You Are Being Lied to About Inflation. It Hasn’t Been 2% for 30 Years (Here’s Proof).

I am going to hang this tweet on my wall for the rest of my life. It sends chills down your spine when you understand it and go “wow, I get it.”

Tim Denning
Jan 12 · 10 min read
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Image Credit: EmmanuelFaure/Getty Images

The calculation of inflation is the greatest thing keeping you poor or just over broke. It’s harsh. But it’s obvious when you trawl through the public data.

Inflation just means the decline of your purchasing power over time. Simplified: What does $20 in 2015 buy you compared to $20 in 2021?

I see people obsess over how much money they earn from their job. Even more ridiculous, I see people beg for menial pay rises.

Purchasing power leaves pay rises and bonuses for dead when you understand it. Instead of asking yourself “how can I make more money?” ask yourself “how can I protect my purchasing power?”

Wealthy people who have their own bankers have known this secret for years. I met many of them while working in finance. They spent a lot of time understanding different asset classes. They varied their allocation of money to an asset based on whether the global economy was growing, had stalled, was in a recession, or had fallen into a deep depression.

I was fascinated because they looked at money differently. Until that point, my number one goal with my 9-5 job was to save money.

Their number one goal was to improve their purchasing power relative to the time in history they were living through.

How much you earn is not as important as your purchasing power.

This Idea Blew My Mind

Think of purchasing power as level one of the money game. I had no idea until two months ago that there was a level two to the money game.

Are you ready?

Michal Saylor, CEO of US publicly listed company MicroStrategy, wrote this tweet:

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Screenshot from twitter taken by author.

I have read this tweet over 50 times now. This tweet is so important it’s going to be the first one I frame and hang on my home office wall.

Now I realize you’re not all financial gurus. I’m going to pull apart the tweet for you so it’s easier to understand. The value your work generates needs to be stored. Most of us store the value we create in the currency of the country we live in.

Fiat meaning

‘Fiat’ just means a currency created by a government. If we break down what a currency is even further it gets interesting. A one-hundred-dollar US printed note is an IOU from the government. That’s right.

Cash you can hold in your hand is an IOU. In the olden days these slips of paper were redeemable for gold if you wanted it. Not anymore, obviously.

Stores of value

Michael’s tweet mentions stocks, bonds, and real estate. These assets act as a store of value. Many people think they are escaping the problems of governments creating currency out of thin air and inflation by owning them.

What if the financial assets you have always been taught to buy weren’t what they seemed?

This is what Michael is attempting to communicate with complex language.

When you say “my home went up by 10% last year” or “my Amazon stocks went up by 30% this year,” did either asset really go up? When you measure whether stocks or real estate went up in price, it depends on what you measure them in.

This is the magic trick most are unaware of.

If you measure how much the overall US stock market went up over the last 30 years then you’d be impressed. It looks amazing! This is where the painful “buy the vanguard stock market index fund” cliche advice comes from.

But if you measure the price of stocks using another metric — like digital currencies or gold — you get a very different picture. The point is not for you to agree with me which assets are better or worse or bash Tesla stocks for their record, some would say, unsustainable gains. The point is to make you think.

What am I measuring the value I create in? What does my value look like when measured with a different metric?

Did the price of the assets you own go up, or did the value of the currency you’re using to measure those assets (your purchasing power) go down?

Monetary expansion

Michael mentioned the phrase monetary expansion. The government and central banks that control money have two magic tricks: 1) Create more money out of thin air. 2) Raise or lower interest rates.

Both these magic tricks are given lots of fancy names that are confusing: quantitative easing, stimulus ($2000 checks of free money), fiscal spending. It’s all a load of nonsense.

Monetary expansion means creating more currency out of thin air. This is a hidden tax on the people who hold that currency.

Currency is created out of thin air for a few reasons: a pandemic (crisis), to fund wars, to help lift a country out of a recession, to give the currency to a bank so they will lend more money to people and businesses.

