Arise2Live Podcast

Transcript for Episode #161  ‘Six Ideas to Thrive in an Inflationary Economy’


Host: Scott Weaver

Date June 15, 2022

Intro: Welcome to Arise2Live Podcast, episode 161.
We are entering an inflationary economy, and this is new waters for many business owners. Scott presents an update on inflation, overview of the economy and what the Federal government is doing about it, and he ends with 6 actions steps for business owners to succeed. Let’s get our thinking caps on!

 Scott Weaver: 

One of the Arise2Live’s mission is to bring perspective to business owners so that they can go from uncertainty to certainty, and I will say that our economic future does look a bit uncertain. Today’s episode is about bringing perspective to the inflation issues that we are facing. I hope that I have not bitten off more than I can chew by trying to present a picture of our economic climate, the economy that we are in. This picture includes inflation, the general economic policy of the United States which includes something called Modern Monetary Theory, or MMT. Also including President Biden’s 3-point approach on dealing with this inflation problem. All this leads up to 6 ideas on how business owners can thrive in an inflationary economy.

Hello everyone, my name is Scott Weaver, the Arise2Live business coach. Thank you so much for listening in today and I hope that I didn’t scare you away by mentioning the word “inflation” or the “economy” or “theory”. I do feel it’s important that business owners and you are aware of what’s going on so that you can make smart decisions for you and your company.

Before we dive in, the show notes are on the under the episode number 161. There are a good number of links to the sources that I used in this episode, and you can read the sources yourself as you have access to them, and while you’re there on the page, feel free to leave a comment or thoughts on this topic. And as always, please continue to share and like this podcast especially to people who you think might need it or benefit from it.

Well, starting here, all I can say is “Oh boy!” It seems like we just got out of the frying pan and now heading for the fire. First, we faced this pandemic, lockdown, and now, high inflation is putting salt into the wounds of the supply chain and the labor problems that we’re seeing today.

So in addressing this in this podcast, please bear with me and pay attention a little bit more than usual. This is not an easy topic to do in an episode. I think it’s going to be a little bit more background, a little bit more educational than normal.  But I’m really hoping and I think this will happen is that when you see what’s going on in the economy, you will have a more resilient company and you will make smarter decisions inside your company and that will definitely pay off. There will be some ideas later on that I think will definitely help make your company more resilient and more proactive.

Well, with that said, let’s dip our toes into the economic waters before us.

Inflation – insights and perspectives       3:46

We start out with some insight and perspective on inflation. At its simplistic definition or meaning, inflation is losing buying power. Your money just doesn’t go as far anymore. In the last six months, perhaps even longer, we all have seen prices rise at the grocery store, the online stores, and, of course, the gas pump. And I haven’t started mentioning the business side of price increases.

The latest numbers that came in from the U.S. Federal government says that the consumer price index increased 8.6% and sped up to 1% in the month of May 2022. This basically means that you are paying almost 10% more than last year for the exact same thing. It’s also been reported that this 8.6% increase in inflation is the highest in 40 years.

Let’s dive down a little bit more and get some perspective on this 8.6% number. From my research, the highest inflationary rate in America was in 1980 at 13%. So we have plenty of room to increase. Hopefully it doesn’t.

Another thing is how many of us actually remember those high inflation days of the late 70’s and early 80’s? Not many. The median age in the U.S. is about 38-39 years old. That basically means that half the population was not even born when we had this problem of high of inflation and anybody basically under the age of 60 only remembers it as a child.

I kind of wonder as a society, how much experience have we forgotten? Are we doomed to reinvent the wheel? In the 1970s, it was high prices of oil that triggered hyperinflation and stagflation. It’s kind of funny we hear the same things now and history has this uncanny way of repeating itself.

Traditionally, the American economy does not deal well with high inflation, and in my estimation, it’s about anything above 7% for long periods of time. I think one reason why this is, is how the business owners pay their employees.

Usually corporations, business owners, companies give employees raises about once a year or so. It just seems the custom in American not to give employees raises very often. We want to reward good work. So when inflation hits, the prices go up but the wages fall behind. They don’t go up at the same pace and that creates a problem with cash-flow. Of course, we like the opposite. We like wages to go up and prices to go down because that means we can buy more things with the same amount of dollars.

The thing about inflation is that it is not a light switch to turn on and off. It’s much more complicated than that. But one thing most people know that once inflation gets out of hand at the national level, it basically becomes a beast to fight every day for a long time.

