{"id":710,"date":"2025-07-04T12:12:55","date_gmt":"2025-07-04T04:12:55","guid":{"rendered":"https:\/\/barzov.com\/?p=710"},"modified":"2026-07-27T18:43:57","modified_gmt":"2026-07-27T10:43:57","slug":"money-matters","status":"publish","type":"post","link":"https:\/\/barzov.com\/index.php\/2025\/07\/04\/money-matters\/","title":{"rendered":"Money matters"},"content":{"rendered":"\n<h1 class=\"wp-block-heading\">Chapter 1: Money<\/h1>\n\n\n\n<figure class=\"wp-block-image aligncenter size-large is-resized\"><img decoding=\"async\" src=\"https:\/\/barzov.com\/wp-content\/uploads\/2025\/04\/money-e1774184737183.png\" alt=\"\" style=\"width:200px;height:auto\"\/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">What is money<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Money matters. As a father, I would like my children to understand money so that they can make informed choices later in life. Everyone understands it intuitively, to some extent, but few people have a complete understanding. For example, many people confuse money with banknotes (cash), even though each of us uses far less cash than the amount of money we keep in our bank accounts. Even &#8220;learned&#8221; economists don&#8217;t have the answers to simple questions like what money is and where it comes from.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In my younger days at school, I happened to be very good at math. I pursued a math degree in university and joined a bank afterward in a role that required a strong command of math. Still, not once in my professional life did I get to use geometry, trigonometry, complex numbers, integration, or even a quadratic equation &#8212; all parts of the standard math curriculum that every high school student in the country had to muddle through, even though most of them would never use them in life.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Isn&#8217;t it strange that the education system, not just in the country I grew up in, but practically everywhere else, would force years of difficult and absolutely impractical learning upon every growing adult throughout 12 years of schooling, yet it never teaches them anything as practical as money matters? After all, each of us would inevitably have to deal with money throughout our lives. Learning about interest rates, time value of money, savings, or how a mortgage loan works would have been infinitely more useful and practical to every single person. Yet no government in the world teaches its citizenry about money, choosing instead complex mathematics, nuclear physics, organic chemistry, and what have you&#8230; Every day I read articles about people getting scammed financially or running into debt. I see friends and relatives make disastrous decisions with their money, even if they are otherwise smart and professional in their respective areas of expertise. But somehow, no priority is given to educating the public about money.<\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter size-full is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"256\" height=\"256\" src=\"https:\/\/barzov.com\/wp-content\/uploads\/2025\/04\/confused_student-e1774185208214.png\" alt=\"\" class=\"wp-image-98\" style=\"width:186px;height:auto\"\/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">Coincidence? No, it is no accident. Governments don&#8217;t teach their populace about money for one simple reason: if the people figured out how money functions and who causes the inflation that they suffer from, they would realize who the culprit is. Let me try to remedy that, for my children&#8217;s sake and for the benefit of anyone reading this.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Origins of money<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">So back to the question: what is money anyway? A simple definition would do:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">Money is a commodity commonly used in the exchange of goods and services<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">Human civilization truly began when people began to <em>trade<\/em>, that is when people began to exchange the fruits of their labor for that of others. For example, a hunter and a farmer might exchange meat for apples. Such a direct form of exchange, called <em>barter<\/em>, would have initially sufficed for simple transactions but would have been found inconvenient for anything beyond that. What if the hunter wanted apples but the farmer needed shoes instead of meat? The hunter would first need to exchange his meat for shoes with a shoemaker and then bring the shoes to the farmer &#8212; not very convenient. And furthermore, a pair of shoes may be equal to 100 kg of apples, far more than the hunter needs.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So soon enough, people must have begun using an <em>intermediate commodity<\/em> for the purpose of exchange. Throughout history, many such commodities have been used, like seashells, fish hooks, grain, opium, various metals (gold, silver, copper), and even cigarettes (notably among prisoners). That commodity is what was effectively considered <em>money<\/em> at that time and place. The features that make a commodity well suited for the purpose of money are as follows:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>It must be acceptable to everyone, which is greatly helped if a good majority of them consume that commodity. For example, cigarettes in prison work well because some prisoners, namely the smokers, consume them, so that even non-smokers are comfortable accepting cigarettes as payment knowing they can exchange them down the road.<\/li>\n\n\n\n<li>It must be uniform (homogeneous), i.e. every piece of money has to be the same as all the others, because if they differed, inferior samples would be shunned. Metals are a good example because every gram of silver is the same as any other gram of silver.<\/li>\n\n\n\n<li>It must be divisible into small units (denominations) so that it would work for small transactions, but it must also be valuable enough so that you wouldn&#8217;t need to carry too much of it for larger transactions. For example, gold is a good example because it can be split into very small pieces for small transactions, yet you don&#8217;t need to carry too much of it either for purchasing something bigger. Conversely, iron would be a bad commodity, because one would need to carry a ton of it in order to pay the dentist.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Over time, gold and silver emerged as the most suitable commodities to serve as money as they fit the above criteria reasonably well. But people went one step further: instead of carrying pieces of gold in their pocket everywhere, and having to prove that it is not diluted with other alloys, they chose to deposit the gold with a goldsmith (or a jeweler or a warehouse) in exchange for a warehouse receipt. Such a receipt was as good as the gold itself, as any recipient would easily be able to go to the goldsmith and exchange it for the original gold. In fact the receipts were even more convenient to carry and exchange than the underlying gold, so they became the dominant form of money. Few people bothered to go and exchange them for gold after they received them, because they would likely spend the money long before that.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">When the goldsmiths discovered that most of the gold was lying around unclaimed most of the time, they got the sneaky idea to use it themselves, e.g. by lending it for interest. But once they lent the gold to borrowers, the borrowers &#8212; just like the original depositors &#8212; would naturally opt to deposit the gold back with the goldsmith in exchange for receipts. That way the same gold was pledged twice and there ended up being more receipts floating around than actual gold lying in the vaults. That was the &#8220;original sin&#8221; that gave rise to the concept of banking, notably <em>fractional reserve banking<\/em>. The term fractional derives from the fact that only a fraction of the free-floating money out there is backed by gold, which is all fine as long as only a small number of people ever bother to claim their gold back. But if enough people lost trust in the goldsmith and went down to ask for their gold, most of them would have to return empty-handed because there simply wasn&#8217;t enough gold in the vault. We will expound on that in a later chapter on banking.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Money today<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Money has evolved since the middle ages, but this evolution would not make sense without first understanding how governments have hijacked the monetary system for their own nefarious purposes, a discussion reserved for a later chapter. For now, we will skip over and jump straight to the present-day monetary system.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Money today consists of cash and bank deposits. Since members of the general public need cash (coins and bills) for daily transactions and keep most of their money deposited in the banks, it is fair to say that:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">Most money is simply a <em>number stored in the memory of a computer<\/em>.<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">That is all. Very anticlimactic, isn&#8217;t it? And how is money created, i.e., how does that number change up or down? Brace yourself, for the answer is even more disappointingly bland:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">The banking system creates money in the ordinary course of lending, and destroys it as credit is repaid.<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">This simple truth is not taught in class. Contrary to what most people believe, money is not created when gold is deposited; money is not created by the government; money is not printed! Money is created inside a computer when Mrs. Jones enters a bank and asks a bank official to grant her a loan for her home renovation.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Since money is created and destroyed through the creation and repayment of loans of the same amount, a corollary ensues:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">Money and debt are two sides of the same coin.<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">Money is created when debt is created, thus money is backed by debt. It is the blind leading the blind. Therefore the &#8220;true value&#8221; of money derives from the <em>trust<\/em> that society places in that money, trust that can be easily lost and that must often be defended by force on the part of the one issuing money<sup data-fn=\"3237fc4c-3fc0-42ba-9831-f9d2232171cc\" class=\"fn\"><a href=\"#3237fc4c-3fc0-42ba-9831-f9d2232171cc\" id=\"3237fc4c-3fc0-42ba-9831-f9d2232171cc-link\">1<\/a><\/sup>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To gain further insight into how money powers the economy, we need to look at the cardiovascular system of the economy: its banking system.<\/p>\n\n\n\n<h1 class=\"wp-block-heading\">Chapter 2: Banking<\/h1>\n\n\n\n<figure class=\"wp-block-image aligncenter size-large is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"819\" src=\"https:\/\/barzov.com\/wp-content\/uploads\/2025\/04\/bank-1024x819.png\" alt=\"\" class=\"wp-image-103\" style=\"width:253px;height:auto\"\/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">The house of money<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">A bank is an entity that specializes in the provision of money. The product is money (in the form of loans), and the price of this product is called the <em>interest rate<\/em>. Yes, the price of money is the <em>interest rate<\/em> at which said money is lent. Consider this your first lesson in finance.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A bank is also a place where people deposit money, and where they can execute transactions with other people, e.g. by writing a check instructing their bank to move money from their account to another person&#8217;s account (which may well be held with another bank).<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">People can also withdraw their money in cash and use it for daily transactions, or they can deposit it at another bank, at which point it becomes virtual again, while the physical cash gets recycled. That means two things are worth noting:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Cash and deposits are both liabilities issued within the banking system<sup data-fn=\"15b9cbbf-0ab8-43ff-8370-e20d65526222\" class=\"fn\"><a href=\"#15b9cbbf-0ab8-43ff-8370-e20d65526222\" id=\"15b9cbbf-0ab8-43ff-8370-e20d65526222-link\">2<\/a><\/sup>.<\/li>\n\n\n\n<li>All money in the economy (a measure called M1 by economists) is the collection of currency in circulation and deposits that are readily available for spending.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">While M1 is important (and we will see how later when we discuss the concept of inflation), the breakdown between cash and deposits is not. The two numbers fluctuate a lot, particularly around certain holidays when grandparents withdraw cash to gift to their grandkids, but that has no bearing on the total money supply. So it is very wrong to think of cash as the entire money supply, especially since, in developed economies, cash is only a fraction of all money, considering most transactions are entirely electronic.