Risk premium

Another complex term. Everything you do with your money has risk. Guess what? Holding a currency has risk too. If the country you live in has an issue then that affects the currency.

Ask the Japanese people. Ask them about “The Lost Decade.” They have never recovered. The Japanese people’s purchasing power is still being affected today. Hedge Fund Manager, Ray Dalio, often talks about it using the phrase “the changing world order.”

A changing world order simply means, over time, different countries can be more influential than others. You could be living in a country that is a superpower and then a new country could take over. What causes the shift? New alliances, currency battles, the size of a country’s GDP, wars, etc.

The dominance of countries shuffles around over time and has for thousands of years. As a normal person like me, you can’t change it. All you can do is be aware of the shift in a nation’s power and invest your money accordingly.

“Grow cash flows” faster than the printing of money

This is the last part of Michael’s tweet. Some stocks, bonds, and real estate generate cash when you own them. (You knew that already — it’s not rocket science.) If you have an asset generating cash and rising in value over time, then the increase in money created out of thin air matters to you.

Michael says the cash you generate from your assets has to be greater than the amount of money created out of thin air (also known as inflation, which simply means prices rising).

If I Gave You $1 Million Would You Only Buy Groceries?

We’ve arrived at the intersection. You know what assets there are, and you understand why governments print money. You understand how the value you generate from your work is given to you in currency (IOUs).

Now it’s time to look at the concept of inflation. You’re told inflation is measured by CPI (consumer price index).

Investopedia explains CPI beautifully:

The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.

It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

Now comes my question: If I gave you $1 million tomorrow would you use it all to buy groceries? You would buy some groceries, sure. But the bulk of the million dollars wouldn’t be spent on groceries, would it?

What would you do with $1 million?

Simple. You’d use most of it to buy stocks, real estate, bonds, gold or digital currency. You’re not stupid. Of course you would invest the money wisely after a few luxury purchases.

So then why the heck do we measure inflation based on consumer goods and services?

What if we measured inflation based on the things we actually buy with the bulk of our money? Well, inflation would look different. The average person would discover they have been lied to about inflation.

The conventional wisdom of “prices rise by 2% on average per year” would go out the window.

You would ask for pay rises differently. You would choose a job and the accompanying salary being offered differently. You would store the value you earn from your work differently.

The way you think about money would change forever.

You can see why Michael Saylor’s tweet is one I’m going to frame and hang on my wall for the rest of my human existence. It’s a powerful concept. It sends chills down your spine when you understand it and go “wow, I get it.”

“Inflation is Killing the American Dream”

Anthony Pomp writes a financial newsletter to over 100,000 subscribers. He goes a step further and says inflation is killing the American Dream. I agree. It’s killing the Australian Dream (where I live) too.

Pomp cites data from the US Bureau of Labor Statistics. The conclusion is simple: inflation has been between 2.5% and 0% since 2008–2009. US citizens have not seen inflation despite the government creating trillions of dollars in 2020 out of thin air (with a few more trillion on their way).

Pomp says the narrative we’re told to believe is technology is driving the cost of stuff and labor down so that’s why there is very little inflation. Convenient. What’s more concerning is Pomp points out something I hadn’t considered:

Inflation affects various classes of society and races differently.

The rich who understand inflation and stop at nothing to protect their purchasing power using professional financial advisors profit off the problem. Those who have few assets, or worse, zero assets, are taken to the cleaners financially and pay for a crisis like covid.

Another way to measure inflation

Pomp recommends a more honest index than CPI created by financial advisor Ed Butowsky, called The Chapwood Index. This is Pomp’s mind-blowing conclusion:

The Chapwood Index shows that the average inflation over the last 5 years is between 8.1% and 12.9% in the top 10 [US] cities.

That is a big difference between the 2% inflation assumptions that people make.

The explanation of the lie that is inflation is articulately nicely on the Chapwood website. I’ve dissected the whole explanation given down to a few sentences so you don’t get lost in the complexity.

