What Does Inflation Mean to You?

By Derek Beese

Take a balloon and blow air into it so it expands and there you have inflation!

Quite so, but there is also a much more sinister meaning which eats away at our monetary worth by stealthily dipping its hand into our pocket. Usually we do not feel it but we do see its effect in the way prices keep rising.

If prices rise we need more money to buy the goods and if we cannot get more money then we can only buy less. What causes this to happen? This is a very complex question and because it is so complex, people outside the world of finance block it out as something they cannot understand. BUT it affects all of us every day of our lives so we should at least try. If we understand the cause then we can do something to correct it.

I have talked on this blog in the past about money and value; inflation is all about the value of money. Search out those previous articles and it will help you to follow this one.

The value of money is simple, isn’t it? A Dollar is a dollar, a Euro is a euro, a Pound is a pound, and a Yen is a yen. If each of these countries were totally isolated, with a great wall around them, so that they could not communicate with each other then everything used in each country would have to be produced within its own walls and would be paid for in its own money (currency). This money is issued and guaranteed by the government of the country and the total amount at any one time is controlled by that government and passes around from person to person and business to business to settle debts. This is called “money in circulation”.

Now this isolated country that we have invented has to produce all of its own food and drink for its people to live and also everything that the people use in their daily lives. This is the “product”, and if the number of people and the product remains constant and the money in circulation remains constant then the cost of everything used will remain constant because the cost is “the money divided by the product”. For example, if the total money in this wonderland is 100,000 and we have a total produce of 1,000 identical items then the cost of each one is 100 (100,000 divided by 1,000).

So far so good, but if the balance is disturbed, say by transferring some of the people making this product onto other jobs which do not make any product, then the amount of product will drop, let’s say to 500 and the cost of each will then be 200 (100.000 divided by 500).

In simple terms the product has become scarcer and its value has increased to reflect this based upon the “human perception” principle mentioned in one of the previous posts. Similarly if the product remains the same but the powers that be, increase the money supply, then the cost of each item will increase. (200,000 to produce 1,000 = 200 each).

An example of this occurred in Germany after the First World War. The armistice agreement imposed on the German people a liability to repay France for all the damage done. This was payable in German currency which the French would convert to their own currency to make good the damage by using their own people. Germany however was a bankrupt nation after the cost of the war, like most of the others, and could not earn enough by selling its produce to pay the debt, so the easy way out was for the Government to print additional quantities of its currency every time a payment became due. Thus they increased the supply of money without an equal increase in product and the result was that the money bought less and less. The debt to France was paid as required by the agreement (in German currency), but the value of the payment when converted to French Francs became more and more worthless so they had no real benefit. Eventually there was so much German money around for no compensating increase in product (that is, the money became so valueless) that no-one including all of the German people wanted it, and in Germany a single loaf of bread cost a wheelbarrow full of money to pay for it. This imposed enormous hardship on the German people who found themselves unable to buy the necessities for them to live. Prices were doubling by the day and money became completely useless so the only solution was to go back to barter. In these conditions a week’s load of food was worth more than the most valuable diamond in the world and would be exchanged for it provided the food owner was willing.

A similar situation is taking place today in Zimbabwe. The produce (output) of the country has been shrinking for many years and the money supply has been progressively increased by the national bank to pay for the government’s liabilities with the result that the currency is totally worthless. A recent report said that a new Z$10,000,000 (that’s right, ten million)note has been issued but all that it will buy is a loaf of bread. This is inflation on a massive scale and is devastating for the people who live there.

So inflation is not a good thing but governments and borrowers flirt with it because it makes it easier to pay off debt. At one or two percent per annum it does some harm but not enough to cause any serious hardship. As it gets above this level however we all begin to feel the pinch because our money will, quite visibly, not buy what it would before. The end result is to penalise the careful, thrifty people and to make life easier for those who run up big debts. That is not a result that is that is either wanted or just but is convenient for those who have borrowed and have to make repayment.

So keep an eye on those figures announced every month in your country. It is the policies exercised by the government that affect them and if the trend is upwards that is not a good sign. Trends are important because these actions take a long time to become apparent and by that I mean years not months, but if the wrong policies are followed for too long then inflation will happen just as surely as night will follow day.

Of course there are a vast number of complexities mixed into the pot to make the issue difficult to understand clearly, even for financiers, but the basic principle remains the same whatever the “confusers” tell you.

Like the balloon at the beginning, inflation causes monetary things to get bigger and bigger until eventually BANG!!!