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Now we know that a bank is an entity that disburses loans, holds deposits, and effects transactions on behalf of its clients, but the reverse is not true: an entity that offers loans and deposits and effects transactions is not necessarily a bank. Your auto dealer may extend you a loan to purchase a car from them; or a payment services provider can allow you to deposit cash and make electronic payments with your stored value card. What makes a bank special is the unique privilege to <em>create<\/em> money out of nothing. All others must have money in the first place before they can lend it, but not a bank. Many people wrongly believe that a bank lends you money that others have previously deposited, but that is simply not true. A bank can lend many times over what was previously deposited by simply creating the money. The mechanism is as follows: Mrs. Jones goes to her local bank branch and asks for a $10,000 renovation loan. The clerk approves the loan and presses a button in his computer, which creates <em>two<\/em> transactions in two distinct accounts:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li>A new <em>loan<\/em> account is created in Mrs. Jones&#8217;s name which will serve as the servicing account for her loan. The loan account initially records a principal balance of $10,000, which decreases as she repays it.<\/li>\n\n\n\n<li>At the same time, $10,000 is credited to her <em>deposit<\/em> account, from where she can go on to withdraw the money and pay her renovation contractors.<\/li>\n<\/ol>\n\n\n\n<p class=\"wp-block-paragraph\">Where did the $10,000 come from? It came from the void. It came out of thin air. It was created in the memory of the computer when the clerk pressed 1,0,0,0,0,&lt;enter>. This is the miracle of birth, the genesis, the Big Bang &#8212; the creation of money and the manifestation of a godlike power vested in a single type of entity: the Bank.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Such great power obviously requires certain checks and rules. For example, a bank cannot simply create money and give it to itself in the form of revenue and pass it to its shareholders as dividends. Remember that cash and bank deposits circulate as interchangeable forms of money, so other banks would not tolerate one of them minting money and gifting it to itself arbitrarily<sup data-fn=\"3a4092de-eed9-4c65-a759-e76eff84af59\" class=\"fn\"><a href=\"#3a4092de-eed9-4c65-a759-e76eff84af59\" id=\"3a4092de-eed9-4c65-a759-e76eff84af59-link\">3<\/a><\/sup>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But what if a bank stuck to the rules of lending but still went overboard issuing risky loans? Any losses would need to be borne by the bank&#8217;s own capital, which is tiny compared to the loan book and can be wiped out by just a small percentage of bad loans. That would jeopardize not just that particular bank but also the trust in the entire banking system, possibly precipitating bank runs at other banks and causing a cascade of defaults<sup data-fn=\"6d6f7f95-36c8-4d5b-86a0-982ef727f81c\" class=\"fn\"><a href=\"#6d6f7f95-36c8-4d5b-86a0-982ef727f81c\" id=\"6d6f7f95-36c8-4d5b-86a0-982ef727f81c-link\">4<\/a><\/sup>. A regulator was needed.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">The Central Bank<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Over time, as banks mushroomed and went bust, leaving many people high and dry, the industry gathered and decided to impose some self-discipline on its members &#8212; for the good of the members and the industry as a whole &#8212; and, we may add, for their clients too. A body emerged in the form of a central bank (CB) that would regulate the banks&#8217; activities and decide on common policies. The Bank of England is one of the world\u2019s oldest central banks, and many of today\u2019s central banks were modeled on it.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">One requirement that the CB, as a banking regulator, imposes on all banks is to hold sufficient shareholder capital against their assets, e.g. loans. One example is the Common Equity Tier 1 ratio stipulated by Basel III. Capital requirements constrain how far banks can expand their loan books and therefore influence the potential growth of the money supply. This gives CBs tremendous power! By publishing just one number, the CB can essentially influence the amount of money in the entire banking system. There are many other levers at the CB&#8217;s disposal to inject or mop up liquidity in the banking system.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">At first glance, it all looks legitimate, as the purported goal of the CB is a noble one &#8212; stability of the banking system, which underpins the entire economy. For good measure, there are other &#8220;acquired&#8221; objectives that the CB pursues for the public benefit, namely price stability in the economy and maximum employment.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">On closer examination, though, things begin to appear shoddier, since what the CB essentially does &#8212; coordinating the actions of members of the same industry and effectively setting the pricing (interest rates) of their product (money) &#8212; would be called a <em>cartel<\/em> in another industry. That is why many conspirators talk about a <em>banking cartel<\/em>. Furthermore, most CBs have their own balance sheets (holding government bonds and foreign exchange reserves), thus incurring profits and losses like any other financial institution.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But things are less sinister in reality. CBs are not really run like for-profit companies for the benefit of their shareholders. For example, the Fed normally remits its excess earnings to the US Treasury. And furthermore, the Chair of the Federal Reserve Board is nominated by the President and confirmed by the Senate, so it is fair to say that the CB serves the people rather than some private interests, while at the same time not being beholden to the (executive branch of the) government, since the President cannot appoint and remove the head of the Fed at will<sup data-fn=\"18368000-d690-454f-9860-10f848a524c1\" class=\"fn\"><a href=\"#18368000-d690-454f-9860-10f848a524c1\" id=\"18368000-d690-454f-9860-10f848a524c1-link\">5<\/a><\/sup>. The Fed has its own mandate, as discussed above, and while that hasn&#8217;t really stopped it from acting politically and with favoritism<sup data-fn=\"476afe2c-b933-4304-a349-47c6ec13def5\" class=\"fn\"><a href=\"#476afe2c-b933-4304-a349-47c6ec13def5\" id=\"476afe2c-b933-4304-a349-47c6ec13def5-link\">6<\/a><\/sup> at times, its loyalty is clearly to the public and not to the banking industry.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">The larger economy<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">It is fair to say that money powers the economy by flowing through the financial system the way oxygen powers a body by flowing through its arteries. Corporations borrow money at interest to invest in projects and assets, earn a return on them (hopefully above the level of interest), and finally repay the loans. Without borrowing, most companies would not be able to function. It is true that less capital-intensive industries can get by without external capital (lending), like an art studio or a small IT company, but most companies require external financing. Financial markets also allow capital seekers (e.g. a mining company) to raise money from capital providers (insurance companies, pension funds, mutual funds), or from public markets via securitization (issuance of bonds), though the most important source of funding remains bank lending.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">One commodities trader once shared with me: &#8220;We traders never keep any money on hand; on the contrary, we borrow as much as we can, we buy goods that we sell for a profit, and then we return our loans with the interest. Any money we can get our hands on is invested to earn a return. We never enter a bank to deposit money &#8212; we only ever step into a bank to <em>borrow<\/em> money.&#8221; That is when I realized that rich people <em>borrow<\/em>, while the poor <em>save<\/em>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Bank lending influences the supply of capital. Given the demand, which is determined by the state of the economy, the supply of money determines the price of money, i.e. the interest rates at which companies borrow, which further impact the interest that other non-banking players may expect to earn on their loans. By lowering or raising interest rates, or the <em>cost of capital<\/em> as economists prefer to say in this context, the CB could render certain projects either viable and investable or non-viable and non-investable, in turn expanding or contracting the economy. When money is tight and expensive, projects become out of reach, companies wilt and lay off people, and the economy shrinks while unemployment rises. When money is plentiful and cheap, any project becomes enticing and companies invest in anything that moves, increasing employment and expanding the economy in the short run.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">One might wonder why not make capital practically free and expand credit <em>ad infinitum<\/em>. Well, because there are many downsides to doing that. First, cheap capital creates froth and zombie companies that would not be able to continue operating if it were not for the cheap capital. It detracts from good projects by making all projects &#8212; good or bad &#8212; seem equally investable. That is bad for the economy, and for a company it is like cocaine that keeps a weak body going for a while before destroying it in the long run. Sooner or later the capital dries up, investments in the bad projects are written off, losses are incurred, and companies fire people, leading to economic contraction and high unemployment<sup data-fn=\"a7bf349d-5678-4c4e-b419-99cbf745ebe4\" class=\"fn\"><a href=\"#a7bf349d-5678-4c4e-b419-99cbf745ebe4\" id=\"a7bf349d-5678-4c4e-b419-99cbf745ebe4-link\">7<\/a><\/sup>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Furthermore, cheap capital inflates the demand for assets, raising the prices of properties and causing an old\/young divide, where young people cannot afford to purchase their first property at sky-high prices and delay marrying and having children. In other words, ultra-cheap capital for too long creates market distortions with high economic and socioeconomic costs to be paid down the road, and should be reserved for when the economy really needs a boost. When the economy is running fine &#8212; for example, due to the discovery of oil or the invention of a new technology &#8212; interest rates should be left to the market forces to naturally rise and balance the demand for capital. This is why the CB has a balancing act to play between price stability, economic activity, and socioeconomic objectives like unemployment and demographics (yes, like it or not, the cost of money impacts how many babies are born).<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Monetary policy does not, in itself, create economic activity &#8212; it only shifts capital from one place to another. An indirect and temporary effect of that may be an increase in economic activity, e.g. by creating a <em>wealth effect<\/em> where companies and individuals feel richer and invest\/buy more things, thus boosting the economy. But again, such an effect is indirect and temporary and should be reserved for when the economy needs a jab, not for powering the economy. The medium-term net effect of monetary policy is always neutral, i.e. what you gain today you will have to pay back in the future. It is only good for smoothing the economy over, not for increasing it.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Lessons<\/h2>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">A bank is a place where the poor go to deposit their cash and where the rich go to borrow money.<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">Counterintuitive as that may sound, if you understand and remember this definition, you will have a much happier financial life than most people. I wish I knew this when I was twenty rather than now. When I shared this with some of my less privileged friends, they looked at me in dismay: &#8220;Are you telling me that I am now richer because I&#8217;m now drowning in debt?&#8221; Well, I didn&#8217;t elaborate back then as it might have offended them further, but this point will become self-evident when we understand how <em>inflation<\/em> works.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Accounting<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Notice that the money held on deposit at a bank is actually a <em>liability<\/em> of the bank, as it owes such money (and interest on the money) to its depositors. Conversely, the loans that a bank issues are <em>assets <\/em>of the bank: assets that generate revenue for their owner (the bank) in the form of interest rates. For all other (non-bank) entities and individuals, their bank loans are liabilities and their bank deposits are assets. That means that the balance sheet of a bank looks exactly the opposite (and thus quite confusing) from the balance sheet of anyone else who is not a bank. It also means that a bank earns revenue from the difference between the interest it collects on its loans and the interest it pays on its deposits.