Per Capita Income Cannot Be Used To Compare How Wealthy A Country Has Become

I’ve seen some people used per capita income as an argument for how progressive an economy has been.  Nonetheless, these people could have been deluding themselves with this argument all along.  Perhaps, if they’ve known the truth, they might want to visit the past to wipe off their smirks on this very topic.  How come?  Per capita income is very distorted in my opinion.

Per capita income equation is PCI = TPI/P.  TPI is total personal incomes of everyone in a country and P is the population of a country.  So, let’s assume a fictional country A has 4 trillion TPI and the population of 80 millions, then the per capita income for the fictional country A is 50 thousands.  We can safely assume that this fictional country A has a high per capita income.  In a perfect world where a country has everyone makes the same amount of income per year, it means each and everyone in this fictional country has the ability to make 50 thousands (money) per year.

Some people like to use the per capita income to boast about one’s own country wealth and progressiveness.  Nonetheless, the simplistic per capita income equation doesn’t account for inflation.  Since inflation isn’t being included in per capita income equation, per capita income cannot really be used to compare the wealth and progressiveness of countries.

Why inflation is important?  Inflation is super important in an interconnected contemporary world like ours.  Countries are trading with each other a lot more so than ever before, thus each country relies on endless information that come out from other countries that are known as global trade partners.  Inflation is one of the important information that can help one country to assess a global trade partner’s economic stability.

Since inflation is important, we need to understand the simple concept which inflation represents.  According to my layman conception of inflation, inflation is a measurement of the strength of market prices according to supply and demand.  Although a currency for a country isn’t exactly meant to be a commodity in a market, but it’s too being affected by inflation.  Since currency is too being affected by inflation, thus inflation can measure the implicit innate price of a currency.

For an example for why inflation is an important measurement of a country’s economic stability, let’s assume a fictional country A got into too much debts and has lost the trust from global trade partners.  Since the fictional country A doesn’t have a stable economy and clean national budget, the global trade partners aren’t willing to lend the fictional country A some money, fearing the fictional country A cannot repay the future loans.  Since each country has different currency, thus there must be a conduit to allow the measurement of currency exchange to occur.  Once the conduit exists, each country can then use the currency exchange rates to decide how much a country’s currency is worth globally.  Let’s assume the fictional country A has lost the trust of global trade partners and can’t receive more foreign loans, the demand for the currency of the fictional country A is shrinking massively on a global scale.  Less demand for a country’s currency in the global market means the currency of such a country cannot be used effectively to bargain for global goods.  Since nowadays, all countries are relying on global goods than ever before, thus local inflation can now be imported and exported.  By this I mean although inflation can be used to measure the strength of prices for local goods and currency, but in the interconnected global world like ours inflation can also be used to measure the prices of goods and currency that are meant to be imported and exported for a country.  The fictional country A is going to have to adapt to high inflation since the demand for its currency is very weak globally.

High inflation means too much money is chasing after a product, thus weakening the strength of the money and strengthening the strength of the price of a product.  In the currency situation, high inflation means too much currency is chasing after a global trust.  If the world decides to not trade with the fictional country A unless the fictional country A uses some hard assets or whatever that is valuable to exchange with another country’s reserve currency for the purpose of foreign trades, then the fictional country A’s local currency has become totally useless for global trade.  This means high inflation for the fictional country A.  People who are living in the country A can make 50 thousands (money) a year, but their 50 thousands income cannot really afford them to buy goods abroad, because the local currency is too weak to have a fair exchange rate in the global market.  The fictional country A has to promise hard assets or whatever that is valuable to be traded with foreign loans (in a reserve currency) so the fictional country A can have some money to import global goods such as anything that needs to be imported.

In the interconnected world like ours, the fictional country A cannot be counted as a wealthy country, because its currency is too weak to be used as money for global goods.  With high inflation, the fictional country A’s per capita income becomes meaningless unless the fictional country A’s currency is the most valuable and sought after for global exchange and reserve currency purposes.

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All Fiat Currencies Are Fallacies?

I think all fiat currencies are fallacies.  One most notable fact about all fiat currencies that scares me most is that all fiat currencies can be multiplied out of thin air.  The problem is that nobody has real control over a fiat currency’s multiplication.

What on earth I’m saying?  Let’s discuss this further.  Let’s say if the government that is responsible for a specific fiat currency is printing the money, then it can basically use financial tools such as interest rates to control the fiat money supply.  What if an enemy of a state is capable of printing the same fiat currency to introduce hyperinflation into an economy?  Even if the government is trying to stop inflation by raising interest rates, buying back government issue bonds, raising the banks’ reserve ratios and so on, these tools might be too blunted by then since an enemy is printing the government’s fiat currency in untold amount of units.

I might be wrong, but in my opinion fiat currencies are the derivatives of non-fiat currencies such as gold.  Unfortunately, even gold can be rigged with derivatives such as gold future contracts.  Without any real delivery of hard assets such as physical gold units, future contracts can be switched to different owners at specific contract prices, thus these future contracts are rigged to move prices.  With prices can be inflated or deflated at will, even gold itself is sound, the gold market itself isn’t sound.  Since gold isn’t using as a unit of money as it supposed to be in the past when there was a gold currency based system, a rigged gold market isn’t a catastrophe if the market gets corrected.  Nonetheless, a rigged fiat monetary market would be a catastrophic life changing event for all walks of life if this market gets corrected.  After all, modern societies are using fiat currencies as real money!

