The Warning Of Hyper Inflation | $2 Trillion Stimulus

What's up you guys, it's Graham here. So I'm gonna be attempting to answer one of the most difficult questions that I've been getting asked recently here in the channel after this new stimulus plan was recently passed, and that would be: Am I still wearing pants? To which the answer is yes, but I've switched to sweatpants now that I've been doing nothing lately but staying at home.

Okay, no but seriously, we have to address a major concern that a lot of people have been asking about recently that not only impacts our entire economy but your money personally. And that would be inflation. It's the concept that as more money gets printed into our economy, like for example, two trillion dollars, it makes the value of our existing money worth less, and therefore our money loses value in terms of what it could buy.

Now inflation is nothing new, and we've been seeing this almost every single year since the beginning of time. It's why in 1955 a house was $9,500, and now, 65 years later, it costs two hundred and seventy thousand dollars. Or how a gallon of milk used to cost 92 cents, and now it's two dollars and 69 cents here in California. It's also why McDonald's used to have an actual dollar menu, but now the same items on that menu cost multiple dollars. It's like, just call it a two-dollar menu at that point, but I'm gonna save that argument for another video.

Anyway, the worry is that as trillions of dollars get printed into our economy, it negatively impacts the value of everyone else's money, as suddenly the prices of everything else go up. Our money buys less, and then we have to make more money to pay for those things. Click, imagine 20 years from now, a gallon of milk is costing $10, a loaf of bread is $15, and a cup of homemade iced coffee is $2. What a nightmare that would be!

Oh wait, there's more; it gets worse. If inflation ever gets out of control, the biggest concern people have is ending up like Zimbabwe, who just printed so much money that a loaf of bread costs—wait for it—I can't even make this up—thirty-five million dollars. And their money lost so much value that people were literally carrying around their money in a wheelbarrow just to buy a week's worth of groceries.

Do I know that? That's obviously a very extreme example, but should we be concerned about an extra two trillion dollars going into circulation? And how is this going to affect our money? And are we likely to see inflation from this? Well, as usual, we're going to be looking into the data and history behind this to try to determine what we might be able to expect.

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And with that said, let's begin the video. To start, I think it's important that we quickly cover what exactly is inflation. Well, this is what happens when the price of everything else around us rises in value, but the value of our money stays the exact same. It's kind of like saying this $20 bill is gonna be buying you five Starbucks coffees today in 2020, but in 2025, this same $20 is only going to be buying you four Starbucks coffees, even though this is the same $20 bill and nothing has changed. The cost of everything else goes up, and all of a sudden, in comparison, this $20 is worth a little bit less money.

There's a really cool inflation calculator out there. If you just go to Google and type in "inflation calculator," it shows you how much your money would be worth through every year imaginable. And even in the last 20 years, we've seen quite a difference in terms of how far your money really goes. Let's take the year 2000; back then $100 would buy you what $150 buys you today. That means that you need to spend fifty percent more to buy you the exact same things today.

So what causes this? I don't know why I did that; I thought it would be cool. I have no idea how that looked—ridiculous, whatever. Well, the cause of inflation is broken down into three categories. The first is due to increased demand and not enough production; like the price of toilet paper begins going up if people are buying it non-stop and they can't keep up with demand—then BOOM! Prices go up.

The second is due to an increase in production costs when making an item—like let's say the price of labor goes up or the cost of source materials rises or anything else like this. Well, in that case, manufacturers have to charge more because it's costing them more money to produce, and that gets passed on to the consumer as prices go up.

The third source of inflation is known as built-in inflation. It's kind of hard to say this is caused by the price of goods going up to the point where people then need to make more money to pay for those goods, which causes them to go up even further, which causes people to need to make more money to pay for them, and that begins the cycle all over again. This is what's known as a wage-price spiral.

This is what someone's pay increases, which then increases their disposable income, which then increases demand for goods and services, which then increases the price of those goods and services, which then demands a higher salary to go and pay for those goods and services, and then that leaves us with this upward spiral of wage-price inflation. How fun is that?

So here's the thing: in small doses, inflation could actually be encouraged. And when it's managed and under control, inflation can actually be a good thing. The United States has really done its best to maintain a safe, stable, and consistent amount of inflation annually. And really, over the last 25 years, they've maintained about a two to three percent inflation rate annually.

For some people, this could be great because inflation could cause certain assets to rise in value on par with that inflation, like with stocks and in real estate. So that means that if inflation is three percent a year, then your investment should, in theory, go up an extra three percent a year. Other people say that moderate inflation is necessary to keep our economy growing because if we know our money is going to be losing value every single year, it prompts us to want to go and spend our money or reinvest it back into the markets, causing it to continue growing.

