Inflation is a scary word, but it's here. Today, Stacey Andres and Michael Wallin break down what's causing it.
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Jag: Welcome in episode number four of the Art of Wealth Unbroken. I am Jon "Jag" Gay. I'm joined by Stacey Andres and Michael Wallen once again. Great to be back with you.
Stacey: Thank you JAG.
Michael: Hello, Mike. Hello, Stacey and JAG. Glad to be here. I think it's important that everybody understands today's topic.
Jag: As the layman of the group. You definitely have my attention by telling me what we're discussing today. And that is the big "I word" that is on everybody's mind as we record this here on March 9th, and that is inflation.
Stacey: Inflation is absolutely on everybody's mind, everybody's being impacted by it. We've definitely over the past year, and the past several months have felt that more and more in our pocket books, it's pinching at the grocery store.
It's pinching big time at the gas pump. And with what's going on right now between Russia and Ukraine and sanctions there, we could be feeling that to even a greater degree. So when it comes to inflation, there's three main driving factors to inflation. One is money supply. The second one is supply and demand, and then the third is energy.
And that's the big thing that we're hearing about. So why don't we start out with money? And Mike, if you wouldn't mind sharing a little bit about what is money supply and share a historical perspective?
Michael: Sure. Well, inflation, as we define it is that we have way more money in the economy than we actually have goods.
So we got more money chasing lesser goods. And so because of that, we start seeing the rising cost of goods and services. That is what everybody is feeling. They're feeling it. Whether, like you said, at the grocery store, the gas pump, whether they're paying their utility bills or they just happened to go have a lunch.
And they realized their lunch that used to cost $10 is now costing $12. Everybody is feeling it. Inflation is not based upon socioeconomic class, even though those that may be in much higher social economic classes are probably not feeling it as much as those that are at the lower levels, retirees or those that might be on marginal income levels.
Inflation is impactful to everybody. Money supply, this was a concern that we all were sharing when everybody thought it was so great that we were going to raise our national debt by $3.9 trillion and dump this money into the economy. Now, we had a situation with COVID. We had individuals that were in really bad scenarios.
They did not have a reserve pool. They didn't have an emergency fund. And the impact of COVID and the shutdown causing individuals to have a decrease in disposable income. The government came in as the lifesaver and wanted to increase supply of the monetary policy. When that happened, the concern was, can the fed control inflation? And that was ultimately not the scenario. We are seeing inflation above 7% across the board. And that impacts everybody. And again, like we said, those that may be in the lower disposable income ranges, inflation impacts them even more. So money supply is driven by the current administration.
And so one of the things is we're seeing now a tightening of that monetary policy. And because of that, through the rising of interest rates, we're seeing the impact of what's now happening into the stock market and looking at the economy across the board.
Stacey: When I think about inflation, when I think about money supply, it causes me to think back to ancient times when you had the old Roman coins. They started to shave a little bit off of the edges to lighten the weight and the coin.,because it actually weighed less it wasn't as valuable.
And it was a way for them to hoard, or transfer wealth really, away from the working class or the peasant class to those that were more wealthy. So when we look at inflation today, I just heard a statistic. I believe it was on Monday, that it is costing the average person $247 more per month. Just for their daily living expenses than it was costing a year ago.
When we think about that, how is money supply the same, but how is it different?
Michael: Well, one of the things, to your point, we're seeing that same kind of impact on the goods and services that we bought today. So what's the impact of the dollar? If we go back about 10 or 15 years ago, if you walked in a grocery store, you'd see a loaf of bread, that would be the same width of the shelf that it was on.
If you go and buy the loaf of bread today, it's three to four inches shorter. So even though we're buying a loaf of bread, and this is what just from consumerism, most people don't understand that they're paying the same amount, but they're getting less quantity. So that's one way that companies are trying to reduce. The other way is the quality of ingredients in the goods that we're buying is being reduced, whether it's on the grocery store side, or, you know, maybe in the materials or the cost of labor corporations are still trying to find ways that they can become more effective and efficient with the resources that they have, but also to avoid the, what we learned in economics as, the "just noticeable difference."
The JND. And the JND is when consumers finally realize that changes have been made to the point to where they decide not to buy a company's goods or services. And what these companies are trying to do is just stay below the JND. And we're seeing that across the board, when we're doing planning with our clients, when we're looking at their budget.
Because when you look at supply and demand, the way our economy is based today, because these corporations have looked to outsource their labor or their materials outside of the United States, we are being impacted by supply chain today. We are not able to get the materials from the manufacturing, into the states and from the ports to the place of retail, where consumers are able to purchase that. And because of that happening, we are seeing that supply chain issue, and that is tending to rise the cost on the goods and services that are in inventory or on the shelves.
