Inflation And Deflation

Central banks around the world are plotting to make your money evaporate by 2% every year, and they think this is saving your life. What's even more outrageous is that if your money doesn't evaporate, they are likely to suffer to the point of collective insomnia. Speaking of which, I believe everyone already knows what we are going to talk about today, which is a topic that everyone has been highly concerned about in recent years. It is also a "monster" that big shots like the Federal Reserve, European Central Bank, and Bank of Japan, who control the lifeline of the global economy, are staring at every day - inflation.
How does inflation destroy the economy? How does inflation plunder the poor? How does inflation play different roles in the world of the poor and the rich? Do you think deflation is better than inflation? Today we will talk about the past and present of inflation and deflation, as well as the shocking secrets behind them.
Why is it said that a decline in prices is a disaster, and that money that is too valuable can actually be fatal? Let's first talk about the essence of something. Do you think inflation and deflation are just simple fluctuations in prices? That's just too naive. Inflation is all about inflation, which means that the money in your hands has shrunk and is no longer valuable, but this shrinkage is not evenly distributed. Some people say that facing inflation, everyone's outcome is the same, and everyone's money is depreciating. Some people also say that the assets of the rich can resist inflation, while the poor are the most miserable. However, the truth may be much more cruel than this. Inflation is actually a carefully designed wealth transfer.
How did this transfer happen? We now imagine the economy as a river, where the central bank's printing of money is like releasing water from the source of the river. This water does not instantly flow through the entire river, but first flows upstream, then slowly flows to the middle reaches, and finally flows downstream. Banks and large enterprises are clearly the first to receive new money in the upstream, while small and medium-sized enterprises are in the midstream. They can only drink water one step later. Ordinary people and ordinary workers are waiting downstream for the water to flow here, which is already their last stop. At this point, the key to the mistake came out. The upstream people received the money first. When they received the money, the prices of many things in the market had not yet risen. They could use cheap money to buy houses, stocks, and equipment. By the time the money was saved downstream, the housing prices had already risen, and even the prices had skyrocketed. That's why your salary had increased by 10%, but the cost of living had increased by 30%. By the time the money arrived at you, your purchasing power had already reached a discount.
What about deflation? Many people may think that deflation is good, things are cheap, money is hard and valuable, but it is actually a big mistake. Deflation is the real economic killer, because deflation can stimulate human nature. The most terrifying instinct is to wait indefinitely. Today, when the housing price drops by 100000 yuan, you will think, 'Wait a little longer, maybe tomorrow it will be 200000 yuan.' Today, the price of mobile phones dropped by 1000 yuan,What you might be thinking is that next month there might be a decrease of 2000 yuan, and even if you buy cabbage, you might wonder if it will be cheaper tomorrow. At this point, the question arises: when everyone is waiting, who will make the consumption? A market economy without consumption is like stagnant water. What if businesses can't sell their products? He can only lower the price, so what if he can't sell even after lowering the price? Continuing to lower prices until they reach a certain level means that everyone is losing money, and if they lose money, they will have to lay off employees. This means that more people have no money to make money, and if they don't make money, they dare not engage in consumption. This will form the most terrifying death spiral in economics.
Japan is a living case. After the foam burst in 1990, Japan fell into a deflationary quagmire that lasted for nearly 30 years. House prices fell by nearly 70%. Do you think people are happy? On the contrary, in this process, the whole society has entered an era of low desire. Young people do not buy houses, get married, or have children because tomorrow is cheaper anyway. Instead of working hard, it is better to wait directly. Enterprises are not much better, and they dare not invest or expand because investing is also a loss. This is the most terrifying aspect of deflation.
At this point, you can probably understand why central banks around the world are pursuing a 2% inflation rate. Why do we start by saying that your money evaporates by 2% every year? In fact, we are trying to save you. You should know that this 2% is not a brainstorm, but a golden equilibrium point that has been reached after countless trial and error attempts. Why is it always 2%? Because this number can precisely achieve three key indicators.
The first point is to give enterprises a certain profit margin. A 2% inflation rate means that enterprises can also moderately raise prices. With profits, there will be motivated production, and with production, there will naturally be employment. The second point is to moderate and dilute the debt. If you borrow 1 million today, and you only need to repay 980000 yuan of purchasing power next year, this will prevent the entire society's debt pressure from crushing the economy. The third is to force people to take action. If money automatically depreciates by 2%, your first choice may not be to save it, but to invest and consume it. Only in this way can the economic vitality flow.
