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Does Inflation Matter

Does INFLATION matter?

Let’s simplify the cause of inflation with a silly story: The U.S. government just printed and deposited 1 billion dollars into everyone’s chequing account. The first thing that happened is a 5-mile-long line up at the Ferrari dealer. But, will the Ferrari dealers sell their expensive cars at yesterdays price? Not a chance, because currency is now nearly worthless.
 Above sports cars, there are exotic sports cars—and then there’s the LaFerrari! Base model starting at $1,420,112 U.S.

The purpose of my above silly story was to emphasize that printing does cause inflation. Further to that point, 78% of all money the U.S. has ever created was printed since January 20201. Please note that the (M2) money supply chart was recently discontinued. I wonder why? Just ask yourself, what is the value of anything that can be produced for nothing?

Okay, enough theory. Commodities broke out to the upside in 2020 after a long hibernation2. As commodities are the basis for everything we consume or transport, it is no surprise that costs (inflation) increased along with them?

We have known for a long time that Statistics Canada and BLS (U.S. Bureau of Labor Statistics) understate inflation6. CPI is known as CP Lie, BLS as BS.

Understating inflation is done to save the government billions a year6. Think about union negotiations when the official inflation was only 1%. This creates unfortunate negative affects, the payout of social programs and pension plans to name a few. Over time we end up with way less income than “actual” inflation would dictate we should have.

One independent inflation calculation for 2022 was 32%7, a far cry from the “official 6.5%. In my recent trips to the grocery store the common increase in prices seems to be about 50%. I also see some items that have doubled, but others that experienced no increase. By my very unscientific method, I would agree with a roughly 1/3 average increase. As such I think the 32% calculation is closer to reality and the 6.5% is way off.

So, does inflation matter? If “official” inflation became 13% a 5-year GIC (guaranteed investment certificate) becomes ~16% and mortgage rates would jump to ~20% (spread is bank profit). A $1,9054 a month payment ($500,000 house with a high ratio $450,000 mortgage at 2%) would become $7,2674 a month.

The likely outcome for many homes would be that the bank now owns them as this payment is much too high. The bank would then attempt to sell it to recapture the debt lent out. House prices are dictated by the affordability of the monthly payment. $7,267 is not affordable. Assuming $1,900 is still affordable the $500,000 house would have to fall in price (using the same high ratio 90% mortgage – now $120,0004) to $135,000. That is a drop in value of -73% or a $365,000 loss.

Our money forms the banks reserve5 (bank deposits are unsecured loans to the bank/credit union/trust company). It does not matter if we deposit to savings, chequing or locked in for a time period. From our deposits, the banks loan money out at a huge leverage5. I was shocked when I looked up the reserve that Canadian banks set aside. It seemed as though it was a secret (finding specifics was nearly impossible). The reserve is apparently 0.62%5 on average for Canadian banks. Less than one percent. Let’s make it 1% to simplify how leveraged the banks are. For every $100 in deposits, they loan out $100/0.01 = $10,000. All the banks need to lose is $100 of their $10,000 block of debt to be bankrupt. Considering the above losses with only a 13% inflation rate drives home the bank risk of bankruptcy.

But these deposits are insured, so who cares? The actual amount that CDIC (Canada Deposit Insurance Corp.) could cover in a system wide banking collapse (which would likely be the result of 13% inflation) is $6738 per $100,000. It is just not designed for a system wide collapse. I do believe the money needed will be printed, but is that not what caused the inflation problem in the first place?

Also think about the effect of your money sitting in the bank. If inflation is way higher than the understated official number, deposits are not being compensated. After tax and inflation these “guaranteed” gains would become “guaranteed” losses.

Why is it that no one is telling you about this but me? Why is this not front-page news? Should GIC’s still be rated low risk?

Does inflation matter? There is more to this story, much more. As this plays out, we will be here every step of the way. Our objective is to guide each of you to the best of our ability and do everything we can to protect and grow your wealth. This is evident with the strategies and investment direction we provide.

If you have any questions, or just want to learn more, please feel free to touch base by email, phone or with an in-office appointment.

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*1  78% of all money created in the U.S. was printed since January 2020.
 type in M1 to the search in FRED to see M1 is discontinued (so is the M1 money multiplier).

*2   breakout over 71 appears to have happened Oct 5, 2020.
*4  calculating mortgage payments. In both cases I used a 90% high ratio mortgage to reduce the amount of capital required to put down (which is typical of most).
*5  The Bank of Canada has abolished reserve requirements
*5   Canadian banks have a 0% reserve requirement, thus affording them the ability to create a virtually unlimited amount of money “out of thin air”
*5  Total Reserve Balances Maintained with Federal Reserve Banks (DISCONTINUED)
*5 Canadian banks have a loan to reserve ratio of 0.62%. Yes, that is less than one percent.
*5  this only shows required reserve ratio’s. Canada not on list. U.S. is now zero as well.
*5  only a fraction of deposits are backed by cash. Banks are required to keep on hand a certain amount of the cash that depositors give them, but banks are not required to keep the entire amount on hand


*8  CDIC cash and investments 5.735 billion, CDIC insured deposits 852 billion, 5.735/852 = 0.67% or ability to cover off 0.67% of deposits. This is $673 per $100,000.