However, other people could view inflation as a negative because, if they're, for instance, holding on to vast sums of cash, their money is going to be having less and less purchasing power every single year that they're holding on to it and not spending it. It also means that this very same stocks, commodities, and real estate you're gonna cost more money to buy in the future as they rise with inflation, and that just means you'll need more money to then go and pay for them.

But overall, in moderation, a steady consistent inflation rate is generally seen as a healthy indicator of our economy because people can know what to expect. Businesses can plan accordingly, and it's slow enough that most of us are not going to know any major difference day by day. That's why the United States tries to aim for as close to a two percent annual inflation rate as possible.

Although what would happen if you just released an extra two trillion dollars into our economy? Is that going to be enough to cause hyperinflation and send us into a world where we need to go with a wheelbarrow of money just to go and buy a cup of coffee from Starbucks? Well, if we look back historically, we could see that since the early 1900s, we've had several periods of excessively high inflation, with a few times where it's exceeded ten percent.

So what caused that? And could something similar happen today? Well, the most severe and probably the most obvious one from the chart happened from 1913 to 1919, as inflation surpassed 19 percent. This was due to the spending of World War One and the vast manufacturing of supplies. Not to mention, it was estimated that a shortage of resources led to higher production costs and higher prices, so it was really like the perfect storm.

After that, we saw another period of intense inflation during and after World War Two. There was a period of wage freezing, price control, and several other measures that were taken into place to prevent large companies from having to increase wages. But because of the severe deficit of spending involved in the war, more money had to be borrowed, more money circulated back into the economy, and due to an increase of spending, we saw an inflation of just over 13 percent.

However, even though from the time of 1900 to 1960, we saw periods of excessive inflation and even deflation—which I'm going to be covering shortly—they nearly balance themselves out, and until 1950, the average inflation was only about one percent per year. That was until the 1970s, where inflation began hitting double digits. By 1974, that was in part due to the removal of the gold standard, in which our dollar's value was tied to the value of gold. That led to the fiat money that we have today, which means this $20 is only worth $20 because we say it has that amount of value; otherwise, this is just a fancy piece of paper that costs about eleven and a half cents to produce.

At the same time, though, in the 1970s, oil prices skyrocketed, interest rates were unstable, and companies chose to hold prices steady while simultaneously laying off their workers. That led to what's called stagflation, which means that as the economy is going down, inflation is going up. See, typically you think if the economy is going down, then prices should go down with it, right? But in this case, prices went up, inflation went up, and the economy went down.

And it took a massive increase in interest rates to get the inflation to come down. Although after that, inflation has been relatively stable, and throughout the last 40 years, we've averaged on par with about one to four percent annually. That is because of stricter monetary policies and the Federal Reserve's target to hit a two percent inflation annually, which is enough to promote spending but not enough to devastate the economy.

But what about today though? Is there any chance of us seeing hyperinflation like Zimbabwe, where all of a sudden a cup of coffee would cost like fifty or sixty dollars? Well, the answer to that is way beyond what I am ever capable of speaking of, to be completely honest. This is something that even the most genius-level economists don't know and can't agree on. So I'm definitely not stupid enough to ever think that I would have the answers, because I'll tell you right now I don't.

But I'll give you my opinion, and I'll look back at what's happened in the past to give you my answer. Well then, just keep in mind this is only opinion, and I'm absolutely clueless about what I'm talking about. Anyway, let's look at this first because this is what everyone is talking about right now, and that would be unemployment.

The unemployment rate as of now has hit one of the highest points in history, and at this pace, it's expected to hit about 15% by later this year. Now why does this matter? Well, generally inflation is caused by not only more money being printed into the economy, but also an increase in spending and also an increase in the price of goods. And for that to generally happen, we need more people employed to make money to then spend money.

And that brings us to this graph right here: The blue line shows us our average inflation rate, and the red line shows us our average unemployment rate. So as we could see, on average, the higher the unemployment rate, the lower the inflation. Of course, this is with the exception of the 1970s, which saw a period of high unemployment and high inflation due to some rather unique economic situations.

But overall, in order for inflation to be prevalent, there needs to be the economic activity to support that inflation. And as it is right now, there is very little of that. We can also look back just 11 years ago to the stimulus package that was passed in 2009, known as the American Recovery and Reinvestment Act. This at the time was a nearly 800 billion dollar stimulus to help lift us through the Great Recession.