Stacey: And , the way that's impacting our clients, is that now the money that they maybe used to have, that they could set aside discretionary spending where they could eat out more often or take the kids out for a day or something like that. And just have a family day out. Now they're having to focus more on, "Do I even have enough just to pay rent, pay utilities, put food on the table and put gas in the car to make it to my job?"
And so it's having a significant impact on everybody. But significantly greater impact on those that have a lower income, middle income. That really don't have a means to absorb those costs with other activities, just because their income isn't high enough. And even though we're at some of the highest income levels coming out of COVID, it's not enough to offset the rising cost of inflation.
Michael: Stacey, we had a client come in this morning, sat down across the table last year. Into the year, the spouse was wanting to cut back from three days as a nurse to going fully retired. We put together an income plan that gave them a positive cash flow. They were able to be able to retire on the income streams that they had.
I met with the client today. This is four months removed from that meeting and with the rising calls, they are already feeling the impact. And we know that the expenses of inflation are going to continue at least for an extended period of time until the energy cost are brought into some kind of a balance that client is now having to modify the plan four months later, simply because of the rising inflation cost.
Stacey: Yeah. I just bought a truck in August of 2020. Not the right time to buy a truck
Jag: No! No, says the guy sitting here in Detroit!
Stacey: (Laugh) Something that doesn't get good gas mileage with talk of fuel prices heading to $7 a gallon. That's a little bit scary. So talking about energy and maybe we can circle back to supply and demand and a couple other things, but maybe a lot of people don't understand the impact that energy costs have in being such a big driver of inflation. So what is it about energy costs that cause everything to cost more?
Michael: First of all, when we look at fossil fuels, we hear a lot of this on the news today. Fossil fuels is not just in the gas tanks in the automobiles. When we look at fossil fuels oil coming in, that is what we create polymers out of.
Think of everything you touch on a day-to-day basis, look around your office right now. Or if you're listening to the podcast, look at wherever, whatever your environment is today and count the number of items that are made out of plastic. Yeah. Every one of those items come from a fossil fuel. Plastic is a essential element of our culture today.
All of them are made from polymers, which is derived directly from fossil fuels. So look at the change that if today we are looking at the importing of barrels of oil every day to the tune of 200 dollars a barrel. And I know it's got back down to about 117 hundred $18 a barrel, but they're projecting it to go to $200 a barrel.
When we look at that, it's not just the petroleum companies. It is not just those that are making gasoline, think of every company and every industry. How many of us listening likes the idea that if we're in our home at night and a big rain storm comes up and goes over our house, we stay dry? Well, there's only one reason we're staying dry and that's because we have a polymer barrier between our shingles and the plywood on our homes.
And that oil based product is what's keeping us from getting rained on. Every time you put something in Tupperware and put it in your refrigerator for safekeeping and your next meal. That's because of that oil, that energy costs. So I don't want our listeners to think of energy only as oil, but when we're looking at energy, when we see the spike in the cost of energy,
when we see rising interest rates, those are the times when we get into none of us ever liked to talk about it, but that little R word that nobody in our industry likes to say? JAG, you know what that is?
Jag: Recession?
Michael: Recession! And nobody likes to talk about that, but that's when we have two contractions in our GDP over two sequential quarters.
And so when we look at that, that's what we're seeing. We're seeing a contraction in our market. We're seeing interest rates from the fed policy being raised, and we're seeing our energy costs soaring because we're outsourcing that. At a tune of 550 million barrels a day into our demand. Those are things that starts getting into policies and procedures from the administrations, whether it's the blue aisles or the red aisles, it's indifferent, we're buying goods and services to make our economy work.
And we are not in the best position to buy those at this time.
Stacey: Couldn't agree more. So two other points. One is supply and demand, and this is something that I think for the most part, probably everybody has a pretty good understanding of, so we won't spend really a ton of time here, but just to simply state, if there is less supply, things are going to cost more.
If the demand remains the same, the price is going to go up. And as the supply increases, then the cost for those items is going to come down. But one other big thing that is really impacting inflation right now, I'm 52, just about 53 Mike. In my lifetime, I have never seen this is workforce resistance. And more than ever coming out of 2020, 2021, with COVID and the impact that that has had. It's changed people's thinking about how they want to work, or even if they will work. And so what is workforce resistance and what is it that's happening with it right now? Is causing such a big impact to the inflation rate.
Michael: Workforce resistance is really where individuals are creating their own personal unions.
Years ago, when people worked in a factory, there were you know, several employees that it would all come together and they would form a union. That would be their voice that would say, conditions are not what we want. We don't like the work environment. You know, we need more safety or we need more compensation or there was something missing and there would be a level of demand brought for this whole group of people that would go to the employers and say, this is the voice of the customer.
This is the voice of your employees. And this is what we would like for you to change, to make this environment more mutually beneficial for both parties. And today what we're seeing is through this huge reset in the workplace, we are seeing individuals being their own unions and telling employers. I'm not willing to work for that.
