Debasing not just the currency

by Philip Brewer on 21 May 2008 20 comments
Photo: Philip Brewer

I eat lunch at a local fast-food place occasionally.  My usual order runs to just over $4, so I was annoyed when I realized while walking over there yesterday that I'd forgotten to pick up a nickel or dime--I was going to end up with a pocketful of change.  In fact, though, I needn't have given it a thought:  My order cost $4.60.

That disconnect is an example of one of the many ways in which inflation hurts the economy.  There's a certain convenience to just "knowing" how much something is going to cost.  When prices are stable, you can go to the store confident that the dollars in your wallet will buy what they bought last week.  During a time of inflation, though, any little purchase--lunch, a snack, a video rental--might cost significantly more.  Even if you have what it cost last week, you have to consider whether it might be necessary to stop by the ATM before you run your errand.

It's not a lot of trouble--a moment's thought, an occasional extra trip to the ATM, a few extra dollars kept in the wallet and the checking account--but multiplied by everyone doing the same thing, it adds up to a considerable amount of extra expense across the entire economy.  During a time of inflation, everyone ends up keeping a bit of extra cash on hand, because they know that this month's bills will be larger than last month's:  money that could have been productively invested ends up sitting, because everybody's estimate of their expenses has greater uncertainty then before.

In fact, though, that's not the main topic of this post.  In addition to costing more, my lunch was smaller--in fact, it was smaller by quite a bit.  Not only is the currency being debased, but the products that we buy with it are being debased as well.

A can of coffee that held 36 ounces has been replaced with canister of about the same footprint that holds 33 ounces.  (The new canister has a convenient handle that takes up the space previously used by the missing three ounces.)  Other items I buy have made similar changes to the packaging to try to disguise the fact that you're getting a bit less.

Now, although I'm kind of insulted by the way they try to hide what they're doing, there's nothing fundamentally wrong with changing the size of a package.  In fact, I'm actually rather pleased by the return of reasonable-sized units.  (For example, I really like being able to get 8 ounce cans of soda.  It's just the right amount to make a nice bourbon and coke.  If I bought 2-liter bottles, I worry that I'd end up drinking more soda.  And, if I didn't, it'd end up going flat before I poured my last 1.45 cocktails out of it the following week.)

Across the economy, though, it's no good when everything is being gradually smallified.  Just as with constantly changing prices, constantly changing package sizes mean that everyone needs to pay a little extra attention--and when they don't, they end up having to make an extra trip to the store, or else do without.  Neither of those outcomes is a catastrophe, but again, if you multiply them--and the effort made to avoid them--across everyone in the economy, it's a huge extra expense that doesn't benefit anybody.

How can you use this to your own benefit?  It's tough, actually.  Really, all you can do is minimize the effects.  The two big costs are:

  1. The extra time and effort spent keeping track
  2. The extra money spent sitting idle in wallets and checking accounts

These two are largely alternatives to one another.  If you pay close attention--check prices daily, check package sizes, keep track of actual amounts on hand (rather than counting packages), then you can carry on pretty much as before.  On the other hand, if you just keep a bit of extra cash (and ample stocks of household goods), then you don't need to pay much extra attention, but the money used that way can't be invested.

About all you can do is find your own sweet spot--pay more attention, keep more cash on hand, or do a little of both--and then wait for the government to get inflation under control again.

3
Average: 3 (2 votes)
Your rating: None
ShareThis

comments

20 discussions

Add New Comment

CAPTCHA
This test helps prevent automated spam submissions.
Guest's picture
Guest

You remind me of shoppers who will spend thirty minutes figuring out which can of soup will cost 3 cents less while they get raped by their mortgage companies, banks, and insurance companies, to name a few, for thousands of dollars each year.
And here is another tip for the poster. By the looks of your picture, it wouldn't hurt you to stop eating at fast food joints and drinking water instead of soda. You could stand to lose a few pounds. That will save you a thousand dollars a year and maybe tens of thousands of dollars in medical costs. Oh, and with your savings you can even splurge on a haircut and beard trim.

Guest's picture
Guest

There's really no reason to be so harsh, you didn't add anything important.

Jason White's picture

Philip, I was one of those who scoffed at the idea that inflation was really hurting us.  I was of the "just grin and bear" it mentality until a recent trip for our weekly groceries really got my attention. 

