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We all need money yet understanding how money works is tough, in part because, like water, money can change shape. When the amount of money increases and the amount of things to buy decreases, money becomes less valuable relative to things, it melts. This is what’s called inflation, which is now almost 7%.1 Said differently, the $100 you have today gives you the power of $93 a year ago. This matters to everyone who spends and saves.
After Friday’s inflation report, the media focussed on the political implications and future path of inflation. These are important questions. Different but longer-term questions:
a) How does inflation work? While the pandemic is short-term boosting prices, can our now forced familiarity with remote services disrupt sectors, like medicine and education, that have so far been shielded from price competition?
b) Should we save differently?
“A” I address today. “B” I have addressed before and will update for subscribers next week. “A” also ties in to today’s podcast with Garner Health CEO Nick Reber, which you can hear here.
Inflation Mechanics
Inflation is the average of a pile of stuff; more about how it works here. Individual prices are determined by supply and demand. As you can see below in the chart my partners at Rose Technology created, over the last 25 years, prices of areas subject to globalization, like toys or apparel, have collapsed.
If you move a textile factory from Connecticut to South Carolina to Shaoxing, costs fall. Medicine and education costs have gone in the opposite direction.
Companies don’t lower prices unless they are forced to, when they are in a strangle-hold. A combination of Amazon and China put the likes of toy retailer FAO Schwartz in exactly this type of position, which is why they went bankrupt in 2003. (My millennial readers perhaps don’t know FAO was a once iconic retailer with a store on the corner of Central Park that featured in the 1988 movie Big; the movie’s most famous clip is here.)
While politicians play a negligible role in setting prices, they get blamed for bad outcomes. High inflation plus the Afghanistan pull-out risks giving the Biden Administration a Jimmy Carter-like patina. The Administration is trying to demonstrate leadership over clogged ports ahead of mid-term elections. Mechanically, politicians can contain inflation by a) putting thoughtful people in charge of the central bank and b) encouraging competition.
Going Forward, the Supply Chain & Medical Costs
Right now, prices are rising because the pandemic led to a) a lot of money printing and b) a flow of goods interruption as the virus shut down ports, shipping containers were comandeered for personal protection gear, etc.
Going forward, inflation geeks are in two camps. Camp #1 believes the pandemic-related stimulus will lead to a further rise in inflation. They think the central bank needs to rapidly reduce the amount of money they are printing. Camp #2 believes the inflation pop is temporary. They reason that before the pandemic inflation was close to zero and the current surge will ease as we go back to normal.
I’m more sympathetic to camp #2. One way I might be right is if education and medicine starts to be more vulnerable to competition in part because the pandemic is accelerating the shift to alternative business models. For instance, will the pandemic breath new life into on-line education? Why should elite schools only offer courses to a small group of students? If they open up to a broad population, prices will fall because supply of education will rise.
In terms of medical costs, I couldn’t think of anyone better to talk with than Nick. Garner uses big data to calculate doctor outcomes. Nick is not optimistic prices can fall in the short-term, but he did open my eyes to why they keep rising.
Two reasons stand out.
1. Bad incentives. As opposed to being paid a flat fee, doctors are financially incentivized to order tests. In the interest of “being prudent,” the patient may agree. Unnecessary tests jack up costs and sometimes lead to false positives and unnecessary procedures, which further inflates prices. Prudent doctors are effectively penalized.
2. Monopolistic hospital systems. There is competition between insurance companies and hospital systems. While conceptually “non-profit,” in fact the hospital systems aim for enough scale to dictate terms to the insurance companies, rather than the other way around.
Nick advocates for preventative care and at the same time suggests we be more skeptical about other procedures, the same way we would if a car mechanic tells us we need a new air filter. His data also helps explain why the US spends more money than say, Germany, and gets worse outcomes.
I came away from our conversation suspecting medicine in the US is a bit like car dealerships, a nationally dispersed political entity that can create legislative pressure to snuff out reform. Maybe the Biden Administration should focus less on ports and more on hospital conglomerates?
Carvana is now disrupting the car sales industry. What is the medical equivalent? Will I be able to one day get a colonoscopy or cholesterol test in a vending machine? My hunch is innovation will touch education and medical costs over time. Innovation plus a modest reduction in money printing plus an ebbing of the pandemic likely gets inflation down.
Other:
What I’ve been ingesting:
1. Watching: Delhi Crime. This story is a fictionalized detective drama based on a notoriously brutal rape. This is both a good versus evil story but also a vivid portrait of modern India, like that the cops don’t have a budget for hand-cuffs.
2. Reading, fiction: Atticus Lish. I tore through both Preparation for the Next Life and The War for Gloria. Fantastic books that, among other things, wrestle with what a hero might look like in an oh-so jaded modern world.
3. Reading, non-fiction: Into the Woods by John Yorke. I’ve read a lot of books about how to construct a story. This one is by the far the best. Not only did it help me with my second book, a financial thriller, but it also helps explain the structure of pretty much any film or book you have seen.
Also, the Still Press team is now booking guests for Season #4 of our podcast. If any readers have a connection, or a connection to a connection, with Yvon Chouinard, please reach out.
https://www.bls.gov/news.release/pdf/cpi.pdf