<\/p>\n\n\n\n<h1 class=\"wp-block-heading\">Chapter 3: Inflation<\/h1>\n\n\n\n<figure class=\"wp-block-image aligncenter size-large is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"755\" height=\"1024\" src=\"https:\/\/barzov.com\/wp-content\/uploads\/2025\/04\/pickpocket-755x1024.png\" alt=\"\" class=\"wp-image-121\" style=\"width:162px;height:auto\"\/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">The invisible hand<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">We all can feel it &#8212; the invisible hand that picks our pocket and leaves us a little poorer each day, making us run a little harder for a little bit less reward. We see it in the daily rise in the price of cheese, in the inexplicable shrinking of the size of a loaf of bread, in the longer wait at the clinic, in the packed bus on our way home, in the sky-high prices of property, or in the refusal of our boss to raise our already paltry salary. We blame it on the food cartel, the greedy bakers, the lazy doctors, the &#8220;incompetent&#8221; bus drivers, the speculators in the property market, and the avarice of our bosses.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But why is it happening <em>now<\/em>? Why were prices a year ago lower than they are now? Why was a loaf of bread heavier last year compared to now? Did the baker suddenly become <em>greedier<\/em>? Did the doctor suddenly turn <em>lazier<\/em>? Did our boss suddenly become more <em>avaricious<\/em>? Probably not. They were all just as greedy, lazy, and incompetent last year as they are now. Yet something <em>has changed<\/em>! I am not insisting that the businessmen are not greedy (they must be in order to stay in business), that there is no cartel of the supermarket chains, or that the doctors are, heaven forbid, competent. Those may explain high prices, but <em>high<\/em> prices are very different from <em>rising<\/em> prices, which is what we call <em>inflation<\/em>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">We feel inflation but we can&#8217;t quite put our finger on it. Whichever way we look, we get disheartened, and our only hope is for government to step in and help us somehow.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Come election time, seasoned politicians appear on TV promising to raise our salaries and pensions, lower the prices of food in the supermarkets, punish the greedy &#8220;speculators&#8221;, and bring (for once!) &#8220;progress&#8221; to our weary populace.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Government financing<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">To understand inflation, we must start with the personal objective of every elected official. Their calculus boils down to two things:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li>To induce every person in society to work to the best of their abilities, peacefully and lawfully exchanging their products and services with one another;<\/li>\n\n\n\n<li>To get reelected.<\/li>\n<\/ol>\n\n\n\n<p class=\"wp-block-paragraph\">Staying in power allows government officials to indulge in the feast of power and to enrich themselves by siphoning off a piece of the public wealth. That is one reason why governments care about total GDP and not about <em>GDP per person<\/em>, which is what each <em>person<\/em> should rightly care about. To get reelected, though, said officials need to placate an angry, hungry, bitter, and not particularly bright multitude of voters, who have thankfully forgotten the promises (and failures) from the previous election a few years back. And nothing wins people&#8217;s hearts like fresh promises of a bright future based upon high salaries, high pensions, and low taxes. So the majority of people would naturally cast their vote for the politician that promises them the most welfare, wrapped in nice-sounding euphemisms like &#8220;progress&#8221;, &#8220;fairness&#8221;, and &#8220;giving each what they truly deserve&#8221;, as everyone believes they deserve more.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Once reelected, the officials need to at least address those promises, and that requires <em>money<\/em>. Now, there are really only two ways for a government to fund its expenditures, which we shall call <em>direct<\/em> and <em>indirect<\/em> taxation.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Direct taxation<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Examples of direct taxation include the usual suspects: income tax, property tax, capital gains tax, estate tax, import tax, value-added tax, excise duties, license fees, municipal fees, etc. Engaging in direct taxation is not very politically palatable, as people don&#8217;t like it when anyone reaches for their pockets. They already feel squeezed enough between low incomes and high prices to want to support even more taxation. More importantly, though, people know <em>exactly who<\/em> robs them of their money and they remember it during election times. That is why there is a limit to how much direct taxation the government can impose on people. There are other commonly quoted &#8220;official&#8221; reasons too: that over-taxation causes the underground economy and even an overall reduction in the size of the economy, so even though taxation may increase as a <em>percentage<\/em>, it may actually decrease in <em>absolute<\/em> terms. Those are valid justifications, but the key reason why governments avoid taxation is the one they don&#8217;t talk about, namely the fact that people don&#8217;t like to vote for those who tax them.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The question is then how to fund the difference between what the government collects in terms of taxes (internal revenue) and the expenditure required to fulfill outlandish election promises. That difference is called a <em>budget deficit<\/em>, and almost every single country in the world is presently running a deficit. One notable exception is Singapore, where Lee Kuan Yew instituted the policy of not running a deficit in any government term &#8212; a policy observed to this day<sup data-fn=\"c681550c-437d-4cc7-8a7a-25fd712977d8\" class=\"fn\"><a href=\"#c681550c-437d-4cc7-8a7a-25fd712977d8\" id=\"c681550c-437d-4cc7-8a7a-25fd712977d8-link\">8<\/a><\/sup>. But such discipline is predicated on not having to fight for reelection every year, as there is a high political cost to staying frugal. Few governments can afford such a luxury. The majority have to resort to what I term <em>indirect taxation<\/em>.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Indirect taxation<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">To finance a deficit (the shortfall between tax revenue and expenditure), the government issues bonds. The central bank absorbs part of this debt by creating new money: government bonds appear on the asset side of its balance sheet, while the newly created money appears on the liability side. As government debt grows, the central bank\u2019s balance sheet and the money supply grow with it. More money then chases the same amount of goods and services, pushing prices higher and generating what we call <em>inflation<\/em>. We will dedicate the next chapter to explaining how inflation works and why it is essentially a hidden, or indirect, tax on the economy &#8212; a tax so powerful that it can entirely replace the need for income tax. As one central banker once said, the real purpose of income tax is not revenue but redistribution, since inflation can fully satisfy the funding needs of a government.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">The mechanism of inflation<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">As governments sell bonds against newly created money, the money supply in the entire economy increases. That means that we now have<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">More money chasing the same amount of goods and services<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">But money is a commodity like any other. An increase in the supply of this commodity (without a corresponding increase of the supply of other commodities) makes its price go down &#8212; basic supply\/demand principle from economics 101. That means that the <em>prices<\/em> of goods and services (i.e. their value measured in terms of money) will rise, and that is what we call <em>price<\/em> <em>inflation<\/em>, or simply <em>inflation<\/em>. In fact, the price of a commodity is based on the ratio of the <em>total supply of money<\/em> on one hand and <em>the total supply of the commodity<\/em> on the other. The more abundant a commodity is, the lower its price; the more abundant money is, the higher the money price of other commodities. The same argument naturally extends to all goods and services in the economy, and so we see that, loosely speaking,<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">prices = (money supply) \/ GDP<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">where &#8220;prices&#8221; in the above &#8220;equation&#8221; are a catchall for all prices of all goods and services, and GDP is the sum of all such goods and services consumed within a year. And since inflation is the <em>change in prices<\/em>, we are now equipped to see what causes inflation, assuming that GDP (the economic activity) remains the same:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">Inflation is caused by an increase in the money supply<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">This is the most guarded secret no government will ever disclose to its dumb citizens. Inflation is a monetary phenomenon caused by an increase in the\u00a0money supply due to profligate governments borrowing beyond their means, or what some call, crudely but aptly, &#8220;printing of money&#8221;<sup data-fn=\"7b4309bc-0764-4eb3-b9a5-50943ba4a7a4\" class=\"fn\"><a href=\"#7b4309bc-0764-4eb3-b9a5-50943ba4a7a4\" id=\"7b4309bc-0764-4eb3-b9a5-50943ba4a7a4-link\">9<\/a><\/sup>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Inflation propagates through the economy in the following fashion:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Government borrows money from the financial system and receives <em>newly created<\/em> money.<\/li>\n\n\n\n<li>Government raises the salaries of its workers &#8212; policemen, teachers, social workers, healthcare professionals at government clinics &#8212; for which it uses the new money.<\/li>\n\n\n\n<li>The workers feel richer now and spend the extra income on the usual stuff: necessities, shopping, entertainment, travel, etc.<\/li>\n\n\n\n<li>When the worker, say a policeman, spends the extra money, say on entertainment, that becomes income to the travel agency providing the service. More income to the travel agent means she gets to spend more on beauty products, which becomes additional income to the beauty parlor. And so the money circulates around at a certain speed according to people&#8217;s spending habits.<\/li>\n\n\n\n<li>Since there is now more money in the entire economy compared to the previous year, at any one point someone is always richer than before and is thus spending more than before, hence demand for goods and services is higher than last year, even though the supply hasn&#8217;t necessarily changed (yet)<sup data-fn=\"d6d95293-44a0-4f1d-b4e7-923b49dca266\" class=\"fn\"><a href=\"#d6d95293-44a0-4f1d-b4e7-923b49dca266\" id=\"d6d95293-44a0-4f1d-b4e7-923b49dca266-link\">10<\/a><\/sup>.<\/li>\n\n\n\n<li>More demand for the same supply means that prices begin to rise, which is essentially inflation.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Forms of inflation<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The above example is what we call &#8220;wage-driven&#8221; inflation. There is another effect too: since every sale is income to the seller but a cost to the buyer, as prices go up many people and businesses are faced with rising costs, which forces them to increase their own selling prices. When the baker&#8217;s rent goes up, he is forced to increase the price of bread in order to remain profitable. And this is what we call &#8220;cost-driven&#8221; inflation.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">You may wonder, if the baker could simply raise prices and increase his profit, why did he wait for his rent to rise? Why didn&#8217;t he do it earlier in order to maximize his profits? Well, the answer is simple: if he had raised prices earlier, he would have lost customers to other bakeries. But now that inflation is everywhere and other bakeries are forced to raise their prices too, the entire industry moves in tandem, so buyers can&#8217;t just switch from one bakery to another; they have to accept the price increase, since the cost driver is <em>systemic<\/em>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Many people, even educated professionals, believe in their hearts that greed is the driver of price increases. But that is plain wrong. The baker is just as greedy as he has always been. If he could raise the prices without losing customers, he would have surely done it already. The price at which he sells is already the one that maximizes his profit under the existing conditions. If he is increasing the price, it is because the conditions have changed, not because he has gotten greedier. If it were that simple to get rich by simply being greedy, most of us would be gazillionaires already.