Cost, Price and Value

By Derek Beese

We all know what these are, don’t we? Even so it is worthwhile to just think about these three words in a little more depth.

The cost of anything, whether manufactured or not, is measured by the amount of money spent on producing it. Easy! You find a stone lying on the ground, pick it up, and its cost is zero apart from the expenditure of your energy which has no monetary cost. So no cost!

The Price. Well, this is not a particularly pretty stone but it did sparkle a little bit which made you notice it, so perhaps someone will buy it from you. You assess what that someone might pay for it in money and try to sell it to obtain a little monetary benefit for yourself. That is its price.

Both of these are easy to understand, and will vary depending upon the cost of raw material, the amount of effort that has to be put in by people to make the final article, the complexity of the item, the quality and the final bit added on to make the whole thing worthwhile for the maker.

Good. Now we have the basis for doing business with other people. So what is this Value thing and how does it affect what has just been said? It is reasonable to think that the value of the product is the price that has been established by the above method. Well, not necessarily. That stone that we found and sold for the price we wanted, making us feel quite happy, was later found to be a gem class diamond and the price now is 10,000 times what we sold it for. Are we still happy? The stone is still just a stone so what suddenly gives it a “value” of such an enormous monetary sum? If it had turned out to be a piece of glass your assessment of price may well have been ok.

So what is value? The answer is very complex but can be distilled down to one basic thing and that is “Human Perception”. Value is what human beings believe. It is no more than that. You will probably react by saying “that is rubbish” and you are entitled to that opinion but look at some examples.

Diamonds are just stones which are found in the ground, but which are rare and when polished in a precise way sparkle brilliantly. The large ones are gem stones because people wish to use them to decorate themselves and to display how wealthy they are. The larger the stone the greater the rarity and the more it is perceived to be valuable. Millions of small diamonds and all the dust waste from the polishing process is used in industry for cutting tools because diamond is the hardest substance known to man, yet the price placed on this application is minimal even though it is far more useful.

A motor car is a very useful thing, it provides thousands of people with jobs to make it and when finished is good transport and continues to give people work to maintain it. A painting gives work to the producer and thereafter hangs on a wall and does nothing other than give some people pleasure when looking at it. Why then is a painting of sunflowers in a vase worth thousands of times more than a motor car? Why is a pile of house bricks stacked neatly in an exhibition valued at over a million dollars or a dead animal painted and preserved in an embalming fluid said to be worth millions? The answer is simply human perception of what these things are supposed to represent. In themselves they are worth peanuts.

A single tulip bulb at one time was so highly valued that people mortgaged all of their possessions and then borrowed more to buy just one single bulb. Fine until the mood changed and no-one wanted them any more. Very much a case of “The Emperor’s New Clothes”. People saw what they wanted to see even though it was not there.

Value is a very nebulous thing and is affected by the human perception of rarity, history and age when considering things but though we normally ignore it, it also applies to people. Sometimes the phrase “he/she is worth his/her weight in gold” is heard. This is a metaphorical statement not a literal one. It does not mean that because gold has a price of $700 an ounce today and the person weighs 200 pounds that his value is 200 x 16 x 700 = $2.24 million, it means that he is of inestimable value to humanity and all living things.

How do you place a value on that? Again it is a case of perception. The words associated with the assessment of human value are those such as kindness, helpfulness, compassion, consideration, charity, love, cheerfulness, happiness, honesty, cleanliness, trust. Those associated with a lack of value or even zero value are such as cruelty, unhelpfulness, evil, inconsiderate, egotistical, hateful, depressing, dishonest, dirty, backstabbing, untrustworthy.

So this simple word “value” is not as simple as it may seem. It is something that all people should take time to think about and to try to understand. What value do you place on the people you know or meet in this journey through life? What is even more important is what value do they place upon you and how do you improve their assessment of you?

Money or Barter?

By Derek Beese

What is money? That is a stupid question you might think. Everyone knows what it is. It’s those pieces of paper and those metal coins that we all use to buy what we need or want. Ye-e-es, but what makes that piece of paper whether it is Dollars, Pounds, Euro, Yen or any currency you wish to name, worth anything at all? It is after all just a piece of paper – very pretty but just paper. It has no scarcity value because there are trillions of them all precisely the same and the same thing goes for the coinage.

So, I ask again, what is money? It is important that we understand because we all use it every day!