Philosopher Aristotle once said that virtue is the middle ground between two poles, and that 2% inflation is actually the middle ground of the economy. It will not turn your money into waste paper, nor will it turn the economy into a zombie. Excess is not enough, just right.
You may be wondering, what if this 2% equilibrium point is disrupted? History has actually taught us two bloody lessons. The first one is about inflation. In 1923, in Germany, to what extent did vicious inflation reach? In the morning, you received your salary, but in the afternoon, you may not even have enough money to buy a piece of bread. It's like a joke in Germany at that time, a German went to buy bread with a sack of money, but was robbed on the way. After the robber got the sack, he threw the money away and took it away because the sack may be more valuable than money at this time. This is a typical case of high inflation, which can directly lead to the complete collapse of the entire monetary system.
The other extreme. As we just mentioned, Japan's 30-year deflationary GDP growth has been almost zero, dropping from the world's second to fourth place. What's even more frightening is that the entire nation has completely lost its fighting spirit in this process, and the whole society is filled with the belief that no effort is useful anyway. This will gradually become a truth like existence and a national consensus in the whole society, worrying about progress and setbacks. This despair is sometimes even more terrifying than poverty.
At this point, everyone may be curious, what is our current situation? It's very subtle. On one hand, CPI is hovering around 0, pork is cheaper, and commodities are falling, which looks like deflation. On the other hand, housing prices in core cities are still adjusting. First tier cities are relatively stable, but the costs of education and healthcare are becoming increasingly expensive, which seems to be experiencing structural inflation.
So some people say that we are experiencing a world of ice and fire, and the economy seems to be walking on a tightrope. On the left is the abyss of deflation, and on the right is the cliff of inflation. We must maintain a high level of balance. So, how should ordinary people get through this cycle? Should we save money or spend money when inflation occurs? Let me put it this way, saving cash when you're bloated is like buying this ice cube for winter. It looks like this huge ice cube is quite valuable, but in reality, it keeps melting every day. However, spending money recklessly is even more foolish because you may buy a pile of garbage that depreciates faster. What is the correct approach? It is to turn the previously non appreciation cash into something that can outperform inflation, which is commonly referred to as the means of production in economics.
However, it should be noted that not all assets can outperform inflation, nor can all assets be called means of production. For example, houses in the suburbs or sunset industries may depreciate faster than cash, so you need to find truly scarce things with sustained value.
What should we do if we face deflation? Cash does look good in a deflationary cycle, but it cannot be held back. It is not simply a matter of waiting for a rabbit, but a wise and prepared wait. When panic reaches its peak and good things are sold at a low price, act decisively, seize the opportunity, and time will never come again. This is what Buffett said: I am greedy when others are afraid, and I am afraid when others are greedy.
Whether experiencing inflation or deflation, your own value lies in the means of production that can outperform inflation. When your ability grows faster than inflation forever, when your scarcity is no longer feared, you truly understand what the ancients said, 'I have it all in my hand.'. Placed in any time and space, he is a wise saying. So if we look at it from a philosophical perspective, inflation and deflation are different answers and solutions to the eternal problem of human attempts to store value, but the problem is that value itself is constantly changing. Yesterday's typists were very popular, but today AI has replaced them, so what can truly cross cycles is not money or houses, but your ability to continuously evolve. There is no perfect monetary system in this world, only eternal games.
Inflation is a chronic disease, deflation is an acute disease, and a 2% inflation is just the least bad outcome and choice that humans have found. The two harms are equally important, and we have learned so much about economics that we are helpless. Therefore, the essence of wealth is not the numbers in an account, but what kind of life these numbers can help you obtain, and what kind of unique charm and competitiveness these lives can support you to have.
When you truly understand the rules of the game of inflation and deflation, you will no longer be anxious about simple price fluctuations, because you have seen through the so-called economic phenomenon, the so-called wealth war, which sacrifices the lack of understanding of this era and those who only stand still and wait for rabbits. The real winner is not confused or afraid, because he has already seen through the rules, crossed the cycle, and moved forward at the speed of light.