Cash-flow reckoning a matter of time

In high school economics, the law of diminishing utility was demonstrated by the value of cookies. Eating one cookie was very satisfying. Likewise, the second and, to a lesser extent, the third. After that there was a diminishing value in each additional cookie. Taken to extremes, cookies would lose all value.

I frequently use a loaf of plain white bread to demonstrate the diminishing value of money. In 1969 I could buy one loaf for twenty-two cents. Doing the same today would cost more than three dollars.

The loaf of bread is essentially the same today as in 1969. So, what has changed? Inflation, compounded annually, has devalued the money to this degree.

In the mid ‘60s I pumped gas for 27 cents per gallon. That translates to about six cents per litre. Today’s gas sells for over $1.40 per litre, or $6.30 per gallon.

While the price also reflects increased production costs, the principal difference is in the value of the money not the product.

Money is recognized as a store of value that can be exchanged for goods and services. To maintain value, users must have confidence in its stability. Traditionally money was backed by the gold held by the issuing country. In recent years it has been backed by the creditworthiness of the issuer.

As with everything, credit has limitations. If money continues to be issued beyond the accepted credit limits of the issuing country, the currency will be devalued accordingly.

Since the crash of 2008, and especially since the onset of the pandemic, governments have been issuing money at unprecedented rates. The grand champion in this practice is the United States which has created, virtually out of thin air, many trillions of dollars.

Endlessly issuing vast amounts of money eventually leads to the complete devaluation of the currency. This creates extreme economic disruption generally described as depression or collapse.

Canada is uniquely tied to the U.S. due to geography, culture, and trade. What happens there directly affects what happens here.

The economy has been kept afloat with excessive credit. Hold onto your hats. There will be a reckoning.

Orland Kennedy Pleasant Valley