A Primer on Inflationary Business Conditions (Segment II)

Preface: Inflation is taxation without legislation – Milton Friedman

A Primer on Inflationary Business Conditions (Segment II)

Credit: Donald J. Sauder, CPA | CVA

To maintain the assumption that the financial utility of a subway token only has intrinsic value for an entrepreneur when riding a specific subway system and not for purchasing a coffee at Starbucks would be sensible, therefore, if progressive printing of any Scrip (or subway tokens as a proxy for a currency), those who can benefit from that intrinsic token’s utility will obtain the most significant, immediate and perhaps only economic advantage, such as riding the subway system.

Economically, a currency is a rainwater to a currency watershed. Excess rainwater ultimately changes a landscape, and sometimes permanently, not to mention the times of clouds. Let’s look more closely at this financial rainwater and landscape illustration.

Moderate inflation rates, i.e., appropriate rain precipitation levels, will bring economic sunshine and an apparent healthy financial eco-system with periodic recessions to drain excess liquidity. With these moderate and predictable financial weather patterns, the financial weather cycle continues successfully. A little inflation is certainly a key characteristic that can lead to all balmy economic conditions because the financial eco-system has adequate precipitation for seedtime and harvest.

Unlike the global water supply, where perhaps there is little change in the worldwide aggregate gallons in recent decades, i.e., more water is not being created, money supplies increases – finitely. Therefore, absent expansion, only the water allocation in the global weather patterns is shifted per evaporation, clouds precipitation including changes in glacier sizes. The only changes that occur are in the form of, say, glacier ice and the location., e.g., there is a minimal expansion in the gallons of global water the can cause immediate or cataclysmic changes.

Inflation in a currency of a financial system can be clearly understood by illustrating that in an eco-system in a [financial] watershed with an expanding amount of water, other than aquatic creatures that thrive in such an environment, there are incrementally and logarithmically increasing risks with the monetary supply expansion, .e.g. inflation from printing of currency.

Since currency is not fish, paper currency printing eventually floods and saturates a financial system watershed beyond the point of sustainability for seedtime and harvest. An economy with that higher than averages rates of inflation in its currency will wane in operational success. This, unfortunately, is the proven history of each currency in the millenniums of financial history. Perhaps, the US dollar will be the first currency to avoid that currency destiny.

Again, to use a weather analogy, inflation is an expansion in specific financial watershed precipitation. At some point, that liquidity necessitates either a deflationary adjustment to maintain economic equilibrium or some financial reset equivalent to a financial Noah’s Ark moment.

For business management purposes, tracking the money supply (water levels and precipitation in the financial watershed) is becoming increasingly opaque because of how liquidity expansion or money supply growth is followed, according to Federal Reserve data. Therefore, if rainwater levels are increasingly non-quantifiable, e.g., the printing of currency raining in the financial watershed, the ability to make informed and sharp business decisions grows increasingly challenging and requires adaptive approaches.

I am not stating that the US Dollar is imploding for the record, although perhaps that is not a remote possibility. That is entirely the Federal Reserve’s discretion to manage the money supply, interest rates, and the government’s concerted ability to adjust tax rates.

These three economic items are crucial to business conditions and entrepreneurial management, although only interest rates and taxes have been chief concerns to most entrepreneurs in recent decades.

To be continued…..

A Primer on Inflationary Business Conditions

Preface: During inflation, Goodwill is the gift that keeps on giving.                             Warren Buffett

A Primer on Inflationary Business Conditions

Credit: Donald J. Sauder, CPA | CVA

As an elementary definition, inflation is simply a currency problem, e.g., the progressive destructive process [or policy] of printing more and more currency. A currency is a system of money used in a particular [national] jurisdiction. Inflationary policies therefore devalue the purchasing power of the specific currency.

When a government uses tax proceeds for spending, it correspondingly reduces excess cash among its taxpayers according to the specifics of its tax codes and the taxpayers earnings thresholds. Therefore, those who pay any taxes accordingly have less to spend or invest, resulting in less demand for goods and services. Therefore, taxes serve as an economic engine governor to effectively manage the speed of the price acceleration. Inflation is not the process of spending money; it is the intrinsic printing process of obtaining money to be spent that creates inflation.

When a government prints money to invest in projects, e.g., infrastructure, the diffusion of those proceeds creates a disequilibrium amongst the benefactors. Those who receive the newly minted money are now buyers with additional funding sources.

Since those fortunate benefactors have extra capacity to purchase, they begin to aggressively compete to buy goods and services, leading to an upward inflationary effect on prices. More money = more capacity to bid up prices = higher prices. This simply equation corresponds equally with a currency’s value following the value exemplified in an ticket’s for a virtual event, e.g., if an unlimited number of people say can more easily attend, then cost or value correspondingly often does not increase.

When inflation begins initially, it shapes each unique segment of an economy differently. The early components which get the money first gain the first and most significant benefits. Likewise, when inflation begins, there are always consequences; that is, the currency purchasing value declines as prices increase to expand the money supply.

Yet, notably, inflationary measures are essential emergency measurements for a concise economic resolution to high unemployment. A level of wage expectations in currency terms is more easily affordable for employment. After all, the value expectation with the wage is lowered in absolute value terms.

Some economists believe that without inflationary progress, a country cannot easily maintain full employment for its people because those who cannot find employment will decrease their idea of the acceptable wage for employment. Therefore a $700 per week wage ideal will reduce to $600 in a devaluation race of wage levels for each occupational task until some people choose to stay unemployment instead of working because of the minor variations in price differentials. For this purpose, the questions continue of whether a sound currency or full employment is the better alternative.

When managing a business in inflationary times, it is helpful to understand that your underlying accounting is in the realm of your tangible currency. Indeed, monitoring any change in the that money supply must contain predictive steps to its translation into costs and revenues. This includes the cost of sales, wages, and yes, taxes, as well as revenue factors in pricing and bidding.

Your business accounting ledger represents revenues and expenses in the a form of Global company scrip. Scrip is a currency form that includes vouchers, token forms like subway tokens, tickets, or arcade tokens. Those who account for transactions in US dollars vs. scrip of other “resorts” have a tremendous financial, competitive advantage that is too often underappreciated and undervalued.

To be continued…..

 

Easter Blessings

Easter Blessings 

This Easter may we foremost remember the significance of Redemption and God’s saving plan that brought us the gift of our salvation and a truly successful exit-plan to all who faithfully believe on his Name.
Blessings this Easter and in the months ahead, as we await the fulfilment of each one of God’s eternal Promises from his Word.
God Bless you and yours,
Sauder & Stoltzfus, LLC