To control it, the government has a few levers, like two. Either stop the buying or freeze the prices. In a globally connected environment, it is extremely hard to freeze prices. Many socialist countries have tried it with very limited success, if you can call it success. In the past, the U.S. government’s approach has been to stop the buying by restricting how many dollars are out in the economy. More on that later.

I should note that an inflationary economy is not necessarily a problem. There are many business owners in the world that survive with just ridiculous amount of inflation. 50, 60, even 100% per month. Can you imagine prices doubling about every two weeks or every month or so? The thing is, in those economies, people have figured out how to deal with it by raising prices every day and giving raises to their employees every day. It’s about getting the cash-flow to work for you.

Before we move on, I just want to remind you that there’s two things about inflation. Inflation means that the dollar bill in your hand today won’t buy as much next month and that traditionally, the American economy has struggled with high inflation.

Before we can get to the practical ideas that business owners can do, we need to take a broad view of the economy. We need to ask the question: where do our dollar bills come from? The answer is: the central bank of the United States, commonly called the Federal Reserve. The Federal Reserve now has a big printing press and they print money to pass out to other banks, investment companies, and government agencies, who then pass it out to the regular people like you and me. Okay, in reality, it’s a bit more complicated than that, but you get the idea.

Now, the Federal Reserve just can’t keep printing dollar bills willy-nilly because then everyone would have too many and try and buy up everything and then when that happens and there’s just way too much, the people’s belief in the dollar would crumble. This happened to an African country call Zimbabwe who had runaway inflation. After printing a $100 Trillion dollar note, yes, I said $100 Trillion note, they gave up on their currency and started using other countries bills.

So, our government needs a good, sound economic policy so that the U.S. dollar doesn’t become like the Zimbabwe Dollar.

Here’s where this “Modern Monetary Theory” or MMT economic policy comes in. I will say that it’s a new approach to government spending, and it is very controversial. An internet search will return 1000’s of pages and apologizing for going all geek out on you, but this is important background to see what’s going on and when you see what’s going on, you make better decisions and you can plot a course for your company in a much better way..

The basic premise of MMT goes like this: because the United States has a monopoly on the U.S. dollar and it can print more money at will, then there is great flexibility for the government to spend and borrow. Tax revenues do not need to constrain government spending to operate or engage in its goals.

Okay, so listen carefully to this key principle of MMT. The theory goes: as long as the economy has capacity in material resources and people resources, the government can borrow or print more money than it spends, the fancy word for this is “deficits”, and they can do this with little or no consequences. The extra money that’s the government pumps into the economy goes to increase productivity and national output.

You got that? The theory says that the government can spend and print whatever it wants to up to the point where there’s no resource capacity in the economy. Pass that point, they create inflation.

So why is this so important to us business owners? It’s because the Modern Monetary Theory is currently the economic environment we are sailing in.

Remember all those government stimulus packages? I mean, trying to recover from COVID is a good reason. But to do so, they printed extra dollars to boost productivity into the economy. Remember how long we’ve been seeing supply chain issues and labor shortages? Well, let’s call these shortages a different name. Let’s call them resource capacity limitations. That MMT economic theory says don’t print or borrow extra money if there is no spare resource capacity.  That is, don’t print money when there’s labor shortages and materials shortages. Guess what the Federal government has been doing for the last year?

So, the first point is this: we business owners will continue to see inflation until there is a reduction in government spending or an increase in resource capacity. In other words, and this is my opinion, we have entered an inflationary economy and businesses need to adjust.

The second point is that knowing the basics of MMT helps us guide our businesses and understand when the government is speaking to us. So what is the government trying to tell us?

President Biden has a 3-point Approach       13:39

On May 30th of 2022, President Biden released an outline of his economic plan in the Wall Street Journal. I suggest you read it. It’s not long and it is a signpost where the Biden administration is going and what they’re trying to do with the economy.

He wants the economy to transition from a pandemic recovery to a stable steady growth economy, and to do so, bring down inflation without losing the economic gains that we’ve already achieved. I think everyone will agree with that goal.

President Biden outlined three approaches to do this.

The first approach is to let the Federal Reserve folks do their thing to fight inflation. That means the Federal Reserve is going to increase interest rates to slow the economy down. Interest rates are going to increase for mortgages, loans, probably savings accounts, too.