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Shrinkflation<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Another manifestation of inflation is its cousin, <em>shrinkflation. <\/em>Whereas inflation means paying more for the same product, shrinkflation refers to paying the same for less product. For example, a snack manufacturer faced with increased production costs may choose to either raise the price of a packet of chips or reduce the chip content per packet. In many cases, the latter is better received by customers, as they are less likely to spot a decrease in the package size than an increase in the price. But shrinkflation is essentially the same as inflation: paying more money for less product and fewer services.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So when you go to the clinic next time and notice that the waiting time has increased dramatically, it is because the government does not wish to pass the increased costs to the population, and so it must contend with fewer doctors and nurses, resulting in longer waiting times and less attention per patient.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Shrinkflation is just another face of inflation and its root cause is exactly the same. Remember this next time when a silver-tongued politician tries to blame the degrading quality of public services on someone or something else: climate change, war in the Middle East, or some other far-fetched explanation that only serves to conceal the one and only culprit: money printing.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Asset inflation<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">The earlier illustration on how money propagates through the economy may seem to suggest that the government workers are the beneficiaries of inflation. There is no such thing. As people and businesses are faced with higher costs, they initially try to resist increasing their own prices for fear of losing clients. During that time, they work as hard as ever but earn less. They are essentially paying an indirect &#8220;inflation tax&#8221;. At some point, they can no longer sustain their margins and are forced to raise their prices, in turn increasing the costs for the next person in the supply chain. How much inflation tax one pays hinges upon their ability to pass the cost increase to their customers. A plumber is his own master and can quickly raise his prices when his travel cost increases, for example, but a salaried employee may have to wait for years before he is in a position to request a salary increase. Walmart is in good shape to pass any cost increase to their captive shoppers, whereas a cinema operator may have a hard time raising prices on people who are already squeezed by rising prices elsewhere. One can forgo watching a movie, but one must still buy one\u2019s groceries.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That is why the inflation tax hits different people and businesses differently. Real assets are protected against inflation unlike cash or salaries, so those deriving income from assets are more immune to money printing than those who are on a fixed income, like retired folks and salaried employees.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The asset owners are generally the wealthier class of society, and so they are less impacted by inflation. Borrowing the example above, a salaried worker may be squeezed between a tough boss&#8217;s refusal to raise his salary and higher prices at Walmart this year, but the Walton family (who own the majority of Walmart shares) are profiting handsomely from those higher prices since Walmart&#8217;s margins have remained the same<sup data-fn=\"bebda468-6262-4729-9e58-36d651eb86e1\" class=\"fn\"><a href=\"#bebda468-6262-4729-9e58-36d651eb86e1\" id=\"bebda468-6262-4729-9e58-36d651eb86e1-link\">11<\/a><\/sup>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So as the government prints money and the money seeps through the economy, it tends to consolidate at the top of the social pyramid, enriching the wealthiest class, namely the asset owners, via increased dividend income and higher valuations of stocks and property<sup data-fn=\"a97757d2-4090-420b-b1b3-89824281800b\" class=\"fn\"><a href=\"#a97757d2-4090-420b-b1b3-89824281800b\" id=\"a97757d2-4090-420b-b1b3-89824281800b-link\">12<\/a><\/sup>. It is good to be rich when a socialist government is in power, isn&#8217;t it?<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Inflation as a transfer<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">In the long run, the effect of any monetary policy is nil. Prices have doubled, wages have doubled, the amount of money in the economy has doubled. Temporary dislocations have been ironed out. Everything measured in money is basically multiplied by 2 and everything is back to normal. Nobody is better or worse off, as their doubled income is ultimately spent on twice as expensive items. The economy is back to where it started, except that the road to get there was littered with pain and stress for those who bore the heaviest burden of the inflation tax.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Observe that money printing does not create or destroy value in and of itself: it only <em>shifts value<\/em> from one person to another. When a barber raises the price of a haircut from $4 to $6, this is an extra $2 of cost to the client (bad for the client) but is also a gain of $2 of income for the barber (good for the barber). So on a net basis, inflation <em>redistributes value<\/em> from one group of people (donors), to another group (beneficiaries). Generally, inflation transfers value:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>From the working people to the government, in the form of an indirect tax that they cannot observe and blame on the real thief.<\/li>\n\n\n\n<li>From the savers to the borrowers, in the form of a loss of value of their savings. One example is pension funds, who are the biggest victims of inflation.<\/li>\n\n\n\n<li>From the poor to the rich, as the values of assets increase. Remember that the poor own cash, which loses value during inflation, while the rich own hard assets like property, land, gold, or shares in operating businesses, all of which are relatively immune to money printing.<\/li>\n\n\n\n<li>From people on fixed income (like retired people and salaried workers) to rentiers (landlords) and self-employed people (like the barber), who are at more liberty to increase their rents or the prices they charge for their services.<\/li>\n\n\n\n<li>From the private economy to the public administration, as the latter are the direct beneficiaries of government spending while the private economy must foot the bill in this zero-sum transfer.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Not only does inflation shift value, but it does so from the more productive to the less productive parts of the economy, punishing the least deserving of punishment and rewarding the least deserving of reward. It causes stress to people, misallocation of capital, difficulty in business planning, and many other distortions that ultimately impact the quality of life and even cause social unrest and revolutions in the extreme.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But for all its negatives, inflation remains the favorite tool of governments, because it allows them to tax the population surreptitiously without the population knowing they are being robbed. This is why you would often hear government officials pointing their fingers at the &#8220;greedy&#8221; traders for &#8220;price gouging&#8221;, the &#8220;unpatriotic&#8221; hoarders of gold for selling the local currency instead of saving it, the &#8220;lazy&#8221; doctors who prefer to leave understaffed government clinics in favor of better-paid private practices, or the &#8220;cheating&#8221; employees who underdeclare their incomes and pension contributions, which governments like to blame for the perennial insolvency of pension funds.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">And the best part is that instead of directing their ire at the government that actually caused the inflation, people fall for the lies because they appear to correspond to what they see. They see the price of bread going up and blame the greedy baker. They see the price of milk going up and blame the greedy dairy farmer. They insist on (and vote for) welfare, subsidies, and price controls &#8212; exactly the kind of policies that cause inflation in the first place. That is the reason socialist policies <em>sell so well<\/em> while being so punishing to the very people they purport to try to help.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Inflation and debt<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">There is another sinister reason why governments resort to inflation: because it reduces the value of outstanding debt. That may sound counterintuitive &#8212; how is it that borrowing more and adding to existing debt could possibly result in a reduction of this debt?<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Well, here is the thing. We saw that inflation causes money to lose value and to ultimately multiply both incomes and prices. If the same amount of apples are produced but the price of apples has doubled, the monetary value of those apples has also doubled. So while the economy does not really increase in <em>real<\/em> terms, it increases in <em>nominal<\/em> terms. Income taxes are collected on nominal income, and so the government&#8217;s revenue has doubled, but the debt has only increased by the interest rate at which it was issued, which is generally much lower than the rate of inflation. And herein lies the one conclusion you should take away from this essay even if you don&#8217;t remember anything else:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">The real burden of debt shrinks when the rate of inflation <em>exceeds<\/em> its interest rate.<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">The above is obviously just as true for savings as it is for debt: if your savings are earning an interest rate lower than the rate of inflation, you are losing real value. If the price of apples rises by 20% while your savings earn 5%, each year your savings lose roughly 15% of their purchasing power in terms of apples. Inflation destroys savings, and likewise it destroys debt. Inflation is your enemy when you have savings and your best friend when you have debts.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">I witnessed that in my home country in 1996, when the hyperinflation caused by an irresponsible and incompetent socialist government wiped out the value of money, and everyone who had a mortgage practically walked away with a free apartment. At the beginning of 1996, my father&#8217;s mortgage was 70% of the value of our home, but by the time the currency value had been decimated 1,000 times (correct, that is 3 zeros), the value of the mortgage had plunged to the price of a kiddie bicycle. The lesson you should take away is this: if you can borrow at an interest rate below the rate of inflation, just do it<sup data-fn=\"a08208ef-f0b1-4ae3-9739-4e10c1ef7539\" class=\"fn\"><a href=\"#a08208ef-f0b1-4ae3-9739-4e10c1ef7539\" id=\"a08208ef-f0b1-4ae3-9739-4e10c1ef7539-link\">13<\/a><\/sup>. But please don&#8217;t jump up and run to your neighborhood loan shark to sign up for a loan at some punitive interest rate (like 1% per day!) and blame my advice for leaving you miserably buried in debt.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Here is another even starker conclusion: <\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>owning savings under inflation leaves you poorer each year;<\/li>\n\n\n\n<li>owning hard assets, like property, allows you to retain the real value of your wealth (while the <em>nominal<\/em> value grows along with other prices), but it leaves you neither better nor worse off;<\/li>\n\n\n\n<li>borrowing against your assets, however, allows you to <em>build wealth<\/em>, as the real value of the assets remains the same and the value of debt shrinks.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">In other words, what makes you wealthier is not the assets themselves, but the loans against them, or put bluntly:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">Debt makes you richer!<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">I would have laughed at anyone who told me that before I had a grasp on how our financial system works. Now I only wish I knew the truth sooner. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The above lessons explain why governments, who otherwise fear inflation for its potency to cause social unrest, actually <em>like<\/em> it when it comes to existing debt. They have effectively created a system where borrowers get rich and savers remain poor. And since the governments themselves are habitually on the borrowing side, they will always exert influence on the CB to tilt monetary policy in their favor. As long as you remain on their side (i.e. as a borrower and not a saver), you will benefit. And that is the case as long as interest rates are lower than the rate of inflation, which is exactly how governments like it too.