“Inflation is a very serious subject, you can argue it’s the way democracies die.” – Charlie Munger

Charlie Munger goes on to explain the political dangers of hyper-inflation running too high in a country.

“What brought in Hitler was the combination of the Weimer inflation, where they utterly destroyed the savings of the middle class in Germany, followed by the Great Depression. It was a 1, 2 punch.”

“And Hitler came in, crazy demagogue, with 40% of the votes. And pretty soon we had a dictator hell bent for World War. So the history is not pleasant. And Germany was a very advanced and civilized nation, the Germany that Hitler took over.”

“I always say that the interesting thing about that was Little Albert Einstein, a little Jewish boy, got his entire primary education with the insistence of the Catholic Church in Germany. Now that is a very civilized nation. So if you let your nation deteriorate too much, what you get is a Hitler. We proved it.” – Charlie Munger

“Think of all the Latin American countries that print too much money. They get strongmen and so forth. That’s what Plato said happened in the early Greek city state democracies. One person, one vote. A lot of egality and you get demagogues, and the demagogues lather up the population and pretty soon you don’t have your democracy anymore. I don’t think that was a crazy idea on Plato’s part. I think that accurately described what happened in Greece way back then, and it’s happened again and again and again in Latin America. We don’t want to go there. At least I don’t.” – Charlie Munger

“Well, when Volker, after the seventies, took the prime rate to 20% and the government was paying 15% on its government bonds, that was a horrible recession. Lasted a long time, caused a lot of anger and agony. And I certainly hope we’re not going there again. I think the conditions that allowed Volcker to do that without an interference from the politicians were very unusual, and I think in 20/20 hindsight, it was a good thing that he did it. I would not predict that our modern politicians will be as willing to permit a new Volcker to get that tough with the economy and bring on that kind of a recession. So I think the new troubles are likely to be different from the old troubles. You may wish you had you had a Volcker style recession instead of what you’re going to get. The troubles that come to us could be worse than what Volcker was dealing with. And harder to fix.” – Charlie Munger

Charlie Munger warns that inflation can be very dangerous for politicians, the party blamed for it, and can be very destabilizing for a nation. Inflation is a huge political risk in the context of history going back to the Roman Empire.[1]

Why is inflation so high 2022?

Inflation rates across the world are running at some of the highest levels in over 40 years. The cause of this inflation is a combination of many factors all happening at once.

  • Government deficit spending that pumped trillions into the word economies for decades. 
  • The monetization of government debt on to central bank balance sheets. 
  • Central Banks keeping interest rates too low for too long. 
  • The pandemic lockdowns leading to supply chain breaks driving up prices. 
  • The pandemic stimulus checks sending money to people not producing goods or services. 
  • The paycheck protection plan payouts to businesses not producing goods or services. 
  • Corporate businesses buying up private homes as rental properties driving up real estate prices. 
  • The rise in labor costs due to the lack of supply of skilled workers. 
  • The sanctions on Russia imports due to the war in Ukraine. 
  • The supply and demand imbalances in the energy markets. 
  • The increase costs of goods for businesses cause retail price inflation. 
  • The increase costs of transportation, fuel, and energy for businesses cause their prices to go up. 

Who benefits from inflation?

The majority of employees, entrepreneurs, businesses, and governments lose during an inflationary environment but there are a few people and businesses that can benefit in some ways.

Here are a list of some of the people and businesses that can benefit from high inflation.

  • Businesses that produce commodities benefit from higher prices for their goods.
  • People in debt benefit as their borrowed money was more valuable than the money they will use to payback the debt.
  • Governments in debt benefit as their borrowed money was more expensive than the money they will use to payback the debt.
  • People with mortgages benefit as inflation increases their home value more than their interest rate expense.
  • Anyone that holds physical assets of value benefits as money loses it buying power.
  • Historically people that have held precious metals like gold and silver have benefitted from inflation as these usually hold buying power and can increase in price during inflation.

These bright spots are heavily outweighed by all the negative effects that inflation has throughout an economy.

What happens when inflation is high?

The inflation rate in the United States averaged 3.28% from 1914 until 2022. [2]

Inflation is ever present and this is why prices steadily march higher over time. The buying power of all fiat currencies are designed to go lower as more money is added to the monetary system over time. Central Banks try to keep the rate of inflation constant at around 2% but have failed in their mandate over and over.

When inflation starts going over 8% year over year a few things become very noticeable.

  • The buying power of savings decline so it requires more money to buy the same thing you were saving up to buy.
  • Gasoline prices go higher so you spend more money on your commute.
  • Diesel prices go higher so it’s more expensive for businesses to transport goods.
  • Higher energy prices make utility bills rise.
  • Everything goes up in price due to the underpinning costs of production and distribution.
  • Earnings buying power declines, if inflation is running at 8% year over year and your annual raise was 3% you lost money. You make 5% less than you made a year ago.

Inflation is a stealthy tax on buying power created when too much money is chasing too few goods and services. Decreasing the money supply, increasing the supply of goods and services, or decreasing demand are the solutions to the problems of inflation.

"This is How Democracies Die" Charlie Munger's Warning
Image created by Holly Burns