By JUDD MATSUNAGA, Esq.
As we enter the third year of the coronavirus pandemic, families across the United States are feeling the pinch of higher prices, including food, gas, housing, and energy. As strong consumer demand collided with pandemic-related supply disruptions, U.S. inflation reached a 40-year high in January. (Source: Wall Street Journal, “U.S. Inflation Rate Accelerates to a 40-Year High of 7.5%,” Feb. 10, 2022)
Gas prices are also at record highs. The average regular U.S. gasoline price spiked to a record high on Tuesday, hitting $4.173 per gallon, according to AAA. Experts project much of the U.S. could see gas prices go up as high as $4 by early spring, and markets like California and Hawaii – where gas is already expensive – could top $5. (Source: USA Today, Feb. 23, 2022)
And then comes Russia’s invasion of Ukraine. On Tuesday, March 8, President Joe Biden announced a U.S. ban on Russian oil and gas imports over the country’s invasion of Ukraine. In the short term, eliminating Russian oil will likely drive sky-high gas prices in America even higher. (Source: CBS News, “What the U.S. Ban on Russian Oil and Gas Means for Americans,” March 8, 2022)
Here’s why you’re paying more for good and gas: Beginning under then-President Donald Trump and continuing through President Biden’s administration, Congress has approved some $4.5 trillion in COVID relief funding, according to CNBC (Dec. 9, 2021). One trillion is 1,000 billion or a million million – it’s a huge amount of money. A trillion is a 1 followed by 12 zeros, like this: 1,000,000,000,000.
And the consequence of the government printing all this money is inflation. Government benefits from inflation by paying off debt with cheaper dollars each year. Because inflation raises wages as well as prices (but wages almost always rise more slowly than prices), tax revenues increase. This gives more income to the government, which allows it to increase its debt and debt payments.
Financial institutions, such as banks, also love inflation because the new money created to finance government debt goes to them as loans from the Fed. Because big banks are flush with cash and do not need to raise rates quickly to attract more deposits. The national average interest rate for savings accounts is 0.06 percent, according to Bankrate’s March 2, 2022, weekly survey of institutions.
Banks, in turn, lend this money to consumers at a much higher rate of interest. Mortgage rates are going up approaching 5%, and auto loans from 6%-15%, depending on your credit score. Obscene profits are possible if one borrows at 1% interest or less, and then turns around and lends that new money to a consumer who must pay 5%-15% interest. As Tony Bennett sang, “Nice Work If You Can Get It.”
Furthermore, according to The Wall Street Journal(Dec. 27, 2021), food prices are estimated to rise 5% in the first half of 2022, while other sources point to a 7% increase by the end of the year. This number might be even higher in reality if we consider that many products are also shrinking in size, which means you’re getting less for more.
But, there’s actually something more sinister going on that you won’t hear about on the news, an inflation tax. “Say what?” you ask. When the government prints money and thereby creates inflation, we get the same exact effect as if the government had imposed a tax on people’s savings. Of course, the American voters wouldn’t go for that. So, government disguises it, economists call it an “inflation tax.”
Let me explain it this way: Let’s say you have Tak, the plumber. Tak earns $50,000/year and Tak buys things. In Scenario 1, let’s assume Tak buys a Big Mac Meal from McDonald’s ($5); shoes from Target ($30); and a tank of gas ($50). And in buying these things, Tak gives these businesses money. In return, Tak receives goods and services from these businesses, i.e., a Big Mac Meal, shoes, and a tank of gas.
Now, if the government were to print enough money to double the money supply, we would have twice as many dollar bills floating around — but the same amount of goods and services. All that would happen would be that the prices of these goods and services themselves would double. So, a Big Mac Meal goes from a price of $5 to a price of $10, the tank of gas goes from a price of $50 to a price of $100.