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">We know that the CB is supposed to be independent of the government and maintain price stability in the economy, so we would expect it to push against government&#8217;s largess, and sometimes the CB does in fact push back by refusing to purchase the newly issued government bonds, leading to an oversupply of them in the market and a drop in their price &#8212; effectively an increase in their yield (the interest rates that the government must pay). Governments don&#8217;t like such an increase in cost, and they are often quite vocal about it<sup data-fn=\"14b49c06-69c9-47fd-872c-1b8b386bdd0c\" class=\"fn\"><a href=\"#14b49c06-69c9-47fd-872c-1b8b386bdd0c\" id=\"14b49c06-69c9-47fd-872c-1b8b386bdd0c-link\">14<\/a><\/sup>. In many cases, they get their way. Below is a fun chart showing that no matter the color of the sitting President&#8217;s party, the Senate, or the Congress, and no matter what any of them may have promised, the one sure thing is that they would raise more debt and increase the debt ceiling when it gets in their way (or suspend it outright):<\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"562\" height=\"458\" src=\"https:\/\/barzov.com\/wp-content\/uploads\/2025\/04\/debt_ceiling.png\" alt=\"\" class=\"wp-image-186\" srcset=\"https:\/\/barzov.com\/wp-content\/uploads\/2025\/04\/debt_ceiling.png 562w, https:\/\/barzov.com\/wp-content\/uploads\/2025\/04\/debt_ceiling-300x244.png 300w\" sizes=\"auto, (max-width: 562px) 100vw, 562px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">I often hear the argument that &#8220;debt will have to be repaid&#8221;, so I would like to address this fallacy. The conversation follows a similar pattern:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Q: But governments can&#8217;t issue debt forever, as <em>sooner or later<\/em> this debt would have to be repaid, wouldn&#8217;t it?<\/li>\n\n\n\n<li>A: No, debt does not have to be repaid, and in practice it never is. Old debt is rolled over by taking on new debt, and additional debt is piled on top of it.<\/li>\n\n\n\n<li>Q: But then debt would grow exponentially?<\/li>\n\n\n\n<li>A: That is exactly what debt does &#8212; it grows exponentially, along with the money in the system.<\/li>\n\n\n\n<li>Q: But that can&#8217;t go on forever, can it?<\/li>\n\n\n\n<li>A: Yes, of course it <em>can<\/em> go on forever, because the CB can always issue <em>more<\/em> money to buy the maturing debt. There is no limit to how much money can exist. The only cost to that is inflation, which hurts people because it is a tax on them. But as long as this tax is not excessive, people will bear with it.<\/li>\n\n\n\n<li>Q: But that means sooner or later we will have hyperinflation, no?<\/li>\n\n\n\n<li>A: Not necessarily. Remember there is a time component: everything happens over time. As long as the growth of money does not exceed the growth of <em>real<\/em> GDP, debt will remain a constant percentage of the economy and there will be no inflation. Any excess growth would generate inflation, which is indirect taxation on top of the direct taxation.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">It is true that a vicious spiral of unchecked monetary expansion, coupled with loss of trust in the currency, can lead, and has led at times, to hyperinflation and a breakdown of the financial system. Hyperinflation is a distinct possibility, but it is not necessarily the only outcome of the monetary bull running on the loose. What it takes to get back on track is a tough government, usually a dictatorship or a military, that has the staying power to force the population to swallow the bitter pill once so that public finances can be put in order. Democracies are generally poorly equipped to stop the vicious cycle, as the one-person-one-vote principle of democracies tends to elect the most spendthrift governments, and since they reckon they may not stay in power for long, they go for the easiest band-aid solution &#8212; more debt now and more inflation down the road.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Interest rates<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">What is the effect of interest rates on inflation? Interest rates are one more lever of monetary policy in the hands of the CB, just like the money supply. Again, as a tool of monetary policy, changing interest rates neither creates nor destroys value, but rather <em>transfers<\/em> value from one class of economic participants to another. For one, interest rates have a negating effect on inflation &#8212; high interest rates reduce the effect of inflation. Furthermore, they impact asset inflation differently from the inflation of goods and services, as the value of assets is derived from future cash flows, and those future cash flows get discounted more when interest rates are high.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Governments have three main reasons to like low interest rates. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">First of all, interest rates are the cost they must pay to borrow. That is why the policy of governments will always be to keep interest rates as low as possible, generating inflation, and feeding asset inflation in the process.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Second, low interest rates make the local currency less desirable versus international currencies, leading to its devaluation, which benefits exporters at the expense of importers. Governments will <em>always<\/em> support exporters with any tools at their disposal &#8212; tariffs, subsidies, and of course a weak currency and low interest rates, as that creates employment and adds to the GDP.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Finally, low interest rates create asset inflation which boosts the value of real estate and pushes up the stock market, benefiting primarily the wealthy. And as most decision makers in government are themselves wealthy asset owners, low interest rates work just fine for them. Yet again, governments may claim that their policies are all in the name of the poor, but they actually benefit the wealthy disproportionately, and that should not come as a surprise to anyone who has been around long enough.<\/p>\n\n\n\n<h1 class=\"wp-block-heading\">Chapter 4: Stock market<\/h1>\n\n\n\n<figure class=\"wp-block-image aligncenter size-large is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"893\" height=\"1024\" src=\"https:\/\/barzov.com\/wp-content\/uploads\/2025\/07\/stock_market-893x1024.png\" alt=\"\" class=\"wp-image-321\" style=\"width:186px;height:auto\" srcset=\"https:\/\/barzov.com\/wp-content\/uploads\/2025\/07\/stock_market-893x1024.png 893w, https:\/\/barzov.com\/wp-content\/uploads\/2025\/07\/stock_market-262x300.png 262w, https:\/\/barzov.com\/wp-content\/uploads\/2025\/07\/stock_market-768x881.png 768w, https:\/\/barzov.com\/wp-content\/uploads\/2025\/07\/stock_market-1339x1536.png 1339w, https:\/\/barzov.com\/wp-content\/uploads\/2025\/07\/stock_market-1786x2048.png 1786w\" sizes=\"auto, (max-width: 893px) 100vw, 893px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Ah the stock market<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">During Soviet times, a granny addresses the president at a political rally: &#8220;Comrade Brezhnev, when will the times finally get better?&#8221; Brezhnev replies triumphantly: &#8220;Oh, the times already <em>were<\/em> better!&#8221; That pretty much gives the right answer to the question &#8220;when is the best time to buy stocks&#8221;: the best time is yesterday; the second best is now.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">We live in eventful times: wars, both military and economic, are ripping the world apart; the economy is sputtering; AI is threatening to replace all workers; climate change is doing whatever, and Trump is blasting nonsense out of his social media accounts. We are not bored for sure. And yet the market keeps marching up, gradually but relentlessly, as if nothing but good times await. Many folks can&#8217;t reconcile that fact with what they see in the &#8220;real world&#8221;, and I keep getting bombarded with questions to help make sense of it all. &#8220;But Vlad, there was bad news yesterday, so why did the market go up?&#8221; They feel almost offended that the stock market refuses to follow &#8220;logic&#8221;, at least as per their understanding of how markets should function. For that reason, I sat down to offer a mental model on how stocks work.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Along the way, the plan is to address (and debunk) many common misconceptions.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To make sense of what follows, it would help the reader to familiarize themselves with the previous chapter on <em>inflation<\/em>, or at least with its main conclusion: that the constant expansion of credit, predominantly government debt, is effected via <em>an increase in the money supply<\/em>, which in turn causes inflation of everything: the prices of assets, goods, and services. In other words, governments &#8220;print money&#8221; and that drives prices up. It would also help to bear in mind the relentless drift up of the stock market over many decades, as the chart of the S&amp;P 500 Total Return Index since 1988 demonstrates &#8212; a respectable annualized return of 11.2%:<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"883\" height=\"391\" src=\"https:\/\/barzov.com\/wp-content\/uploads\/2025\/07\/sp500_tr_chart.png\" alt=\"\" class=\"wp-image-385\" srcset=\"https:\/\/barzov.com\/wp-content\/uploads\/2025\/07\/sp500_tr_chart.png 883w, https:\/\/barzov.com\/wp-content\/uploads\/2025\/07\/sp500_tr_chart-300x133.png 300w, https:\/\/barzov.com\/wp-content\/uploads\/2025\/07\/sp500_tr_chart-768x340.png 768w\" sizes=\"auto, (max-width: 883px) 100vw, 883px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Breaking down the problem<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Why do people buy stocks in the first place, and what gives a stock its value? We shall postulate that the value of a company derives from its potential to earn income (aka <em>earnings<\/em>)<em> <\/em>over time. There are of course other fringe reasons why people buy stocks, like bragging rights or because some influencer said so, and by God everyone who shorted GME knows better than to ignore those reasons! But what truly powers the market and gives value to a company and its stock is its ability to earn income.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">With that in mind, let us break down a stock price (P) into <em>earnings per share<\/em> (EPS) and the <em>quotient<\/em> of P to EPS, otherwise known as the &#8220;P\/E ratio&#8221;:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">P = EPS x P\/E<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">Now, let us be honest: EPS is a very crude way to measure the health of a company&#8217;s operations. First off, it is backward looking: things may look very different next year. And second, it may include one-offs like restructuring charges or divestment gains, which are not going to be repeated in future earnings seasons. CFOs get paid hefty sums of money to massage the reported earnings, and Wall Street analysts get paid equally well to decipher them. What we are presenting here is not an accurate valuation model that you can plug into your spreadsheet and use directly for trading; instead it is a simple framework for how to think of a value-generating asset in general terms.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Drivers of P\/E<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">There is nothing miraculous about the above formula<sup data-fn=\"baa24f3e-c10c-4e74-9c71-ccd6c73f470d\" class=\"fn\"><a href=\"#baa24f3e-c10c-4e74-9c71-ccd6c73f470d\" id=\"baa24f3e-c10c-4e74-9c71-ccd6c73f470d-link\">15<\/a><\/sup>: since the EPS is just a number we could look up from the company&#8217;s latest financial statement, the formula simply shifts the hard task of evaluating P to the more manageable task of evaluating the P\/E, the latter being easier to approach because we can think of it in economic terms. For example, a P\/E of 30 simply means that the market values the company at 30 times the annual income that the company last earned. As the price ticks up and down every second, and as the EPS remains the same (until the next financial year), it is essentially the P\/E that is continually moving.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The P\/E ratio is a forward-looking measure which essentially captures the market&#8217;s expectations of how fast the income will grow: a company with a high P\/E is expected to experience faster income growth than a similar company with a lower P\/E. The P\/E, unlike P alone, is a number we can compare across stocks.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Another way to look at P\/E (or rather its inverse, EPS\/P) is as a measure of <em>return on capital<\/em> or <em>yield<\/em>. If we are to invest $1 into a company with a P\/E of 20, that investment will be <em>yielding<\/em> 1\/20 = 5% (or 5 cents in this case) as long as the company&#8217;s income <em>remains the same<\/em>. That is similar to a bond, or fixed deposit, which pays a coupon of 5%, except that with the bond we have <em>certainty<\/em> of both the coupon and the terminal value (the principal), whereas with the stock price we don&#8217;t.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This way of thinking of P\/E is both helpful and dangerous at the same time. On one hand, it allows us to compare investments across assets, e.g. we can look at a stock with P\/E of 20 (i.e. earning 5%), and a property investment yielding 5% of rental income. That is useful in terms of putting things in perspective, but it makes one very dangerous assumption: that the company&#8217;s earnings will remain the same. In fact, a high P\/E signals precisely that the company earnings are expected to grow a lot in the future, and that expected growth is precisely what accounts for the high P\/E. Consider a P\/E of 40 (yield 2.5%), twice as high as the one in the earlier example. If we look at it from a yield perspective, we would assume that the stock is overpriced (and that the market is wrong) compared to the previous P\/E of 20. But the market is rarely wrong. What the market is telling us is that this high P\/E stock will likely experience high earnings growth.