Play Pretend

FIAT Money is worth something because the Government says it is worth something. It is worth something because we all agree to play along. The adult version of play pretend. Interest is the price of money. In most countries, that price is set by the Government. The can't be too silly about it, because other Governments set prices too and exchange rates mean you can go play a different game if one game gets too ridiculous.

Inflation is the reminder that money is just a game. Ask anyone who has lived through periods of inflation about how much pocket money they got (if they were lucky enough to get pocket money). I got my age. R7 when I was 7. R8 when I was 8. It seems South African parents in the 80s were fond of R2 as the currency to get kids to do chores. Making breakfast, mowing the lawn, taking out the rubbish. Good luck trying to get a kid to do that for R2 now. When the Rand (R) was initially introduced in 1958, it replaced the South African Pound at a rate of R2 to one pound (£). Me thinks maybe those parents got a pound when they were little terrorists.

If you hold cash, it won't be 'worth' as much in the future. This is a way of getting people to spend their money and keep the wheels turning. 'Financial Repression' is when the Government sets the price of money below inflation. This means that in reality, you are paying people to borrow money from you. The *REAL* interest rate is the *NOMINAL* interest rate (the number you see) less inflation. Money should cost something, but should doesn't pay the piper.

A *REAL* asset, is something that actually has a job. Real assets provide some protection against inflation. If you own a thing in the real world that does something, its price will tend to go up with inflation. That is what inflation means. Money buys less real stuff. So if you own real stuff, inflation has less of an effect.

My personal preference is to get my money a real job. I invest in Equity. Equity is a share of ownership in a real underlying business. By buying shares in 20-25 companies, I am getting my money 20-25 real jobs. If those businesses create value, then my money will grow. If they don't create value, my money won't grow. But it will be protected (somewhat) from the mood changes of Government.

A Productive Asset is something that grows in value because it generates something real. That something real can be sold for cash. The magic happens when that cash actually buys something else that is real rather than cash. If it is a factory, perhaps the cash is reinvested in a bigger factory. Maybe the factory is big enough already, and the cash gets a job in another Productive Asset. The key is that value is being created, and any cash generated is reinvested.

Reinvestment is the key to the real game. Money is just a way of keeping score.

South African Money

Inflation & Universal Basic Income

The key drivers of inflation are (1) expectations, and (2) supply and demand. 

1) As we become used to inflation, we expect wage increases. Everything gets more expensive, so we are no better off, but most people don't think in mathematical terms - so they are happy because the number is bigger.

2) If there is no more stuff, but more people want the same amount of stuff - the price will go up. Fewer people will want the stuff as it gets more expensive. More people will provide the stuff as it gets more expensive. Inflation is a signal to use less, or make more.

Inflation happens most rapidly as a signal that there isn't enough production. Hyper-inflation happens is a great signal that things are falling apart. You have to spend your money quickly, because it won't be worth anything rapidly. It is a the most tangible sign that things are running out, and everyone is living hand to mouth.

If a Universal Basic Income (UBI) is funded by a transfer, there is no more money in the system. It is just changing hands. Expensive luxury goods may get cheaper if the net contributors have less money to pay for those luxuries. Basic goods may get more expensive, because people can now afford them. This would shift the incentives from producing luxury goods to producing basic goods. All good.

Even if a UBI was funded by printing money, if it was distributed universally, it would effectively be the same thing as a transfer. It would just be sneakier. Same total amount of goods, but more money. People who had nothing would now have at least a minimum (even if it was worth a little less). Basic goods may be more expensive, but (1) this would encourage more production, and (2) the UBI would be paying for that increase for poorer people.

If this doesn't make sense, just think of the sneakiness of normal inflation. A salary can increase without you being able to buy more! Money isn't actually a thing. It is a law. It is just a way of accounting for who owns what. An agreement. We could just decide that everyone owns enough to survive.

The Basics

Housing Inflation

By lending money to people to buy houses, you don't make houses more affordable. You create money, not roofs. The financial world helps things happen. It acts as a lubricant or a catalyst, but the real drivers are supply and demand. Money and debt are ways of counting. They aren't the things you count. If you want affordable houses, you build more houses. The Catch 22 we find ourselves in is that people see housing inflation as investment growth. When people buy a house (unlike a computer, car or television) they want price to go up over time. One interest group (those with homes) wants the price to go up. The other (without homes) wants the prices to go down... till they buy, then they switch groups. It isn't a solvable problem. It is politically impossible to please both groups. If the game doesn't work, change the game.