To explain, the story must start many thousands of years ago, before man invented this thing called money. When early man saw that another man had something that he wanted he had two ways to acquire that thing (say some food). Method one – bash him over the head with a jolly heavy club and steal it, or method two – give him some thing that he will find useful by way of exchange. The latter is the most satisfactory because that way both parties go away happy and there is always the chance to do the same thing again in the future. He has made a friend, not an enemy. The latter method is barter and is where goods of any nature which are of relatively equal value to the owners can be exchanged to the satisfaction of both parties. The goods can also be services, such as: I will dig your vegetable patch if I can have an agreed amount of the veg. grown.

Barter is a very good system for trading and served the people worldwide for a very long time. For thousands of years it was the sole method of doing friendly trade and has survived right into the present time. It is still widely used. For example, two gardeners one of whom grows superb potatoes and the other who grows marvellous soft fruits frequently will exchange produce at harvest time to their mutual benefit. It is also used for much larger transactions.

But – and there is often a ‘but’ – the system has its limitations! As bigger industry developed the exchange items became and frequently are, totally unbalanced. Let’s say that a man who has a thriving business producing garden spades wants to obtain a Jaguar car. Does he go to the car manufacturer and say – your car is worth £40,000 and my spades are worth £1 so I will give you 40,000 spades for one of your cars. I leave you to imagine the answer!

So barter had to be extended somehow and the method developed was to create a middleman who acted as an intermediary to enable the two parties to do the deal. Initially these were business people who would say (in the spades example), “I will take your spades and trade them on to someone else but I cannot pay you for them immediately so I will give you a note promising to pay you at an agreed time in the future”. This middleman had to be someone (or a business) that was trusted by everyone and had total integrity so that other people( in this case the Jaguar manufacturer) would accept his promissory note in payment and was then able to use it himself to pay for goods to carry on his business. This transfer from person to person (or business to business) carried on until the due date for payment when the note was presented to the originating middleman and payment was made, thereby settling the debts of everyone who had traded the note.

Ah, you will say, but what if the middleman had bartered the spades for some other product that the end promissory note holder did not want, – the system would all fall down. Correct. So a product which had universal acceptance and an accepted standard value common to everyone had to be found so that final payment would be in this product and would be accepted by all together with its value. That product was Gold because it was so scarce and everyone valued it, supported by the second most valued metal Silver. The standard unit of gold was subdivided into smaller units which became silver coins and could be passed from person to person very easily.

That is why in the UK the more valuable coins are silver coloured (they are no longer made of pure silver) and in the USA they had the Silver Dollar. The number of silver coins making up the gold basic unit was evaluated by weight, each coin having a precise weight of pure silver depending upon its value. In the UK a one shilling coin was exactly half the weight of a two shilling coin, and if you   collected together one pound weight of the silver coins it was worth one gold basic unit. Hence the Pound of Sterling Silver or the Pound Sterling.

The middlemen over time evolved away from dealing in product and dealt only in what had become known as money and became what we now know as Banks. They still perform the same function today and are the organisations that oil the wheels of business. The notes that they issued were centralised in virtually all countries of the world into the nationalized banks of each country. For example look closely at a Bank of England £5 note and it says, Bank of England, I promise to pay the bearer on demand the sum of five pounds. But this is no longer five pounds weight of sterling silver because the link between all currencies of the world and gold was terminated during the World War 2 for very pragmatic reasons. The backing for the promissory note has now become the government of the country issuing that note. So the value of any currency is now wholly dependant upon the financial stability and the integrity of the government of that country.

Now, one other development grew out of the creation of money. It was found that not only was it ideal for settling financial debts but it also created a means of security. If a person or business receiving money could put some of this aside he/she/it had a recognized store of wealth which was acceptable to all people across the globe. This could not be done with barter. Hence money became dual purpose: 

1. To buy things made or produced by others and to settle debts.
2. To provide security for those who could same some of it and have it available to meet unexpected adversity. 

Item 2 is commonly called saving and is something that all people should do, each according to his or her circumstances.

How to Use Our Brain Effectively

The first step on how to use our brain more effectively is by learning at least a little bit about this fantastic ‘thing’ we have within our heads. Unfortunately it doesn’t come with a manual – it would be so helpful!

Within our heads we keep this precious and incredible organ that represents just 2% of our total weight and is always switched on, never turns off, since we were born to until death no rest, even when we are sleeping.

Made of 100 billion very small cells called neurons. These neurons work in groups and the groups interact with each other forming a huge network of information. When you think about a lime, one group has the green information, another one has the round information, another has the texture information and another has the sour flavour bit and so on. You can even have groups of neurons that store other information about lime connecting it with a sad or happy memory that can make you have some other emotions attached to a lime.