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But what is the &#8220;correct&#8221; P\/E? Is P\/E of 40 high when interest rates are, say, 5%? Well, it just says that $1 invested in the company will be earning 2.5 cents (if earnings remain the same) vs 5 cents in a fixed deposit. That sounds like a bad deal, considering that the stock yield is both <em>lower<\/em> and <em>more uncertain<\/em>. But that is precisely where the bodies are buried: the high P\/E is telling us that the market expects the earnings <em>not<\/em> to remain the same; it expects the earnings to <em>grow<\/em> over time, regardless of the reason, be it great company management or general inflation. So a stock with a P\/E of 40 is not necessarily expensive.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To see how earnings growth impacts the P\/E, assume a constant growth rate G. Furthermore, assume that all future cash flows are discounted using a constant interest rate I, which is composed of two things: a risk-free component R, strongly influenced by central banks, and a risk premium component I-R, determined by the company&#8217;s business model. With a bit of math that we don&#8217;t care to elaborate here, and assuming that P is the net present value of the company&#8217;s future earnings, the formula looks like this:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">P\/E = (1+G) \/ (I-G)<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">Some useful conclusions can be derived from the above formula.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If G=0 (no income growth), the P\/E is 1\/I and the stock is basically a perpetual bond with a coupon I, i.e. at its worst, a stock becomes a bond. In other words, what makes a stock worthwhile in comparison to a fixed-income security is precisely the growth embedded in the earnings.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If interest rates go down, the stock price goes up. Notice that central banks (CB) tend to lower interest rates when the economy tanks in order to spur lending and reduce borrowing costs for the businesses, which immediately causes market prices to go up. In other words, negative news about the economy leads to CB action that instantly drives stock prices up. This is ironic, but it is a fact that often throws off newbies, who expect that good news on the economy should be good for the market.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Furthermore, notice that the denominator has I-G in it, so if G increases and approaches I, the P\/E shoots up to infinity as the denominator converges to 0. In other words, P\/E is extremely sensitive to G: small adjustments in the expected earnings growth can cause profound changes to the stock price. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Now, most importantly, remember that the company income could grow for any reason, as we are talking about <em>nominal income<\/em> in dollars and cents. This is a key point that we will return to later when we discuss the drivers of earnings.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Finally, let&#8217;s take stock of one key fact about the two components to a stock price:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">P\/E is about <em>expectations<\/em> of how well the company will do in the <em>future<\/em>. It is a forward-looking metric and it impacts the stock price <em>instantaneously<\/em>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">EPS is about how the company did in its latest financial year. It is a backward-looking metric that impacts the stock price <em>slowly<\/em>.<\/p>\n<\/blockquote>\n\n\n\n<h3 class=\"wp-block-heading\">Drivers of earnings<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Companies employ people and capital to produce and sell their products and services. The more <em>efficient<\/em> a company is with its resources, the lower the cost and the higher the profit. The more <em>effective<\/em> a company is, the better the product and its sales and in turn the higher the profit. In other words, if a company is good at what it does, it earns high income, which means high EPS. High EPS justifies a higher stock price. This is how people often think of what drives EPS and we shall call this the &#8220;rosy perspective&#8221;: that smart management, a motivated workforce, ingenious marketing, a quality product, and happy customers lead to high and growing income and, in turn, to a high stock price.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But that view is too generous to a company&#8217;s management, because it ignores the simplest, yet most potent, driver of income increase: inflation.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Consider the following example. A bottle of Coke cost 5 cents until around the late 1950s and it costs about $2 now. This is a price increase of 40 times, equivalent to an average annual inflation of approximately 6% over about 65 years. Imagine for a second that The Coca-Cola Company was selling the exact same number of bottles today as it did back in the 1960s and that it was maintaining the exact same profit margins, that nothing else differs in terms of management, workforce motivation, market share, product quality, customer satisfaction, etc. The only difference is that both the top and bottom lines on the income statement are multiplied by 40. That means the EPS would have grown 40 times for no reason other than inflation, translating, assuming an unchanged P\/E, into a 40-fold increase in the stock price of The Coca-Cola Company.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">As we learned in previous chapters, inflation is a monetary phenomenon driven by the increase of credit (primarily government debt) and has nothing to do with the management. And yet it has a profound &#8212; and positive &#8212; impact on stock prices! So while it is often thought of as a &#8220;bad thing&#8221; that depletes consumers&#8217; finances and makes them less prone to spend, it is actually great for stocks! Stocks love inflation! We will come back to this point when we look at the market level and draw some lessons from history.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Putting it all together<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Back to the breakdown P = EPS x P\/E. As we saw, inflation has a two-pronged impact on the stock price via each of the two components:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Past inflation is what accounts for a large part of the growth of EPS. If we apply the same formula for the price of Coca-Cola Company today and in 1960, we would see that the EPS &#8212; and therefore, assuming an unchanged P\/E, the stock price &#8212; would have risen 40 times because of inflation alone, everything else being the same.<\/li>\n\n\n\n<li>Expectations of future inflation drive future EPS growth, and therefore impact P\/E. Therefore even if we don&#8217;t experience any inflation yet, the mere expectation of inflation would pop the P\/E and, in turn, the stock price. <\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Upon checking, the price of the Coca-Cola Company&#8217;s stock has risen a mouth-watering 1400 times, far higher than the increase of the price of the drink. Product-price inflation was the largest contributor: its 40-fold effect exceeded the combined 35-fold effect of P\/E expansion, volume growth, and margin growth.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Aggregate market<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Those who know me would often hear me advocate for investing in the entire market (e.g. via passive ETFs) rather than in individual stocks. So let&#8217;s look at the market as a whole. We could define<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\">market EPS = sum(earnings)<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">market&#8217;s market cap = sum(market capitalization)<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">market P\/E = (market&#8217;s market cap) \/ (market EPS)<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">where the sum is over all companies in the market index in question. Everything so far discussed about individual stock prices applies to the market as a whole. For example, the inverse of the market P\/E can be interpreted as the &#8220;yield of stocks&#8221; and compared to interest rates. As of July 4, 2025, S&amp;P 500 P\/E is 28, i.e. a yield of 3.6%, lower than the 10-year Treasury yield of 4.4%, suggesting that investors expect future earnings growth, likely driven by inflation rather than organic growth. We could also extend the same conclusions from individual stocks to the entire market:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The main driver of the stock market is inflation.<\/li>\n\n\n\n<li>Interest rates are an additional driver of the stock market, and they are a lever in the toolbox of the CB.<\/li>\n\n\n\n<li>Bad economic news implies that the CB may lower rates, which is good for the market.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Since the stock market can react in a matter of seconds to any news, it is practically always forward-looking as any past information is already baked in the price. So while past inflation can explain past price increases, it is the changes in future inflation that drive changes in the stock market. Consider the &#8220;Big Beautiful Bill&#8221; that was recently passed in Congress, which is projected to increase the budget deficit by $4 trillion over the next decade. That will contribute massively to the future inflation of everything: goods, services, properties, etc. However, the market doesn&#8217;t have to wait for 10 years for this inflation to get realized. The mere <em>expectation<\/em> of it drove the market to an all-time high (ATH) recently.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In fact, not just the S&amp;P 500 but other major stock indexes &#8212; Germany&#8217;s DAX, the UK&#8217;s FTSE, India&#8217;s Nifty &#8212; are at or near their ATH. Gold and Bitcoin, two alternative investment assets, are also hovering near ATH. Properties all over the world are as expensive as they have ever been. Many people cannot reconcile all that with the &#8220;real economy&#8221; they observe all around. After all, we got the tariff wars, we got a new Cold War brewing, we got AI already causing mass layoffs of high-paid employees, we have a demographic crisis in the rich societies. And we experience high inflation in healthcare, childcare, and housing that is choking us, particularly young families that have yet to get on the property ladder. And yet, the market keeps going up and up and up. Even in old boring Europe!<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The answer is simple: it is all because of expectations of inflation. Markets love it when politicians print money. In fact, in times of heightened inflation, the stock market is the main beneficiary as it is the most responsive to news. It will take years before the new money seeps through the economy and causes the price of bread to go up. Property markets will rise faster than goods and services, but even there prices will rise gradually over time, as market participants&#8217; expectations adjust slowly, and the transactions themselves take many months to close. But in the stock market, transactions and the dissemination of information take microseconds, so any time a politician opens their mouth to speak, the stock market is already reacting and adjusting its expectations for the next many years.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This nimbleness of the stock market is actually what makes it the best beneficiary of inflationary expectations. The best way to illustrate this phenomenon is to look at historical examples of extreme inflation caused by rampant monetary expansion. This <a href=\"https:\/\/mises.org\/mises-daily\/zimbabwe-best-performing-stock-market-2007\" data-type=\"link\" data-id=\"https:\/\/mises.org\/mises-daily\/zimbabwe-best-performing-stock-market-2007\">article<\/a><sup data-fn=\"9497a2af-5b10-440b-95ae-981e8f84c684\" class=\"fn\"><a href=\"#9497a2af-5b10-440b-95ae-981e8f84c684\" id=\"9497a2af-5b10-440b-95ae-981e8f84c684-link\">16<\/a><\/sup> from 2007 about the hyperinflation in Zimbabwe is something I really wish I had read back then. If I had read it and understood its implication, I would be quite a bit wealthier today, because what it describes is not just an isolated example but a fundamental mechanism of the stock market, that was incidentally on display in the years 2009-2025 as CBs turned on the printing presses.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">I know you won&#8217;t read it: many of my friends over the years failed to do so against my advice, and until today they keep coming back to me with the same dumb question: why is the market going up when it is already so expensive and the economy is turning sour? It is the inflation, dummy!