During that time, if we look back at the news articles that were posted between 2009 and 2011, the worry there from the stimulus was runaway inflation. In fact, the worry was so bad that one hedge fund manager literally bet his reputation on it, except now if we actually go and look back at this, the inflation that we saw at the time, beginning in 2011, throughout the entire recovery, was that inflation hit at its peak 3%. Then the years after that were much closer to 2%.

Because there's not too much that I can pull from that's comparable to what's happening today combined with the lack of previous stimulus packages that we could look back on, there's not too much data already out there that we can accurately rely on. But I would say expecting events such as extreme hyperinflation to ever happen in the United States or in North America is highly unlikely to ever happen.

We are not Zimbabwe, who had a 100 quintillion dollar bill, who printed money without any restraint or regard to its currency to try to get itself through World War Two. We aren't Venezuela, which had a 100 trillion dollar bill valued at about 40 cents USD. We're also not Japan, which has had a population growth problem for many decades.

As of now, the U.S. dollar is the reserve currency from which other countries base their asset prices from. And in the event we ever saw any sort of out-of-control inflation, our entire worldwide economy would be just collapsing and crumbling apart. So I think it's safe to say that most likely we're probably not going to see any sort of crazy hyperinflation like this.

If anything, I think the most likely scenario to come from this, if something is to happen, it could be deflation. This means the prices of things go down and the value of your money ends up going up the longer you hold on to it. So in other words, it's the complete opposite of what happens with inflation.

And throughout history, we've seen several instances of this happening, and it generally happens during a recession. For instance, we saw deflation in the early 1900s as the United States increased the tax rate to fund the war, leading us to a recession and a period of lowered prices. Then not too much long after that, the Great Depression saw another period of deflationary spiraling as spending shrunken and funding dried up.

Then after that, we sent another short period of deflation right after World War Two after the United States changed some of its monetary policies. And then really since then, over the last 60 years, we've only seen very brief deflation, in a very minor amount of it during the 2009 Great Recession.

So I think the real enemy here, due to high unemployment and lack of spending, could actually be deflation instead of inflation. However, the counter-argument for that is that for deflation to occur, we generally would need a surplus of goods being produced, of which we're not getting because pretty much production of almost everything has come to a screeching halt.

So we're in a rather funky time where people are not spending as much money, people are not producing as many goods and services, but more money is being printed into the economy, which could in theory counteract the lack of spending. And if I were to guess, I would say the Federal Reserve is going to do anything it can to keep inflation steady and avoid deflation.

So given the circumstances and given that we didn't see any sort of unusual or crazy inflation during the 2009 stimulus, I'm gonna say we're most likely going to see a steady inflation or, at the worst-case scenario, maybe some short-lived deflation. But honestly, I have no idea what's gonna happen, and my guess is just based off history and what's happened in the past.

I also fully acknowledge that there's been talks about stagflation, which means that we see high inflation during a time of high unemployment and low economic growth. And this is largely what happened throughout the 1970s. It's certainly a concern, although from the way I see it, any concerns like this are gonna be short-lived in terms of supply production.

The real topic that needs to be discussed and addressed is the effect and the aftershock of what two trillion dollars does to our economy, which I think, based off what happened in 2009, is just going to be rather uneventful in terms of what happens with inflation.

And as far as what you could do about this, the answer really depends on what you think is going to be happening. If you think we're gonna be seeing inflation, then yeah, gold and Treasury inflation-protected securities are most likely going to keep your money intact.

But seriously, there's no perfect hedge against inflation. And if we look back historically, the best bet and hedge against inflation is just to keep your money invested in the markets and ride it out for as long as you can. If you think we're gonna be seeing deflation, then usually cash, bonds, and a locked-in CD would be the best place to keep your money intact.

But like I said, trying to time this perfectly is going to be very difficult. And I believe long-term, the best bet out there is simply just to keep your money invested, let it ride for as long as possible, and really just let it go.

I really believe for most people with a long-term outlook, just keeping your money invested is probably going to bode well over the next 20 to 40 years. Who knows, maybe I'm delusional for not thinking we're gonna see any sort of crazy out-of-control inflation, or maybe we might even see a brief period of deflation.

But I am optimistic that long term, everything is just going to balance each other out. It might take a while for people to ramp up their spending after all of this, but I do believe that long-term, everything is going to return to normal, or at least as normal as it can be considering the circumstances. But again, that's just my opinion, and full disclosure here that I'm absolutely clueless about what I'm talking about.

I don't know a single thing! So if you agree or disagree with me, let me know down below in the comments. And like I said, I read nearly all of them. So if you have another opinion, I would be more than happy to read it and see what you think as well.

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