And of course, one of the prices that would double are the people’s wages. So now, in Scenario 2, Tak is earning twice as much as before, i.e., $100,000/year. But the prices of the things Tak buys have all doubled as well. So, if I were to ask, is Tak better off in Scenario 1 or Scenario 2, the answer is they’re the same. It doesn’t matter whether Tak earns $50,000/year and a tank of gas costs $50, or whether Tak earns $100,000/year and a tank of gas costs $100 — it’s the same amount of gas.
However, there is a significant difference in the two scenarios when you look at Tak’s savings. Let’s suppose in Scenario 1, Tak had $200,000 in savings, he earns $50,000/year and a Big Mac Meal costs $5. Along comes the government, it prints enough money so all the prices double. That means that the Big Mac Meal costs twice as much, the shoes cost twice as much, and Tak’s earning twice as much, but Tak’s savings are the same — although they only buy half (50%) of what they used to.
It’s no wonder we’re all feeling the pinch, especially if you’re living on a fixed income, e.g., Social Security. This is what happens when the government comes along and prints lots of money. In effect, what it’s doing is draining away the purchasing power of your savings, i.e., inflation is a tax on your savings. If you think things are bad now, they could very well get worse, especially if inflation continues to rise.
So what can you do? In inflationary times, the experts agree that it would be a good idea to pay down any high-cost credit card debt. To help alleviate any future “pocketbook pain,” borrowers should start consolidating debt to a lower-interest option or personal loan to help you: (1) keep more money in your pocket for other expenses; or (2) to have money in savings that you can have fast access to if you need it.
The average baby boomer has $6,043 in credit card debt spread out over nearly five credit cards. They often make the mistake of taking advantage of one of those zero-percent APR teaser rate cards. The problem is that the interest rate skyrockets once the zero-percent offer ends, resulting in much higher payments if you continue to carry the balance. (Source: AARP, “5 Really Bad Financial Decisions and How to Avoid Them,” March 3, 2022)
To save money on gas, the AAA recommends the following tips:
● Slow down and drive the speed limit. Higher speeds result in more aerodynamic drag.
● Avoid “jackrabbit” starts and hard accelerations. These actions greatly increase fuel consumption.
● Look ahead. When approaching a red light or stop sign, take your foot off the gas early and allow your car to coast down to a slower speed until it is time to brake.
● Use cruise control on the highway to help maintain a constant speed and save fuel. However, never use cruise control on slippery roads because a loss of vehicle control could result.
● Minimize your use of air conditioning.
● Avoid extended idling to warm up the engine, even in colder temperatures. It’s unnecessary and wastes fuel.
In conclusion, savers who keep a lot of cash in bank deposit accounts, such as a high-yield savings account, need to be certain all their money would be protected if their bank were to fail. Although bank failures are rare, only deposit with insured institutions. Before depositing your money with any institution, make sure they have a sign in their entrance saying their deposits are insured.
Watch out for non-insured accounts: Banks and credit unions also offer investment products that are not insured. Investments like stocks, bonds and mutual funds can lose money, and those losses are not covered by the government. Don’t assume just because a product comes from a bank or credit union that it must be insured against loss.
If your deposits exceed the $250,000 FDIC insurance limit, you may have to spread money into more than one FDIC-insured bank to insure all your money. You could also set up a trust and name beneficiaries. Each beneficiary is insured up to 250,000. Setting up accounts with different ownership categories is something you should discuss with your banker or other financial advisor.
Finally, you may be able to get better interest rates at online banks, which do not have to maintain brick-and-mortar branches. Many online banks are offering rates of at least 0.5% for “high-yield” savings accounts, and some are offering cash bonuses — say, $100 or $200 — for opening accounts.
Judd Matsunaga, Esq., is the founding partner of the Law Offices of Matsunaga & Associates, specializing in estate/Medi-Cal planning, probate, personal injury and real estate law. With offices in Torrance, Hollywood, Sherman Oaks, Pasadena and Fountain Valley, he can be reached at (800) 411-0546. Opinions expressed in this column are not necessarily those ofThe Rafu Shimpo.