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Shadow inflation

For the past several years, we have been conducting this event at a lovely resort in the Lithuanian countryside. It’s a pretty place– a nice, comfortable, relaxing environment away from all the noise and distraction of daily life. Now, I pay for the whole thing myself. I rent out the entire resort and pick up the total cost of food, lodging, entertainment, etc. For this year’s event, my staff was able to negotiate the same price as last year, and I was happy about this. But after the first two days, we began to notice something different: the resort was actually skimping out on our food portions! In other words, they kept the price the same as last year… but they were delivering less value than before. In this case, it was in the form of food portions that were at least 10% smaller! (Needless to say, we rectified this by ordering several dozen pizzas… followed by a very candid conversation with the resort’s General Manager.) This is an example of something that I see all over the world. It’s a shadow form of inflation that I call ‘value deflation’. You see, most people think that inflation is really all about price, i.e. paying X% more this year than last year. But this is merely one version of inflation. At its core, inflation is loss of purchasing power. This can mean an increase in price for the same amount of stuff, or it can mean a decrease in the amount of stuff for the same price. I see many signs of both all over the world as I travel. Price inflation is obvious. We all know when we’re paying more because we see the price tag. When the price of food or fuel goes up, in fact, it can even result in sticker shock. Value deflation, on the other hand, is far more deceptive. Most people aren’t that closely attuned to realize that their portions are getting smaller, that their ‘extras’ are going away, etc. We didn’t notice until our stomachs started growling. Value deflation is not taught at university economics courses; you’ll never hear any of these Nobel economists or central bankers mention it. Stiglitz, Krugman, and Bernanke all happily tow the line that ‘there is no inflation’ because the price of iPads keeps going down. These are the people who have the power to influence policy and conjure trillions of dollars out of thin air… and it’s amazing how easily they can hide the truth from people through this shadow inflation.


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