The point is every one of us has our own memories, beliefs, skills, abilities stored in these groups of neurons. Therefore every time we encounter a situation in our lives these groups in connection with other groups are going to fire off and make us respond in a certain way. It can make us react in exactly the same way every time we have a specific stimulus.

However when we do something new a group of neurons will form new groups connections creating a new network of neurons. If we do it only once it will not create strong connections in these networks. If you repeat it again and again it will form stronger connections that will last. This is the process that the brain uses to learn and can serve us immensely but it can also make it difficulty to break unwanted connections i.e. bad habits. Luckily neuroscience tells us that we can also break the unwanted connections. If we are really willing to stop any mental or physical pattern we just have to continuously interrupt the pattern until we get the neurons network to stop working together in that particular way.

The learning process occurs is two ways through our intellect where we have to study long and hard to master a subject or through experience and the latest is the most powerful one. That is why we never forget how to ride a bike or drive.

The frontal lobe is an area of our brain located in the front. The frontal lobe is responsible for our focus and concentration. It allows us to make choices and decisions. It represents our free will.

When making choices we have two ways to do so, first is the biological response that allows us to save our lives in a danger situation the famous fight or flee reaction. The groups of neurons interact with other groups activating an entire network to have a response that will save our lives. However the same applies to habitual behaviours. Which not always are good ones.

The second way to make choices is by using the power of your frontal lobe, the power of focus and concentration and separate ourselves from the environment and observe. Observe as if we are outside the scene of our experience, as if we are a second person. If we, using the power of observation, can unplug unwanted neuron connections and plug new connections than we have the power of building an entire new network. A new ‘me’ and a new ‘you’. Observing we can realise – I have these neuron connections that fires and cause me to blame someone or something else for the unwanted results I have in my life.

Being observers of ourselves we are using our consciousness to make our brain examine all our choices and possibilities. We can make our brain work for us and not against us. Plug and unplug we have the power!

Who is in Control? You or Your Money

By Derek Beese

This may seem to be a very silly question but do you ever wonder at the end of the week where all your money went and left you with nothing? Many people do just that and it usually means that the money is in control. There is no plan and the money says “here I am, spend me on whatever takes your fancy”. There is a very old saying that “money burns a hole in his pocket” which is another way of saying that the money is in control!

This is a difficult thing to correct and for some people are almost impossible because they just will not admit that they are not in control themselves and until this fact is admitted to oneself, the cure cannot begin.

The cure is simple to say but often very hard to apply because it means that you have to make a set of rules and stick to them. In time they become second nature and the more you stick to them the easier they become because they become a habit.

What are these rules that give you the control over money? 

First you have to make a plan – usually called a budget by financial people. The Government makes an annual budget and all businesses make annual budgets and all charities make annual budgets and everyone who has to deal with money on a professional basis makes a budget. This is the first essential step to being in control of money. In simple words, it is their Plan for the year ahead. The estimate of what they are going to receive and how much they can spend and how much they have to put aside to meet unforeseen events. So rule one is make yourself a plan.

Rule two is to make sure that this plan sets aside a small amount of money which will not be spent – a regular amount. You decide how much because the plan is yours but those who are best at this try for about £5 out of every £100. This in financial jargon is five percent (5%). The word percent comes from the Latin Per Centum which means “for every hundred” so five percent means five for every hundred. If your income is two hundred then 5% percent is 2×5=10. If three hundred then 3×5=15.

Rule three is to open a savings account with a building society or the post office which is easy to do. Just go in and ask and they will lead you through the procedure. Make it one which has a branch office which you pass every week. Then rule three says that every week when you pass this office you go in and deposit your planned amount and leave it in the account. It is still your money but do not draw it back out. Try to make it the same day every week so that it becomes a habit to go in there for that purpose. Do not put it in a jam jar or a box for two reasons. One is that this makes it too easy to “borrow” and is a temptation that breaks rule two and the second is that money saved should be made to work for you. All the time it is in the savings account it will earn interest for you and if it stays untouched it will slowly grow larger without any action by you.

By the magic of compound interest the more that is in the account and the longer it is left untouched the faster it grows. In a building society there is no charge for this and your money is guaranteed safe by the Government up to £50,000.

Rule four is to stick to your plan.

Then you can say that you are in control of your money and your money does not control you.

By Russell Beese

www.beeseproperties.com