Salary and benefit increases are pegged to the Consumer Price Index (CPI), which for more than a century has purported to reflect the fluctuation in prices for a typical “basket of goods” in American cities — but which actually hasn’t done that for more than 30 years.

As long as pay raises and benefit increases are tied to a false CPI, this trend will continue.

Pomp goes on to describe the problem of inflation as a death sentence, financially, for most Americans.

“One way to think about this is if you are simply generating 8% a year in stock market returns on average, your investment returns are not keeping up with the real rate of inflation.”

It’s this insight from Pomp that should make you want to question the “buy the vanguard index fund and you’ll be right over the long-term” advice.

An index fund of stocks returns most people (me included) 7%-8% every year. But when inflation is calculated to be a lot higher, it doesn’t help you retain your purchasing power.

Inflation Was 20% in 2020

Michael Saylor has a drastic opinion. He says when you measure inflation based on something real, like stocks, for 2020, inflation is more like 20%. This opinion is based on a simple idea.

When you hand out free money to corporations, businesses, and everyday people, they put the money into the stock market. The stock market is one way to see the invisible mystery of inflation in her true colors.

I look at the inflation problem with a simple filter: You can’t create trillions of dollars out of thin air and say there is no effect. It’s not logical.

If it were possible, then a country could pay all their debts for eternity in money they created out of thin air. The logic doesn’t work for monopoly money, so why would it work for a country’s currency?

Think about stock prices when you think about inflation and your purchasing power. The two are linked.

The Solution to Inflation

Now is not the time to bury your head in the sand.

When I saw the lie of inflation for what it was, it scared me a little. I felt a little sick. I felt stupid for asking for all those pay rises. I felt silly for thinking I was safe because my employer gave me incremental pay rises tied to CPI (not in 2020 though). I felt dumb for spending 5+ years putting all my money into a savings account and thinking I was a genius.

I felt different about my large investments in index funds, and the cliche advice given by investment legend Warren Buffett: “Buy the index.”

I haven’t come to any full conclusions yet. The point of everything I’ve shared with you is to make you think. When you question the bubble you’ve been living in you discover new insights. Learning is how you increase your value.

My research has led me to the potential solution. Decentralization will swallow the inflation problem, eventually.

The world is shifting. Dapps (decentralized apps) are being built. Entire parts of the internet are becoming decentralized. In the future users will own the platforms, apps and companies they interact with.

Ownership is changing.

Money is changing too. Defi (decentralized finance) is another concept tackling the lie of inflation. New assets to replace the old ones — stocks, bonds, gold — are being created. New ways of moving value are coming.

The dream is that anything with value can be put online and split up, easily, into billions of tiny pieces. Imagine owning $20 of Kim Kardashian’s home without endless paperwork and hidden risks. Defi could make it possible.

Until decentralization takes over from centralization, the main thing you can do is get a financial education.

Educate yourself on how your money works.

Understand what assets exist. Understand when to own what assets. Understand the ways you can store the value you create. Overlay everything you learn with a risk lens to ensure you don’t get greedy and lose all of your money.

When you question the concept of inflation, the value you create through your work and time away from your family, fundamentally changes.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.

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The Ascent

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Tim Denning

Written by

Aussie Blogger with 100M+ views — Writer for CNBC & Business Insider. Inspiring the world through Personal Development and Entrepreneurship — timdenning.com/wc

The Ascent

A community of storytellers documenting the journey to happiness & fulfillment. Join 150,000+ others making the climb on one of the fastest-growing pubs on Medium.

Tim Denning

Written by

Aussie Blogger with 100M+ views — Writer for CNBC & Business Insider. Inspiring the world through Personal Development and Entrepreneurship — timdenning.com/wc

The Ascent

A community of storytellers documenting the journey to happiness & fulfillment. Join 150,000+ others making the climb on one of the fastest-growing pubs on Medium.

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