The second approach is to reduce some costs and build more capacity in the economy. Sounds like MMT theory. They’ve already taken action.

They’ve done release some of the oil reserves and they’re cracking down on foreign ocean freight companies to help the supply chain that was badly needed.. There’s also mention of some fuzzy ideas of building more affordable houses, lowering Medicare costs, reducing child care costs, etc. We’ll just have to see when the details of those plans get out.

The third approach was to take a proactive step to cut the fiscal deficit.

In other words, the plan is to cut government spending and raise taxes. Don’t expect any more stimulus packages and the extended child credit act has elapsed. No longer people can take take advantage of that. That’s on the spending side. On the tax side, there’s an expectation of increased taxes on companies and the rich, as well as a more aggressive IRS to collect more taxes.

For business owners, as I said before, expect higher interest rates for your company and for your customers and that is likely to slow down sales but not necessarily revenue. Expect higher taxes and make sure your books are audit resistant. But remember MMT? To fix inflation is to lower government spending and increase economic capacity. Increasing capacity is a government priority and for business owners, it is an opportunity because enough of us are improving our businesses, are increasing our capacity. It helps everybody.

What can business owners do in an inflationary economy?       16:26

Well, after some initial adjustments to this new economy, us business owners can actually do good, we can do OK, even thrive.

In the last couple of recessions, the phrase “cash is king” has been the secret. In an inflationary economy, “cash flow is king.” That is the secret. And what do businesses already have? Cash flow. A goal is to protect the cash flow or create new cash-flows.  So be creative when thinking about when you make the adjustments for your company. So careful with the cash flow management. That is super important.

Another thing to work for is the ability to raise prices to match the increased cost of materials and labor. In other words, you’re passing on the cost increases to the customer. Now, that’s been very hard to do in the last 15 years or so. But In inflationary times, the customer is actually expecting price increases. That’s just the way it is. But the customer is likely to cut back on buying certain things.

So creating a must have products a customers will want to buy or have to buy. That is another secret of thriving when there’s a lot of inflation.

Another thing is to get access to fixed interest rate financing, that is loans. With a fixed interest rate, you’re paying back with future dollars that are worth less than today. So if you’re buying equipment, your ROI can actually increase from the basic calculations. I will say the bankers know this too, so they may be harder to get, but it’s a thing to keep your eye open and maybe you can secure a fixed interest loan. However, make sure that you can comfortably service the debt payments because paying off loans dips into your cash flow and I’ve already talked a lot about the cash flow importance.

Another thing that business owners can do, and this depends on your expertise in the company and the ability of the company to buy physical assets that will appreciate in value with inflation. A lot of companies have this ability. They’re already buying physical things. So basically you buy them low much more than you need and then you sell them at a higher price. It’s buy low, sell high. Of course, in the business environment, you have to balance out this method with paying taxes on inventory or business property taxes.

Also in an inflationary period, the frequency that you need to pay your employees needs to be pretty fast. Talking to even quarterly raises or even monthly raises so that your employees can keep up with inflation and not leave. So you can keep up the production inside your company. And I will also say this is that as a business owner, when you do this, when you take care of your employees, that is part of your contribution to society. And a lot of good things happen when you take care of your community.

OK we have covered a lot in this episode and I do trust that the background will help you understand this new business environment that we are in. New waters that we’re sailing in that has unfortunately some rocks underneath the surface. I also hope that this episode increases your business acumen.

We talked a little about how the Modern Monetary Theory or MMT approach to the economy is affecting inflation and a brief overview of President Biden’s 3-point approach to address the inflation problem. And of course, I will say it once again, expectation of higher interest rates, higher taxes, less government spending, but, and this is important, the government is looking to increase economic capacity and as business owners with companies, we are part of that. And that can be a really good thing for us.

So reviewing the six things that you can do in an inflationary economy.       20:47

  1. Cash-flow is king.
  2. Passing on cost increases to the customer.
  3. Create new must-have products.
  4. Get access to fixed interest rate financing.
  5. Give frequent raises to your employees.
  6. Buy physical assets to sell later.  These assets have to appreciate as with inflation.

I will say that you may have to be reactionary over the next six months or so as you make adjustments to the changes in customer behavior and costs. Be creative both on the cost cutting side and the price increase side. Definitely try to make that acceptable to the customer.

Keep an open eye for opportunities that come up. Don’t be afraid of inflation, you can figure out how to make money, and as always, Arise2Live.

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