Forget the "Bubble." Prices Aren't Rising, Your Money is Just Worth Less

My local farmer informed me that prices for his goods are set to increase for the second time this year. A year ago, I paid €13.10 per kilogram for meat. A few months later, the price rose to €16.70 per kilogram. Now, I have been informed it will increase by an additional €3, bringing the total to €19.70 per kilogram. This marks a 50.38% price increase in a single year. I buy directly from him, so there are no supply chain, big monopoly, or mass production price increases to account for. He is not a small-scale farmer making up new prices either; he explained to me his increased costs and even the profit margins he receives.

I might be wrong to think a "bubble" is forming, as a colleague at work was talking about rising house prices and when the "bubble" might burst. It seems less about a bubble and more about our "religious paper," the Euro, diminishing in value. You can imagine that the farmer actually said to me: "Your made-up paper is worth less to me now, pay more."

Difference Between Asset Bubble and Devaluation of Currency

Before offering my own perspective, I recommend three books on this subject:

• The Price of Time: The Real Story of Interest by Edward Chancellor, which traces the history of interest rates and argues that excessively low rates lead to financial instability.
• The Price Of Money: How to prosper in a financial world that’s rigged against you by Rob Dix, which explains how modern money works and how to navigate a financial system where currency value is in decline.
• The Long Good Buy: Analysing Cycles in Markets by Peter C. Oppenheimer, which examines market cycles and provides a framework for understanding them.

While some parts of these books might be tedious, they offer a better perspective on the nature of our currency and help distinguish between an asset bubble and currency devaluation.

The dot-com boom in 2001 and the housing crash in 2008 are widely cited as prime examples of asset bubbles. During both periods, people overvalued the potential of new technologies and financial products, leading to a frenzy of speculation. This was fueled by the availability of cheap credit, which allowed people to borrow heavily to invest in assets they believed would appreciate indefinitely. This combination of over-optimism, speculation on future returns, and excessive borrowing is the textbook definition of an asset bubble.

On the other hand, currency devaluation, often caused by cheap credit and excessive money printing, is essentially a seller's position on the worth of that currency. The value of an asset can, however, be also measured against something else. For example, if you had bought houses exclusively with gold for the last 100 years, the amount of gold required would have remained relatively stable. This demonstrates that the price increase is not necessarily an asset bubble, but rather a reflection of the currency's decreasing purchasing power.

So the next time you see or complain about rising grocery prices, consider looking at it the other way around, towards your own wallet. Think about the fact that your belief in a currency is colliding with reality.

Money is a Religion

I have not yet read Paul Vigna's new book, "The Almightier: How Money Became God, Greed Became Virtue, and Debt Became Sin," but its topic fits this discussion well. I've read throughout my life how belief in Christianity was replaced by the belief in state's authority (17th - 19th centuries), which was then replaced by blind belief in scientists and tech-innovation (20th century - present), all from a religious perspective. People's blind faith in authority shifts over time, but I hadn't considered the religious belief in money until now.

History demonstrates that a currency can behave like a religion, relying on a shared belief in its value. Over the past century, countless examples show how this belief was broken, leading to a currency's evaporation and leaving people with nothing. The hyperinflation in the Weimar Republic in the 1920s is a prime example, where the German mark became so worthless that banknotes were used as wallpaper. Another case is the collapse of the Soviet ruble in the early 1990s, where hyperinflation wiped out the savings of many citizens in the former Soviet republics. Similarly, Zimbabwe's hyperinflation in the late 2000s saw its currency become practically useless, forcing the country to adopt foreign currencies.

As someone from Latvia, I can tell you that the Latvian lats ceased to exist when we transitioned to the euro on January 1, 2014. The process was smooth, but today, the lats is/are no longer a functional currency. My mother still keeps a few unique lat coins as collectibles. However, their value is purely sentimental and they remain essentially worthless unless we all suddenly become "lats worshippers" again.

Not So Optimistic Future

I personally believe that in my lifetime, I will experience the complete devaluation of euro or/and dollar currency and the emergence of a new one that will be "different" and "better" this time. The only question is when. The rising meat prices I experienced earlier could be considered early signs. However, nobody can predict the future.

Maybe we can prepare for it?

I will not discuss this here, but if you consider going into "prep" mode after reading this, remember that "preparing" and "timing" for things like a market crash has its costs. Our actions are not free, and being a prepper always has a price, especially in opportunity costs. For more information on missteps in market timing, I recommend the book "How Not to Invest: The ideas, numbers, and behaviors that destroy wealth―and how to avoid them" by Barry Ritholtz

With that in mind, I will try to keep less cash and invest more into assets, my education, and my professional experience. Believing in your own worth can give you much more than believing in a currency.

Thank you for reading.