I'm not willing to work in that condition. Now, how they got to that point is because we created a monetary policy that was putting money in individual's pocket. That allowed them to say I can survive without actually working. That is a false sense of security, because at some point everybody's got to do something that creates gainful employment. We've got a little bit of a psychology that is kind of working in the wings here, where individuals are saying I'm just not willing to work. I'm not willing to work in that environment. Many of them may have got educated in a field of study. That they now find out that's not really what I want to do.
I'm not finding joy. I don't find happiness in what I'm doing. So I think that the course of this next couple of years, we're going to see this impact of maybe employers making some job changes and saying, "Hey, we can make this more conducive." There's going to be other jobs that are not going to be able to do that.
Employees are not going to be able to change. And we're going to have to say some compromise from the workforce to say, I'm willing to do that job because I need to eat because the government can not provide for everybody. You cannot tax the wealthy to provide for the less fortunate. Because there's not enough wealthy people to tax that amount of money.
So everybody's got to make a contribution. Everybody's got to find that area of what they're willing to do and make a positive impact. And that workforce resistance, you know, we all get burnout. That's why we call it spring break and we all start feeling it and we're like, oh, I just need a break. I need a vacation.
That's great. Everybody needs a break at a time, but then you have to come off of vacation and you've got to go back to work.
Stacey: So in our industry, there's products that we use for financial planning that can help produce income for clients. Some of those products give bonuses. And I just had this conversation yesterday.
If you get a bonus on some sort of a vehicle that we're going to use to produce income for you or for the financial planning process that you give up something. Nothing is free. And if you get something upfront, which the government was giving in 20 and 21 giving "free money." Well now in part, we're seeing the cost of that free money and that kind of uninhibited spending in the inflation rate in the rising cost of goods and services.
Unfortunately, like you alluded to earlier, that's not going to go away anytime soon. In my opinion, we're going to continue to see rising inflation and it's going to hurt us all to a greater and greater degree. So my son, he has two jobs. Evening. he delivers pizza. And when you see pizza delivery, guys making 20 or 25 bucks an hour.
When you hear a burger joint down the street, paying their employees 18 to $20 an hour because they can't get people to work. That drives up the cost of that good. And companies are in business to make a profit. They're not going to work for free. Their employees aren't going to work for free.
That is clearly evident. It's hard to get them to work for 15 bucks an hour. So these are the driving factors behind inflation right now. And it's going to be interesting just to watch it over the next six months, eight months through the end of this year, to see how our administration is going to handle it and what they're going to do to help families and the consumer really just kind of survive
and thrive. Any closing comments from you, Mike, before we wrap this up?
Michael: Yeah, I think that what we're feeling today is the impact of what we have seen since 1970. And we have seen the cost of goods and services rising, but wages never kept up with the rising cost. And ultimately the workforce environment has hit that bursting point.
And individuals like your son, they need $25 an hour. They need that level of income because the cost of goods and services have risen so much that getting rent, you know, we're based outside of the Nashville Tennessee area, which has one of the highest rates for housing at this point. We are seeing individuals that do not have the ability to live a very modest lifestyle.
Mostly the younger adults that we have coming into society today. And they're not feeling the American dream because over the last 30 years, we have seen cost of homes going up, automobiles going up. I mean, Stacey, JAG, y'all tell me what was the cost of the first car you purchased?
Jag: I couldn't afford one. I had to inherit it when my grandmother died,
Michael: (Laugh) () As with many of us. Mine was $1,500.
Stacey: I'm thinking mine was around $3000. This was 1985, probably. Yeah. And my dad helped me buy it.
Michael: Absolutely. So let's fast forward that today I would love to have one of our listeners go onto our website. Art of wealth unbroken and give us some information on what was the cost.
And we'll talk about it on our next show. I would bet they're paying anywhere between 12 and $15,000 for a used car equal to what we purchased back in the eighties. So how would we expect them to be able to purchase that, to get a car, to actually be able to get to work? If the means that it takes to be able to buy the car is prohibitive for them to even be able to get a job?
And that's a problem that, you know, it's easy for us to sit on this side with a little bit more gray hair above our ears and say, "Oh, they just don't want to work, or they don't want to do this." You know, Stacey, I know your son, he's working two jobs. We've got to make an impact on what things cost in this country. And make it so that people actually can survive.
Jag: Absolutely. Gentlemen, we'll leave it there. And again, the website is art of wealth unbroken.com. Stacey, Mike, stuff that we talked about today. We're not going to answer it in the next day or two, but we see, we'll be curious to see how it turns out over the next weeks and months.
Thanks for both being here. And we'll talk again soon.
Stacey: Appreciate it, Jag.
Michael: Sounds great. Thanks Jag!