We typically buy and eat the same things each week (with two small kids there isn't much room for exquisite cuisine at our dinner table).  We do most of our shopping at a local Super Walmart and typically spend around $150 per weekly trip (a number that has been steadily increasing over the past few months).  Last weekend we were approaching $200, according to my running total, so we put back a few things we could live without to get back to our normal budgeted amount.  It looks like we'll have to get more creative on our next trip to the store.

Guest's picture
Curt

Nice post. I like to talk about inflation, because we are drastically underestimating the impact it will have in the decade to come. Prices will be going up year after year, forcing more people in to live on fewer and fewer dollars per month.

I'm not so sure people will carry more cash. First, they don't have am much money and second nobody carries much cash today - only credit cards. Also, we will have less and less products to choose from - as businesses go bankrupt.

Guest's picture
Kirk

I agree that portions are dropping. It is a hidden inflation. The restaurants and food companies are hoping we won't notice if the price is consistent, but the portion is smaller. We do Chinese take-out at the same place every couple weeks. I have noticed that the rice portion has gotten bigger as the meat has dwindled. Of course, rice is costing more so I bet they will fill my container with lots of sauce next.

I don't agree that the government needs to get inflation under control. This is the market talking. We look to the mighty Wizard too much to fix problems they cannot control. The only thing the government could do is lower the deficit. This will help buoy the dollar and control inflation. The Fed, while not technically a government organization (actually a private consortium of banks), could raise rates to stem the effect of inflation.

This is a world economy with 2 billion people moving from poverty to middle class. Demand is insatiable. Supply is dwindling. Econ 101.

Philip Brewer's picture

@Kirk:

The central bank causes inflation and the central bank can fix it.  That was the clear lesson of the 1980s:  Despite huge government deficits, the Fed brought inflation down sharply.  The only reason that we have inflation now is that the Fed thinks the alternative would be worse.  Just as soon as they decide that's no longer true, they can bring inflation to halt.

Despite the legal structure of the Fed (owned by the member banks), it is a creation of Congress.  Congress gave the Fed its mandate, and Congress can change it.  Congress created the Fed, and Congress can destroy it.  The Fed will always bend to the will of Congress.

You're right, though, to focus on resource limits.  That's a different problem from inflation.  Inflation is the money becoming less valuable.  Resource limits mean that everyone's standard of living is falling.  It's a different problem that shares a common symptom--rising prices.  The solution to inflation is straightforward--don't grow the money supply faster than the economy.  It's not clear that there is a solution to resource depletion.

StructuralPoke's picture

go to http://www.mouseprint.org/ for more interseting examples of the incredible shrinking product...

Linsey Knerl's picture

I, for one... totally agree with Philip's post.  And anyone who needs 30 full minutes to figure out the soup debacle has probably got more problems than just getting financially snowballed by their lenders.

 

Guest's picture
Joan

Dear Phil,

I want you to know that I have never responded before, I regularly read your posts and enjoy them very much, they are well thought out and well written. Good luck with your writing career, I just wanted you to know that you are are appreciated and not to worry about jerks like "Guest" who obviously have nothing better to do than
be nasty.

Guest's picture

I don't know what set off that first comment from "Guest". Your point is extremely well taken, and your examples of small, everyday expenses are just what the post calls for: they are pertinent, easy to miss, and their effect is cumulative. Keep up the good work.

Guest's picture
Kelja

Philip:

You say, "The central bank causes inflation and the central bank can fix it." This is a correct statement but... this is a big but... They won't.

Reason #1 - They'd collapse an already shrinking economy and market. Think the housing crisis is bad, just think what increasing interest rates will do to it. Additionally, higher interest rates could cause the stock market to tank. We're essentially between a rock and a hard place. Can't decrease the rate because that fuels inflation; can't increase it because it will play havoc with the markets. Between the proverbial rock and hard place created by, thank you, the FED.

Reason #2 - Inflating the currency, creating more paper money out of nothing is the only way out of our deficits. We are hopelessly in debt to other nations with no real way to pay it back. If we can cheapen the currency, we get to pay the bill with dollars that are worth less. A neat trick, heh?

Volcker was able to jump the rates in the 70's to save us from Carter's mistakes. It caused pain for awhile, yes, but we didn't have a housing crisis and we weren't a debtor nation. Also, we had a positive savings rate.

Inflation - you haven't seen anything yet. If you check the futures markets you can see it coming like a runaway freight train. Inflation is an insidious tax on everyone and another way to re-distribute wealth.

Funny, (for anyone who reads the constitution) the congress is supposed to be in charge of the currency. We gave that responsibility away to a non-governmental body, the FED, 100 years ago. Before the creation of the FED, inflation was benign, hardly getting worried about. Since its creation, inflation has been built-in to the system. The FED was created, so it's said, to protect us from the vicious economic cycles. But it didn't do that either.

