In Part 6, I talked about how storing wealth is always risky because any asset used to store it is susceptible to shifts in value, so you could lose some of your wealth simply by the asset losing value. This is the risk of storing wealth, but it’s a risk worth taking in order to have some wealth saved away in case of an emergency.
Today I’m going to cover two more foundational ideas before I start building more on that foundation I’ve laid: (1) the cost of a lifestyle and (2) how to be immune to inflation.
The Cost of a Lifestyle
Let’s think about how many hours someone has to work to sustain their lifestyle.
Way back in the hunter-gatherer societies, people’s needs were pretty basic. Food, water, clothing, and shelter comprised the majority of their financially costly needs. There was no innovation to significantly augment the number of WUs per hour someone could generate, so when they went to work hunting and gathering and finding shelter, they were probably earning about 1 WU per hour. But because their needs were so simple, their total weekly cost to sustain their lifestyle was probably only around 50 WUs. So, they worked for about 50 hours, and the rest of their time was free to sleep and attend to social duties and recreate. They wouldn’t ever really work much extra like we do these days because they had no easy way to store additional wealth that they might have generated with that extra work. Storing too much extra food was pointless because saving it for too long would just make it go bad. And they didn’t accumulate many belongings because those were too difficult to carry around with their nomadic lifestyle. So they worked each week for what they needed and that was it.
Compare that to today. Our modern lifestyles cost way more than 50 WUs per week. Fortunately, innovation has enabled us to generate way more WUs/hour as well, so even those living below the poverty line can afford a lifestyle that is way more lavish than almost everyone who lived even a couple hundred years ago. But still, how much of it is necessary? Do we need to eat so much and spend so much on travel and entertainment and things? I tire of this rat race of working so hard to just barely be able to afford a modern lifestyle.
Another difference, when comparing to our ancient counterparts, is that we have the ability to work extra to store some wealth in case of a time of need. This is all thanks to the invention of money. But so many of us spend so much and work so much that there’s no leftover wealth to save or invest and no leftover time to work to generate more wealth either.
I used to work at a hospital where I would average four 12-hour shifts per week. How many of those 48 hours were generating WUs that simply went to sustaining my lifestyle that week. Maybe I could become more frugal and only need to work three 12-hour shifts per week, and it would be enough to sustain my lifestyle and also invest for retirement. Then I could spend more time doing things that are more important to me, like spending time with my kids. How many shifts/week would facilitate the greatest happiness and fulfillment?
How to Be Immune to Inflation
All right, so those were my thoughts on the number of WUs it takes to sustain a lifestyle and how it has changed over time (plus some philosophical musings), and those ideas will come up again in subsequent posts in this series. Now let’s talk about becoming “inflation proof.”
Remember in Part 6 when I talked about the blacksmith starting to counterfeit gold coins? The effect of that was that the number of WUs stored in the form of gold coins stayed the same, but the total number of gold coins had increased, so each gold coin represented fewer WUs. Yes, I’ve said this same thing in a few different ways now, and that’s because it’s important. Another way I’ve said it is that the WUs got “diluted” over a larger total number of gold coins. I’ve also given a ratio to calculate how many WUs each gold coin is worth:
aggregate-number-of-WUs-attempting-to-be-saved-as-cash:aggregate number-of-gold-coins
Understanding this principle is a prerequisite to understanding inflation, which I’ve also already defined. The important thing to remember is that we perceive inflation by seeing diffusely higher prices, but what’s really happening is the number of WUs represented by a unit of money is decreasing, which means the money price of everything has to increase to still reimburse the seller the appropriate number of Wealth Units.
There are lots of different factors that cause inflation in modern monetary systems, and I haven’t talked about most of them yet, but they all act in the same way: They alter the WU:money ratio. And printing more money is one way to do that.
As a sidenote, I think this is a good place to mention that when a society uses money that has intrinsic worth (i.e., commodity money like gold or corn), it prevents the government from causing inflation (i.e., taking some of your wealth without your consent) by creating more money out of nothing because nobody has the ability to create gold or corn out of nothing!
Now, on to explaining how to become immune to inflation.
In this series, I’ve been distinguishing stored wealth as cash-wealth and non-cash-wealth for a reason. Cash wealth–if it’s the kind of cash that does not have intrinsic value–is susceptible to the government making more of it and thereby taking some of your WUs through inflation. On the other hand, non-cash wealth, such as a house or ownership in a business, doesn’t lose any value when inflation happens, which should become clear with the following example.
Let’s say the farmer has 100 WUs worth of grain that he’s stored to sell next year because he’s going to grow a different crop next year. Then, the blacksmith counterfeits a bunch of gold coins and causes 10% inflation in the intervening months. Has the farmer lost any WUs worth of grain? Nope. He still has the same amount of grain, and grain’s wealth price has not changed. So, when he finally goes to sell his grain, he’ll figure out the WU:gold coin ratio and price the grain accordingly. Maybe he would have sold the lot of it for 10 gold coins last season, but this season he will sell the lot of it for 11 gold coins instead. Either way, he is getting paid 100 WUs. This assumes that the price of grain has not changed. For example, if some other farmer had pests eat the majority of his wheat crop, maybe grain has become in short supply, which would allow our farmer to sell it for more than 100 WUs. But, assuming no market changes have altered the wealth price of wheat, he would still sell the lot of it for 100 WUs, just the money price required to get those 100 WUs would have changed.
My point is this: In monetary systems where new money can be printed, cash is susceptible to inflation, but non-cash assets are not susceptible to inflation because their prices simply change to reflect the new WU:money ratio.
So, you want to be “inflation proof”? Store your wealth in non-cash assets and you’ll be fine. Although, be careful which non-cash assets you choose–most are susceptible to depreciation (like a car). The best would be to store your wealth in non-cash assets that appreciate over time (like most investments do, which we discussed in Part 3).
This is the last of the foundation I needed to build to finally start evolving Avaria’s money toward modern money. It all starts with the invention of banks in Part 8, which changes everything.
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