If the keeper of a fiat currency isn’t doing well in regulating ebbs and flows of the inflation/deflation and the flight of the currency, such a fiat currency may very well become valueless and destroy the whole economy of a country.  If a country’s fiat currency is too influential in the world market, the whole world market may as well appear to be on a verge of collapse if such a country’s fiat currency is out of whack.

Can the United States’ high inflationary and low interest rate policies help China to grow even more?

Can the United States’ high inflationary and low interest rate policies help China to grow even more?  As we know how the United States is trying to keep the inflation rate high and interest rate low to promote consumption spending and bring in more revenues for government agencies.  United States is doing this while also cutting back some spendings in general, because the United States needs to deal with both huge foreign and internal debts and the interest of the foreign debts.  As United States prints more money to keep inflation rate high, this affects China’s inflation rate big time.

Why?  China’s Yuan is still pegging to the Dollar, and so China’s inflation rate is probably shooting up really high when the inflation rate in the United States skyrockets.  As China’s middle class is growing in astounding number, China’s middle class is sure to have a lot of cash to spend.  Although Chinese tradition is to save more and spend less — Chinese had been poor for a long while since the downfall of China’s ancient kingdom and during Mao’s time — with more money Chinese people are sure to be able to afford better modern accommodations.  As in the United States, high inflation may encourage Chinese to spend more since they may fear that prices are keep climbing for the accommodations (e.g., household items, cars, furnitures, electronic items, smartphones, etc…) that they need.

In the time that the Chinese are having a lot of money, they are sure going to spend for whatever that they must have and need. With the high inflation rate in China to boost the domestic Chinese consumers to spend even more, Chinese internal market may heat up even more and growth in consumption may as well skyrocket.  This in turn will boost firms and companies from abroad to bet even bigger on the Chinese market as Chinese market is set to grow a lot higher in term of consumption lead.

Unlike the United States in term of forgoing home manufacturing capacity, China may boost consumption even without letting go home manufacturing capacity.  Why?  Out of 1.4 billion of people or so, if I’m not wrong on this China’s middle class is roughly around 300-400 million of people or so, and so around 1 billion more Chinese are still working their way toward becoming the new middle class citizens.  With so many more Chinese that aren’t yet achieved the middle class status, they’re sure working hard in the home manufacturing based entities/market in hope of making a better living.  This is why China may not yet be able to forgo the home manufacturing capacity for cheap labor is still possible in China’s poorer areas.

Meanwhile, China may try to boost their service sector to grow even more to compete with foreign service industries.  On the top of all of that, China doesn’t need to print so much money as the United States to boost inflation rate, because the United States’ inflation rate alone is already pushing China’s inflation rate up. I think China’s market will grow even more as the United States prints more money to boost the inflation rate at home. The question is if the United States decides to tapering, what will happen to the markets and economic growths in China and the United States?

Fed’s Low Interest Rate And High Inflation Design Might Stop Functioning In The Long Run In Generating Economic Growth And Government Agencies’ Revenues

Lately, I got a bit of a fever in wanting to know more about the United States’ economy, thus I’m still reading a very long book on economics of sort.  The book is “The Death of Money: The Coming Collapse of International Monetary System” by James Rickards.  This book got advance details on various economic assessments, and so it is a bit dull for me to finish it.  Nonetheless, I’m trying to anyway.  So far, it seems this book got my attention on couple things, but let me mention one in this blog post.

As reading this book, I noticed that James Rickards mentioned the Fed intended to keep the interest rate very low and print a lot dollars in the hope of creating higher inflation.  I think the Fed has had the idea of planting the fear — of seeing prices of products keep going up — into people’s mind.  Why?  If people are seeing prices are going up for everything, they fear the prices will continue to climb for some period to come.  These people’s solution might be all about spending the money they’ve earned now on the products they’re really needing now, because they fear the prices for the products they need will continue to climb to ever higher prices.  I surmise the Fed has thought this has been and continues to be a good option for the government to generate sale tax revenues.  After all, people will have to pay sale tax for the products that they will buy, right?

As the United States economy isn’t recovering fast enough to the level of high confidence in various industries, and so the United States government is in a very tight spot of wondering how to generate a strong recovery for the United States economy.  In this slow recovering period with low growth on job generation, the United States government is also in need of money to pay for the national projects.  With tighter budgets for everything, the United States government is supporting the Fed to generate high inflation and low interest rate.

In my opinion the Fed’s design of low interest rate and high inflation can work for a short period of time.  Right after the United States’ 2007-08 financial crisis, many people who were not directly hit by the financial crisis were having money still.  These people could spend their money in low interest rate and high inflation period to sustain their comfortable lifestyle.  Unfortunately, these people were the last supply for the Fed.  After seven years of low growth and slow recovery and low growth on job generation, the people who spent their money in low interest rate and high inflation period might just have ran out of money.  Going forward, it’s pretty hard to see how low interest rate and high inflation period can help the United States sustains the slow recovery.  As of now, we are still talking about an economy that is trying to recover in a slow recovery period!  And so the outlook for Fed’s design in hoping to generate growth for the economy and collecting some revenues might not look very bright!

Of course, I’m not expert on economics matters, thus I might be very wrong on what I had detailed.  Nonetheless, it’s my opinion that the Fed might have to do something else besides printing money and keep the interest rate low.  I guess we would have to wait and see how things will unfold for years to come.