<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So what happened in 2007 is that Zimbabwe went through a hyperinflation, so bad that buying just a loaf of bread would require cartloads of currency bills &#8212; and much more in the evening than in the morning, since prices would jump up even during the day. Since Mugabe&#8217;s disastrous policies destroyed the economy, causing 80% unemployment, the only way for the government to fund itself was to print (and spend) even more money, adding to the inflation spiral. Essentially fighting fire with gasoline. But something miraculous happened: even though the value of the Zimbabwean currency was getting decimated and prices of daily necessities reached in the billions, the stock market was going up, recording a 12,000% return over a 12 month period. Not only did the stock market beat the inflation by a long shot, but it beat all other stock markets in the world <em>in real terms<\/em>, i.e. after adjusting for the loss of value of the currency!<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Is it an ironic coincidence that the country with the worst economic decline would experience the best stock market returns? Is it a coincidence that the stock market was rising much faster than the inflation? No, there is no coincidence, and the article explains the mechanism that causes the stock market to be the first beneficiary of printed money. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To sum up, the main drivers of stock prices are interest rates and inflation, and both are entirely of a monetary nature and under the purview of the CB to manage. Stock prices have much more to do with monetary policy &#8212; and expectations of future monetary policy &#8212; than with any economic &#8220;distractions&#8221; you would read about today, like international trade, geopolitics, unemployment, demographics, or whatever a crazy president last tweeted.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This isn&#8217;t to say that no other factors play a role. Innovation is surely a wind in the sails of the stock market. Technology is changing the way we live with e-commerce, video streaming, artificial intelligence, Ozempic, electric vehicles, self-driving cars, drone deliveries, and many more great inventions yet to come. That boosts the economy and shareholders&#8217; wealth. But even in the absence of innovation, the market will keep drifting up because the main undercurrent remains the same: good old inflation.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It is worth admitting that not all stock markets are created equal. In a world where the US dollar is the principal reserve currency, in which most international trade settles in USD, where the most liquid market is the US market, and where the NYSE is the exchange where companies get their best listing valuation, it is only natural that liquidity anywhere in the world will ultimately flow back to the US market. For that matter, if you are wondering which stock market to invest in, my 2 cents are: just go for the S&amp;P 500 and forget about it.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Side notes<\/h2>\n\n\n\n<h3 class=\"wp-block-heading\">Why not go for dividends<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Notice that throughout the text we referred to the company&#8217;s earnings and not the dividends which it may or may not be paying. The reason is that what gives value to a company stock is what it earns, irrespective of what it does with it <em>afterwards<\/em>. Whether it reinvests the earnings in its operations, or whether it returns a portion of them through share buybacks or dividends is a subsequent decision.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Many people falsely believe the earnings are somehow &#8220;lost&#8221; if they are not immediately disbursed in cash as a dividend, and they often select stocks based on which one pays the higher dividend yield. This is a gross misconception that ought to be addressed.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Consider a common statement that sounds like this: &#8220;Well, your property may have appreciated in value, but unless you sell it there is no profit.&#8221; The underpinning assumption that &#8220;only cash in the pocket counts&#8221; is deeply entrenched in many of us. To illustrate why this is wrong, consider a piggy bank that holds $100. Your friends are laughing at you, saying that you don&#8217;t really have anything since you can&#8217;t use a single dime of it (unless you break the piggy bank, which you don&#8217;t wish to do). But that is not true: the piggy bank is worth <em>at least<\/em> $100 even if the money is &#8220;locked inside it&#8221;. Would you sell it for $90 to someone who would quickly break it and pocket the $10 profit? Of course not. It doesn&#8217;t matter if the value is liquid or not, as long as you <em>have the option<\/em> to convert it to liquidity (break the piggy bank). It doesn&#8217;t matter if you break the piggy bank or not &#8212; what matters is that you have the option of doing so.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In fact it may be worth a lot more than $100, if for example it is the case that grandma puts $1 into it every week. In such a case, you are better off keeping the piggy bank for as long as possible, even if that means deferring the moment when you get to enjoy its value. The value is real, even if it is locked in.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Back to the property example, if it has appreciated in value, then that is a valid profit, even if you haven&#8217;t sold it. In fact, you may be crazy to sell while the property is still appreciating, even if the whole world is laughing that you don&#8217;t have a single dollar of &#8220;real&#8221; profit since you are unable to encash<sup data-fn=\"32f1c13a-f307-4eb1-912a-438d62ed0b97\" class=\"fn\"><a href=\"#32f1c13a-f307-4eb1-912a-438d62ed0b97\" id=\"32f1c13a-f307-4eb1-912a-438d62ed0b97-link\">17<\/a><\/sup> it.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Back to the company&#8217;s earnings. Whether a company retains the earnings or promises to return some of them in the form of dividends should make no difference to its value. After all, the question is similar to whether to keep the money in the piggy bank or to break it. Its value remains the same. Furthermore, in the case of stock shares:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>if a company doesn&#8217;t pay dividends, one could sell 5% of their shares to recreate &#8220;their own&#8221; 5% dividend; alternatively,<\/li>\n\n\n\n<li>if a company does pay dividends, one could reinvest the proceeds back into the company, creating their own &#8220;no-dividend&#8221; investment;<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">For that matter, the dividend payout has no <em>direct<\/em> impact on a company&#8217;s valuation. <\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter size-full is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"200\" height=\"251\" src=\"https:\/\/barzov.com\/wp-content\/uploads\/2025\/07\/piggybank-e1774185826382.png\" alt=\"\" class=\"wp-image-378\" style=\"width:166px;height:auto\"\/><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\">Why dividends do matter after all<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">It is also true that the payout of dividends may indirectly signal something about the health of the company, which should be considered in its own context:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Returning money to shareholders (via either buybacks or dividends) demonstrates discipline. I have personally witnessed egregious waste of funds in large corporations, driven by corruption, ego, self-interest, and outright stupidity. Lots of unnecessary hiring and overpriced acquisitions at inflated &#8220;goodwill&#8221; are bound to result in disaster down the road, so I have learned to appreciate it when a company returns excess capital to its shareholders.<\/li>\n\n\n\n<li>Changing a dividend payout is something companies avoid, as it may indicate (rightfully or not) a liquidity crunch, something especially long-time loyalist shareholders are very sensitive about. That is one reason many companies go out of their way to sustain a dividend payout regardless of whether it makes sense financially.<\/li>\n\n\n\n<li>Share buybacks may offer a more tax-efficient way<sup data-fn=\"db02e518-9fe3-488b-9d8d-bda0f98064a9\" class=\"fn\"><a href=\"#db02e518-9fe3-488b-9d8d-bda0f98064a9\" id=\"db02e518-9fe3-488b-9d8d-bda0f98064a9-link\">18<\/a><\/sup> than dividend payouts to return money to shareholders. For some reason, though, it is seen in a negative political light by socialists who believe share buybacks should be outlawed in favor of forcing the company to pay higher wages. Silly as the argument may be, in those &#8220;eat the rich&#8221; times one must never be too complacent.<\/li>\n\n\n\n<li>Returning capital to shareholders may actually signal that the management sees no good prospects for deploying this capital to internal projects, and that may indicate that future earnings will stall. That is another consideration that should be taken in its own context. <\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">In other words, dividends <em>do<\/em> matter, but not for the reasons that most people imagine.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">A note on forecasting<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Notice that none of the above statements imply that we have a tool to <em>predict<\/em> the market. Since the market is driven by people as they absorb new information, without knowing what information the future holds, we can&#8217;t conclude what the market will do. And that is by definition quite impossible (absent privileged information). By nature, any information that is widely available and known to the world is already baked in the price. Everyone&#8217;s expectations, knowledge, sentiments and fears are included in that one price.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">&#8220;Is the market that efficient?&#8221; I often get asked. &#8220;How long does it take for newly released information to get reflected in the stock price?&#8221; is another common question. Well yes, the market is incredibly efficient and it takes virtually microseconds for the price to reflect the news, which for many years now has been processed not by humans but by machines that parse it and trade instantly on the market. So don&#8217;t hope you can outrun the market on something you just read. That piece of information is long buried in the market price under multiple layers of new information.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Conclusion<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">As promised, we now return to some common misconceptions mentioned throughout.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Q: &#8220;Market is crazy high now, so it is not a good time to buy&#8221;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A: Any time is good to buy. Just look at more than one century of stock market prices &#8212; it has gone up thousands of times, way beyond the price of gold and inflation. You can imagine that at any point in history someone was shouting &#8220;the market is too expensive now, don&#8217;t buy&#8221; only to watch it get even more &#8220;expensive&#8221;.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Q: &#8220;But the market is at P\/E of 30 now, this is a historical high, there ought to be a correction!&#8221;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A: Maybe yes, maybe no. P\/E of 30 is high by historical comparison, true enough, but all it says is that the market expects earnings growth that will be high by historical standard. Whether such growth is due to inflation or innovation like AI is secondary. What matters is that there will be growth, and we keep seeing it every quarter.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Q: &#8220;Can you guarantee me the market will go up from now?&#8221;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A: No I can&#8217;t, I don&#8217;t have a crystal ball. There are long periods of time when the market moved sideways. Remember that the market is forward-looking and the known information is already absorbed in it, so any expected &#8220;good news&#8221; is already in the price and won&#8217;t help the market grow from here onward. But if you are young and your investment horizon is long, you have got to invest in the market. History shows there is no better shelter from the ravages of inflation, and in fact, equities are the one asset class where the dreaded inflation actually works <em>for you<\/em>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Q: &#8220;Profits only matter if they are in the form of cash. So profits from the appreciation of an asset should not be <em>real<\/em>, correct?&#8221;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A: This misbelief is wrong on many levels. Not only is profit from price appreciation very real, but most investment profits tend to come precisely from price appreciation rather than from distributed income: like dividends, in the case of stocks, or rent, in the case of property. But such thinking is surprisingly prevalent among otherwise learned people. That is one reason I wish they taught finance in school instead of, say, useless trigonometry.