Go figure.

Philip Brewer's picture

You don't need to worry that a comment from a passing guest is going to hurt my feelings, but I do appreciate the support.

Besides, in this case, our guest gave me a great idea for another post.  Look for it tomorrow!

Myscha Theriault's picture

You're a rock star. And I'm quite certain I'm not the only one that thinks so! Good job, as usual.

Guest's picture
biking gal

"Guest" isn't behaving very guest-like, but you remain the perfect host. It's obvious who the better man is. But I pity "guest". We may have to deal with him for a minute, while he can never escape himself.

I love your posts for their intelligence and depth. And I love Myscha's for the amount of content she can pack into one subject. (She can think of 83 things to do with a paper clip, while I could think of maybe 5, and one of those would be to hold paper!)

Keep up the good work!

Guest's picture
Gates

Kirk nails it with this quote: This is a world economy with 2 billion people moving from poverty to middle class. Demand is insatiable. Supply is dwindling. Econ 101.

It's good to think that the Federal Reserve has something to do with this, historically they have. But the Reserve's does not have control this time, the Reserve cannot modify this inflationary effect. Even if the Reserve stopped printing money, the "inflation" would just keep running. Too many people want the same resources as the "average American".

The reason is simply stated by Kirk: Demand is up. And it's worth noting that for many years the US has had the cheapest access to goods anywhere. Even two years ago Canadians were paying significantly more for goods and services, even after exchanging currencies. These are people less than 100 miles away paying 10-30% more for simple things like food, books, clothes & cosmetics. Even now with the dollar at par, $10 still gets you way more food in a US restaurant than an equivalent Canadian one (even within a chain).

Phil, you call this "resource depletion", but I think it's fair to call it "globalization". And it's not just a US thing, Canada will be going through the same crunch on a smaller scale. But as the wealthiest countries these two are going to be pulled down by the effects of globalization.

The reason Kirk brings it up is that the money issues that, what most people are seeing right now is not primarily an inflation issue, it's a competition issue. The CPI is simply not accounting for the prices changes that we're seeing. Nor will it in the future. Give it another 2-3 years and you'll likely see unit prices 1.5 to 2 times even current day prices. This number will have little to do with the available money supply.

Europeans are already paying 1.5x to 2x (currency-adjusted) for many goods and services. Parity is a long way away.

Philip Brewer's picture

@Gates:

No, I agree:  A rising standard of living in poor countries (driven by globalization), in the face of resource limits, leads inevitably to lower standards of living in rich countries.  It takes the form of both rising prices and slowing economic activity.  Further, there's nothing the Fed can do to help.

What the Fed can do, though, is make it worse.  It can (as it's been doing lately) pump up the money supply to try to head off the slowing economy.  It can also (as it probably will in a few months) ease off on money supply growth to try to bring prices back in line.

Another factor layered on top of all this is that we're seeing some real dislocations in the financial markets.  Some of the effect of that is deflationary, which is another reason the Fed's policy of late has been inflationary.

Even though part of the price increase that we're seeing are not inflation, but rather a decline in standard of living, I suspect that a good bit of it is inflation.  The Fed has decided (for the reasons mentioned) that this much inflation is a lower risk than less inflation.  The point of my article was to point out some of the less-obvious costs to the economy of this policy choice.

Guest's picture
Curt

Sure, there are other factors of supply and demand from an increase in standard of living in many nations, but that is about 1% of the problem.

The other 99% is caused by increasing the money supply - which is the Fed is doing at a very fast rate. If supply and demand was the primary cause, than why didn't we see inflation in the last 5 years with China and India growing 8-12% per year? And why are we seeing inflation spiking all around the world?

Here is an article about this:
Inflation Is Everywhere
http://www.pennyjobs.com/pp/public/Articles.aspx?aid=83

Fred Lee's picture
Fred Lee

Just wanted to point out that a container of Edy's Ice Cream has shrunken by a whopping 25%. Does anyone else feel the same pain as me?

And by the way, Phil, I like your beard. Don't shave. 

Guest's picture
Ginny

Average price gasoline 1981: $1.38

Adjusted for inflation to 2007: $3.43

Add a few more percent for 2008 inflation.

Source: www.westegg.com/inflation

Paul Michael's picture

Nicely done Philip, to get something positive out of the first comment. I always admire people who put themselves out there with their complete name under their comment, umm..."guest."