
The more the government prints more money, the more everything will become more expensive:
Money printing = Everything becoming expensive
This is what inflation really is. It is as simple as that. We have inflation because we print more money. Prices of everything is becoming more expensive because we print more money.
In the past, inflation was defined as ” increased in money supply”.
This definition was later changed to “ increased in prices of goods”.
This was perhaps to hide the fact that the real reason why we have inflation is because they print more money.
When you asked your friends or family why we have inflation, they could not give you an answer.
They don’t teach in school that money printing = everything becoming more expensive.
We do have economics classes but the economics curriculum we have in school don’t explain why we have inflation.
The school system only teach us to memorize things but never question things like inflation and money printing. Perhaps it is because the government benefits from this money printing. In chapter 2, we will explore more why the government loves money printing.
💰What will happen if we all receive a Million?
When I was a kid, I asked my father why don’t the government just give us each a million so that we will all be rich and happy? He said “ if that happens, everything will become expensive and our money will lose its value”.
This is called hyper-inflation.
My dad was a retired seaman and didn’t had any finance background but he understood the concept of:
“money printing = everything becoming more expensive”.
This is what happened in countries like Argentina, Venezuela, Lebanon, Zimbabwe. Their currency has lost its meaning due to money printing that a toilet paper is more valuable than their paper money.
I am not saying that we will hyper-inflate like those countries. In those countries a combination of corruption, bad economic policies etc. are the reasons why they hyper-inflated. It could happen to us, but a lot of things have to go wrong for that to happen.
We’re certainly not immune from that. Because we used the same money that they used, it’s different currency but it’s the same type of money.
This type of money is called Fiat Money.
Fiat money is money that is backed by the government. It has value because the government says it has value.
Fiat money is money that can be printed.
Chapter 2 of this book will focus more on what fiat money is. We will answer the questions why fiat money became a money that can be printed.
💡CONCLUSIONS
The key takeaway from this chapter is to understand inflation.
By now, you know the true reason why there is inflation through my simple equation:
Money printing = Everything becoming more expensive
Inflation is not a natural phenomenon. We have inflation because we print money.
Chapter 2 will focus on money printing. Why we have it and why we do it.
Understanding the problems we have on our current money is important to understanding what bitcoin really is.
Because bitcoin was created to solve the problems that our current money have today.
NEXT: Chapter 2: “What is Money”
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