Marc Cuniberti: Government & government money
July 1, 2018
Some common areas where price increases are considerable, rampant and ongoing are healthcare and college education costs. About a decade ago one could add home prices to that list. The costs of all three seem to be like a rocket ride to the moon.
There's a very good reason for these exploding costs over the last few decades and it has to do with a basic economic principal what I call "asset specific monetary inflation." It can be best explained by using the following example:
Suppose I put 30 people in a locked room and each is given $100. I then bring out a $3,000 Rolex and offer to sell it to the highest bidder but no one can combine their $100 with another.
The highest possible bid would be $100 as that's all any one person has. Then I give everyone in the room $1,000 more. From the highest previous bid of $100 now comes more bids which obviously go much higher. Understanding what happened is fairly easy. There's more money to spend and therefore the price is driven higher.
Now draw it out to healthcare, education and housing. All three areas have been fed copious amounts of money over the past few decades.
College, health care and housing
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In the case of college educations, the government has made available billions in student loans flooding the market for college degrees with both people and money. Increased demand coupled with billions in government money and you have your reason education costs have skyrocketed.
In our second example, with the advent of health insurances and then Obamacare, another fire hose of monies have been aimed directly at the healthcare industry. In both cases, the amount of money going into the sector is enough to make each sector as big as small country.
The result of massive monies flowing into these sectors is rising prices and the more money is thrown in their direction, the higher prices will go. It reaches a point where without government assistance or insurance help, the average person can no longer afford the services.
The monetary model affirms the outcome and the outcome confirms the monetary reality. Throw more cash at something and its price skyrockets.
The same held true for housing and still does. In this particular case the government mandated everyone should be able to afford the "American Dream" of home ownership and directed the banks to comply through redlining practices (forced lending standards), ultra- low interest rates and oodles of programs to help people buy or keep their homes. The result was a home market that blew a bubble so large, when it popped, it almost brought down the entire global economy.
Still a non-believer?
A vicious cycle
Let's make up another program and see what happens. Suppose the U.S. started a food insurance program where everyone paid a flat fee (the premium payment for the insurance), and in exchange for the flat monthly payment, you could now buy all the food you needed. The results would be what we see in healthcare and college. Consumers would no longer look at food prices (just like now where they no longer ask the price because they have insurance).
Stores being fully aware consumers no longer care about price, would jack up prices as price is no longer a consideration. Demand in turn would also skyrocket, as no longer constrained by price, consumers would buy a lot more food and more expensive food. As food prices rise because of higher demand coupled with higher prices, costs billed to the insurance companies also skyrocket.
Faced with higher costs, the food insurers now have to raise their price of insurance premiums.
And a vicious cycle ensues where insurance prices climb higher and higher as do the costs of everything covered under the insurance. The result is the food business is now mirroring the healthcare, education and housing markets, where prices and premiums skyrocket relentlessly upward.
The cause is a monetary sickness caused by monetary inflation.
Simply put, where the government throws money, because of the amounts they throw, skyrocketing prices are sure to follow. Add in the existence of insurance programs and the same thing occurs.
Where copious amounts of money go, copious amounts of inflation follows. Adding to the problem is the majority of people do not understand this cause and effect, so they call for more government assistance, more government loans and more insurance because of the higher and higher prices.
Both the people and most politicians don't realize the result of all this will be even higher prices.
And round and round and higher and higher we go. Such is the unfortunate truth of the social experiment called government assistance and insurance.
This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. He is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at 530-559-1214 or at SMC Wealth Management, 164 Maple St #1, Auburn. SMC and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com.
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