Inflation is out of control, and it is destroying people’s lives. But before you lose all hope, I want to look at inflation from a different perspective. Because there is a huge opportunity to make money, that you may not even realize.
I want to look at inflation from a theoretical perspective. This is going to seem very abstract, but understanding the theory helps you to realize what is going on. And I am going to end the video with some practical steps you can take to make money during high inflation.
To understand how inflation happens, we are going to create an economic model and simulate inflation in a theoretical environment.
Let us start by defining our variables. Every economic system has two main types of people: owners and workers. In this society, owners are passive, and workers are active. This is a simplistic explanation. In real life, you have people who are both owners and workers. It can get complicated. But we want to simplify things to understand inflation. So, I am using the idea of passive and active as the defining features of owners and workers.
This can be confusing because it is common for business owners to work in their business. For this example, I am classifying those business owners as workers. A good example of this is comparing Bill Gates with Elon Musk. Bill Gates used to be the CEO of Microsoft. But Bill no longer works at Microsoft. Now he just lives off his investments. Elon Musk is the CEO of Tesla. He is the owner, but he still works there as an employee. For the sake of this example, I am classifying Bill Gates as an owner and Elon Musk as a worker.
It is important that you understand why we are establishing these definitions. We are trying to separate out capital markets from production. Inflation on a fundamental level is an imbalance between capital markets and production. The owners in this example are completely passive. They are sitting on their yachts in the Caribbean, and they are letting their money work for them.
Another thing to realize about the example of Bill Gates and Elon Musk is that Bill Gates is 66 years old. Elon Musk is 51 years old (15 years younger). Bill Gates is at retirement age, and he should not be working anymore. Elon Musk is still young and busy working. This is something that we see in economic systems. As people age, they enter retirement and switch from workers to owners, or from being active to being passive.
So, these are our variables. We are going to create an economic model to show the interaction between capital markets and production. The model will have two variables, owners and workers. As people age into retirement, it will impact the interaction between capital markets and production as people switch from active to passive.
Let us imagine a theoretical world. For the sake of simplicity, this world will have 50% owners and 50% workers. The owners have a lot of money. The workers are willing to work in return for getting some of that money. So, the owners and the workers agree to a deal. The owners will pay the workers a wage of $1 per month to work in their business. This is good for the owner, because every worker will generate $3 in sales which is $2 in profit for the business every month. This is a stable economic system where everyone is happy. The worker is getting paid every month, and the owners are making money every month. This is a market at work. The owner’s product is their money. The worker’s product is their productivity. There is equilibrium of supply and demand where the workers are getting enough wages and the owners are getting enough profit.
In this theoretical world, if people are being born and dying at the same rate, the ratio of owners and workers remain the same. But what if the ratio changes? What if suddenly, a lot more people start retiring at the same time? Let us change the ratio just a little bit. We will increase owners to 51% and workers to 49%. Let us look at what happens with just a one percent change. The results of the deal change dramatically. The deal was that each owner would pay each worker $1. But now there are fewer workers. This means, they are not going to be able to generate as much profit. Additionally, because there are more owners, that means that more capital dollars will be competing for fewer workers. Supply and demand will shift, which means that workers will be able to demand higher wages.
We can calculate the impact of this shift. If we take workers divided by owners times the profit, we see that instead of $2 in profit, the deal will only generate $1.92 in profit. If we take owners divided by workers times the wage, we see that workers will be able to demand $1.04 as a wage instead of the previous $1. The owners are paying more and making less money.
What this is showing you is the interaction between capital and production. When there is a surge of retirements, supply and demand will shift so there are more capital dollars fighting for fewer places to put that capital to work. In this environment, owners are paying a premium for workers.
Let us switch to reality, because the world is not 50/50 owners and workers. We can look at the population statistics for the United States. What we see is a huge jump in population with the Baby Boomers who are now at retirement age. Now you may think that the population looks stable in future generations. But that is not what our economic simulation shows. The deal from our example was $1 in labor for $2 in profit. When the Baby Boomers were still young enough to be in the worker category, the deal was happening with a ratio of 24% to 76% when comparing the Baby Boomers against the previous generation. When the Baby Boomers retire, the ratio changes dramatically with a ratio of 52% to 48%.
Our simulation only looked at a change of 1%. We are looking at a change of 29%. You can imagine how significantly that would impact the deal. To keep the same ratio stable, Gen X would have had to be 3.4 times the size it was.
A lot of people talk about the Fed creating inflation by printing all this money, which is true, but it is not the full story. What is driving inflation is the spike in retirements by Baby Boomers. The Fed was trying to ease the pain by printing money, but it just made the situation worse, because there was even more capital fighting for fewer workers.
So, why have I gone through this example. Because people are freaking out over inflation, and they are missing the opportunity that is sitting right in front of them. We are entering a moment in history where people are paying a premium for workers. This opportunity will never come again in your lifetime. Especially for young people, you need to take advantage of this moment. This means, the effort you put out now will get abnormally high returns for about the next 10 years until things correct. You should get a job. Get a second job. Start a business. Ask for a promotion. If you do not get a promotion, go find another job that will give you a raise. Hard work is the key. Any way that you can go out into the world and be a hard worker will get rewarded.
There are two types of people who are really hurting in this environment. The first is retirees who cannot get a job and start a business. Unfortunately, your money will not go as far, and you need to play defense with your finances.
The other type of people who are hurting are workers who are not productive and businesses that are not productive. Those people will get fired, and the businesses will go bankrupt. Unfortunately, businesses need to make way for the people who are productive. You need to make sure you are truly adding value so you can stand out in the crowd. If you are going into work and doing the same thing you have always done, you are missing an opportunity.
I hope this example helped you think about inflation in a new way. The key is the two terms I used at the beginning: Passive versus active. If you are passive, you are going to get hurt. If you are active, you are going to make money.
Now I want to hear from you. Do you think it is possible to make money during high inflation? Let me know in the comments down below. Thank you so much for watching. I am Zach from Wolves and Finance. Let’s go out and make some money.
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.