If you are crazy, you don't have to fly

If you don't want to fly, you aren't crazy

Stretched Porridge Money

When I moved to London in 2008, one of the noticeable differences was less worry about inflation. I worked in investments and all the numbers in South Africa focus on real returns. In other words, the money you have made after accounting for everything getting more expensive. Once inflation dips below 2-3%, people forget about it. Prices still grow, but quite slowly. Now when I visit South Africa, it is cheap relative to London. It is cheaper for me to travel here than it is for me to stay at home. But the numbers have gotten silly. 

When I was growing up, I would get R2 on a Friday for having made the porridge for the family in the morning during the week. My 'Porridge Money' would be enough to buy a Super Moo (flavoured milk drink) and a packet of crisps. Movies would cost around R7.50. Now they cost about 10 times that. R75 is still much less than I would pay for a movie in London. Gem and I like to go to the Peckhamplex. An independent cinema which charges 'just' £4.99 (About R110).

Inflation is a funny animal. People already don't really understand money, and inflation makes things even more complicated. Investment people panic about inflation and they panic about deflation (seen in Japan). Japan has seen decreasing prices. This means if you keep your money in the bank and it stays the same, you will be able to buy more with it tomorrow. Steady, stable prices are easier to deal with and plan for. Houses in Tokyo are cheaper today than 20 years ago. Tell that to a Londoner.

Mansa Musa of Mali (1280-1337) was the richest person to have ever lived. Timbuktu where he lived boasted vast libraries, and was a centre of learning and prosperity at the heart of the Trans-Saharan trade route. He was a Muslim (Africa's trade history with the East long predated its interaction with Modern Europe) and once did a pilgrimage to Mecca. He was so rich that he freely gave people gold. Like a world where the richest man has all the water, Musa brought rain. This wreaked havoc on Egypt when he past through. The amount of stuff stayed the same, but now everyone had lots of money! It took more than a decade for things to regain some normal functioning. (As an aside, the first European 'discovered' Timbuktu in 1828. By that time, like Rome, it had fallen)

Inflation and Deflation aren't well understood. Even by people who understand money a little better than average. Money is a very abstract concept. Money isn't actually a thing. It is a promise of a thing. It doesn't do anything itself. It is a lubricant, or a messenger, or a tool to help people be productive. It is smarter than barter, because you don't have to find someone who has, or does, what you need. You can just set a price. The problem with prices is they move up and down. Price is not value. It is based on supply and demand. How much is wanted and how much there is. It changes. Inflation up. Deflation down. 

One of the push-backs I have heard on Universal Basic Income is that it would lead to inflation. That basic food stuffs are already expensive, but that if everyone was given enough money to buy food, accommodation and education, the prices would just sky rocket. This is partly true, but it also misses the point.

The richer people get, the less they spend on the basics. We only need one bed. Our tummies get full. Our needs get met and we move into story land. If you want to make money from a rich person you have to tell them a story. You have to convince them that the wine, whisky, coffee, cheese, holiday, art or whatever is incredibly unique. Convince them they are inadequate now, but you can help. You have to make them feel special. You have to decrease the supply. You have to provide the one and only. You aren't dealing in the realms of need anymore. You are dealing in the art of illusion and manipulation. Of smoke, mirrors and heart strings. If they think they have enough, you have lost.

If everyone had a Universal Basic Income, basics probably would get more expensive. Only if there wasn't enough of the stuff. So if there wasn't enough bread, but demand increased because the hungry now could 'vote for bread', then yes the price would go up. All this would mean is that we would now know we need to make more bread! Denying someone the ability for vote for bread, means that the price of bread is wrong. It should be higher. We should make more bread. Higher prices will encourage more bakers. It doesn't mean the hungry should stay hungry.

Even if a UBI lead to inflation of basic goods, the poor would still be better off. They would be able to afford bread. The better off would just have less money available for their stories. That sounds like a good deal to me. When we started making enough bread, the prices would normalise again. Instead of one Mansa Musa, we would have people with full tummies able to tap into their creativity and fully participate in society.