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Footnotes<\/h2>\n\n\n<ol class=\"wp-block-footnotes\"><li id=\"3237fc4c-3fc0-42ba-9831-f9d2232171cc\">A good example on the loss of trust in a currency is given in Lee Kuan Yew\u2019s book \u201cFrom Third World to First: The Singapore Story: 1965-2000\u201d, where he reminisces the Asian financial crisis of 1997. <a href=\"#3237fc4c-3fc0-42ba-9831-f9d2232171cc-link\" aria-label=\"Jump to footnote reference 1\">\u21a9\ufe0e<\/a><\/li><li id=\"15b9cbbf-0ab8-43ff-8370-e20d65526222\">There is a peculiar legacy on display in Hong Kong\u2019s dollar bills, where until today different banks continue to issue different notes, e.g. a $10 note could be issued by either Standard Chartered or HSBC with the respective bank\u2019s logo on the bill; yet that is nothing but a relic, and of course all HK banks accept any notes regardless of the issuer. <a href=\"#15b9cbbf-0ab8-43ff-8370-e20d65526222-link\" aria-label=\"Jump to footnote reference 2\">\u21a9\ufe0e<\/a><\/li><li id=\"3a4092de-eed9-4c65-a759-e76eff84af59\">Though giving sham loans without the hope of repayment to related entities is still technically accepted and widely practiced in murky jurisdictions. An example is KTB bank in Bulgaria that went down in flames and opened a $4b hole in the deposit insurance fund, which had to be topped up by the government. Essentially, the public was robbed at the expense of a few lucky \u201cdebtors\u201d. <a href=\"#3a4092de-eed9-4c65-a759-e76eff84af59-link\" aria-label=\"Jump to footnote reference 3\">\u21a9\ufe0e<\/a><\/li><li id=\"6d6f7f95-36c8-4d5b-86a0-982ef727f81c\">Cases in point are the failures of First Republic Bank and Silicon Valley Bank, which went down in 2023 owing to severe asset-liability, interest-rate and liquidity-risk mismanagement, which endangered the entire banking industry and required emergency funding by the CB. <a href=\"#6d6f7f95-36c8-4d5b-86a0-982ef727f81c-link\" aria-label=\"Jump to footnote reference 4\">\u21a9\ufe0e<\/a><\/li><li id=\"18368000-d690-454f-9860-10f848a524c1\">It must be acknowledged that President Trump is trying really hard to do precisely that as of the time of this writing. <a href=\"#18368000-d690-454f-9860-10f848a524c1-link\" aria-label=\"Jump to footnote reference 5\">\u21a9\ufe0e<\/a><\/li><li id=\"476afe2c-b933-4304-a349-47c6ec13def5\">Remember the bailout of Citigroup in 2008 and the refusal to bail out Lehman Brothers. <a href=\"#476afe2c-b933-4304-a349-47c6ec13def5-link\" aria-label=\"Jump to footnote reference 6\">\u21a9\ufe0e<\/a><\/li><li id=\"a7bf349d-5678-4c4e-b419-99cbf745ebe4\">Europe is discovering that right now after years of low interest rates and accommodative monetary policy. <a href=\"#a7bf349d-5678-4c4e-b419-99cbf745ebe4-link\" aria-label=\"Jump to footnote reference 7\">\u21a9\ufe0e<\/a><\/li><li id=\"c681550c-437d-4cc7-8a7a-25fd712977d8\">See \u201cFrom Third World to First: The Singapore Story: 1965-2000\u201d, pp 232. <a href=\"#c681550c-437d-4cc7-8a7a-25fd712977d8-link\" aria-label=\"Jump to footnote reference 8\">\u21a9\ufe0e<\/a><\/li><li id=\"7b4309bc-0764-4eb3-b9a5-50943ba4a7a4\">Technically money is not printed, as it is in electronic form, and also the government doesn\u2019t create it directly; rather, the central bank may create money when purchasing government bonds or other assets. <a href=\"#7b4309bc-0764-4eb3-b9a5-50943ba4a7a4-link\" aria-label=\"Jump to footnote reference 9\">\u21a9\ufe0e<\/a><\/li><li id=\"d6d95293-44a0-4f1d-b4e7-923b49dca266\">While economic agents may respond to increased demand by increasing supply, part of their response will inevitably be higher prices. If a barber\u2019s clients increase by one, he can accommodate and simply shave one more customer, but if too many customers queue up, he would need to raise his prices. <a href=\"#d6d95293-44a0-4f1d-b4e7-923b49dca266-link\" aria-label=\"Jump to footnote reference 10\">\u21a9\ufe0e<\/a><\/li><li id=\"bebda468-6262-4729-9e58-36d651eb86e1\">Not only has the dividend income increased for Walmart shareholders, but the asset value, i.e. the share price, is presently close to its all-time high. <a href=\"#bebda468-6262-4729-9e58-36d651eb86e1-link\" aria-label=\"Jump to footnote reference 11\">\u21a9\ufe0e<\/a><\/li><li id=\"a97757d2-4090-420b-b1b3-89824281800b\">As of the date of writing, the market capitalization of Hermes International, a top-end luxury-goods seller, is in excess of the market capitalization of Louis Vuitton Moet Hennessy, the seller of mid-tier luxury goods. Similarly, the market capitalization of Ferrari is much higher than that of Volkswagen. Such comparisons would have been ludicrous in less inflationary times.\u00a0 <a href=\"#a97757d2-4090-420b-b1b3-89824281800b-link\" aria-label=\"Jump to footnote reference 12\">\u21a9\ufe0e<\/a><\/li><li id=\"a08208ef-f0b1-4ae3-9739-4e10c1ef7539\">The rate of growth of the minimum wage in Bulgaria over the period 2021-2025, one proxy for the inflation over that period, is 11.5% &#8212; way above the \u201creported\u201d inflation of 4.5% over the same period and still further above the current mortgage rate of 2.6%. <a href=\"#a08208ef-f0b1-4ae3-9739-4e10c1ef7539-link\" aria-label=\"Jump to footnote reference 13\">\u21a9\ufe0e<\/a><\/li><li id=\"14b49c06-69c9-47fd-872c-1b8b386bdd0c\">For example, US president D. Trump is trying to depose the head of the Fed for refusing to lower interest rates. Another example is when Turkish president T. Erdogan installed his son-in-law as the head of the Turkish CB and has instructed him to keep interest rates low and to continue to purchase government bonds, which has naturally resulted in runaway inflation and a massive collapse of the value of the Turkish lira. <a href=\"#14b49c06-69c9-47fd-872c-1b8b386bdd0c-link\" aria-label=\"Jump to footnote reference 14\">\u21a9\ufe0e<\/a><\/li><li id=\"baa24f3e-c10c-4e74-9c71-ccd6c73f470d\">Such breakdown assumes the company already has some earnings. Pricing startups with no earnings and only\u00a0<em>expectations of earnings<\/em>\u00a0is an altogether different ballgame. <a href=\"#baa24f3e-c10c-4e74-9c71-ccd6c73f470d-link\" aria-label=\"Jump to footnote reference 15\">\u21a9\ufe0e<\/a><\/li><li id=\"9497a2af-5b10-440b-95ae-981e8f84c684\">Mises Institute,\u00a0<em>Zimbabwe: Best Performing Stock Market in 2007<\/em>. <a href=\"#9497a2af-5b10-440b-95ae-981e8f84c684-link\" aria-label=\"Jump to footnote reference 16\">\u21a9\ufe0e<\/a><\/li><li id=\"32f1c13a-f307-4eb1-912a-438d62ed0b97\">In practice, one can access the property appreciation via equity loan, thus encashing the profit. <a href=\"#32f1c13a-f307-4eb1-912a-438d62ed0b97-link\" aria-label=\"Jump to footnote reference 17\">\u21a9\ufe0e<\/a><\/li><li id=\"db02e518-9fe3-488b-9d8d-bda0f98064a9\">In certain tax jurisdictions, like in the US, dividends are double-taxed unlike interest payments; in other jurisdictions, like in Singapore, dividends are only taxed at corporate level. <a href=\"#db02e518-9fe3-488b-9d8d-bda0f98064a9-link\" aria-label=\"Jump to footnote reference 18\">\u21a9\ufe0e<\/a><\/li><\/ol>\n\n\n<figure class=\"wp-block-image aligncenter size-full is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"256\" height=\"256\" src=\"https:\/\/barzov.com\/wp-content\/uploads\/2025\/04\/money2-e1774184702129.png\" alt=\"\" class=\"wp-image-174\" style=\"width:234px;height:auto\"\/><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>Chapter 1: Money What is money Money matters. As a father, I would like my children to understand money so that they can make informed choices later in life. Everyone understands it intuitively, to some extent, but few people have a complete understanding. For example, many people confuse money with banknotes (cash), even though each [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":"[{\"content\":\"A good example on the loss of trust in a currency is given in Lee Kuan Yew\u2019s book \u201cFrom Third World to First: The Singapore Story: 1965-2000\u201d, where he reminisces the Asian financial crisis of 1997.\",\"id\":\"3237fc4c-3fc0-42ba-9831-f9d2232171cc\"},{\"content\":\"There is a peculiar legacy on display in Hong Kong\u2019s dollar bills, where until today different banks continue to issue different notes, e.g. a $10 note could be issued by either Standard Chartered or HSBC with the respective bank\u2019s logo on the bill; yet that is nothing but a relic, and of course all HK banks accept any notes regardless of the issuer.\",\"id\":\"15b9cbbf-0ab8-43ff-8370-e20d65526222\"},{\"content\":\"Though giving sham loans without the hope of repayment to related entities is still technically accepted and widely practiced in murky jurisdictions. An example is KTB bank in Bulgaria that went down in flames and opened a $4b hole in the deposit insurance fund, which had to be topped up by the government. Essentially, the public was robbed at the expense of a few lucky \u201cdebtors\u201d.\",\"id\":\"3a4092de-eed9-4c65-a759-e76eff84af59\"},{\"content\":\"Cases in point are the failures of First Republic Bank and Silicon Valley Bank, which went down in 2023 owing to severe asset-liability, interest-rate and liquidity-risk mismanagement, which endangered the entire banking industry and required emergency funding by the CB.\",\"id\":\"6d6f7f95-36c8-4d5b-86a0-982ef727f81c\"},{\"content\":\"It must be acknowledged that President Trump is trying really hard to do precisely that as of the time of this writing.\",\"id\":\"18368000-d690-454f-9860-10f848a524c1\"},{\"content\":\"Remember the bailout of Citigroup in 2008 and the refusal to bail out Lehman Brothers.\",\"id\":\"476afe2c-b933-4304-a349-47c6ec13def5\"},{\"content\":\"Europe is discovering that right now after years of low interest rates and accommodative monetary policy.\",\"id\":\"a7bf349d-5678-4c4e-b419-99cbf745ebe4\"},{\"content\":\"See \u201cFrom Third World to First: The Singapore Story: 1965-2000\u201d, pp 232.\",\"id\":\"c681550c-437d-4cc7-8a7a-25fd712977d8\"},{\"content\":\"Technically money is not printed, as it is in electronic form, and also the government doesn\u2019t create it directly; rather, the central bank may create money when purchasing government bonds or other assets.\",\"id\":\"7b4309bc-0764-4eb3-b9a5-50943ba4a7a4\"},{\"content\":\"While economic agents may respond to increased demand by increasing supply, part of their response will inevitably be higher prices. If a barber\u2019s clients increase by one, he can accommodate and simply shave one more customer, but if too many customers queue up, he would need to raise his prices.\",\"id\":\"d6d95293-44a0-4f1d-b4e7-923b49dca266\"},{\"content\":\"Not only has the dividend income increased for Walmart shareholders, but the asset value, i.e. the share price, is presently close to its all-time high.\",\"id\":\"bebda468-6262-4729-9e58-36d651eb86e1\"},{\"content\":\"As of the date of writing, the market capitalization of Hermes International, a top-end luxury-goods seller, is in excess of the market capitalization of Louis Vuitton Moet Hennessy, the seller of mid-tier luxury goods. Similarly, the market capitalization of Ferrari is much higher than that of Volkswagen. Such comparisons would have been ludicrous in less inflationary times.\u00a0\",\"id\":\"a97757d2-4090-420b-b1b3-89824281800b\"},{\"content\":\"The rate of growth of the minimum wage in Bulgaria over the period 2021-2025, one proxy for the inflation over that period, is 11.5% -- way above the \u201creported\u201d inflation of 4.5% over the same period and still further above the current mortgage rate of 2.6%.\",\"id\":\"a08208ef-f0b1-4ae3-9739-4e10c1ef7539\"},{\"content\":\"For example, US president D. Trump is trying to depose the head of the Fed for refusing to lower interest rates. Another example is when Turkish president T. Erdogan installed his son-in-law as the head of the Turkish CB and has instructed him to keep interest rates low and to continue to purchase government bonds, which has naturally resulted in runaway inflation and a massive collapse of the value of the Turkish lira.\",\"id\":\"14b49c06-69c9-47fd-872c-1b8b386bdd0c\"},{\"content\":\"Such breakdown assumes the company already has some earnings. Pricing startups with no earnings and only\u00a0<em>expectations of earnings<\/em>\u00a0is an altogether different ballgame.\",\"id\":\"baa24f3e-c10c-4e74-9c71-ccd6c73f470d\"},{\"content\":\"Mises Institute,\u00a0<em>Zimbabwe: Best Performing Stock Market in 2007<\/em>.\",\"id\":\"9497a2af-5b10-440b-95ae-981e8f84c684\"},{\"content\":\"In practice, one can access the property appreciation via equity loan, thus encashing the profit.\",\"id\":\"32f1c13a-f307-4eb1-912a-438d62ed0b97\"},{\"content\":\"In certain tax jurisdictions, like in the US, dividends are double-taxed unlike interest payments; in other jurisdictions, like in Singapore, dividends are only taxed at corporate level.\",\"id\":\"db02e518-9fe3-488b-9d8d-bda0f98064a9\"}]"},"categories":[8],"tags":[],"class_list":["post-710","post","type-post","status-publish","format-standard","hentry","category-finance"],"_links":{"self":[{"href":"https:\/\/barzov.com\/index.php\/wp-json\/wp\/v2\/posts\/710","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/barzov.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/barzov.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/barzov.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/barzov.com\/index.php\/wp-json\/wp\/v2\/comments?post=710"}],"version-history":[{"count":42,"href":"https:\/\/barzov.com\/index.php\/wp-json\/wp\/v2\/posts\/710\/revisions"}],"predecessor-version":[{"id":757,"href":"https:\/\/barzov.com\/index.php\/wp-json\/wp\/v2\/posts\/710\/revisions\/757"}],"wp:attachment":[{"href":"https:\/\/barzov.com\/index.php\/wp-json\/wp\/v2\/media?parent=710"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/barzov.com\/index.php\/wp-json\/wp\/v2\/categories?post=710"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/barzov.com\/index.php\/wp-json\/wp\/v2\/tags?post=710"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}