If people could easily see how rapidly their earning power was being eroded, public anger would rise dramatically.
“Why this oversight? Why is it that we have been so slow to take up these fundamental problems which are of vital concern to all people? It is because of the “Money Illusion”; that is the failure to perceive that the dollar, or any other unit of money, expands or shrinks in value. We simply take it for granted that “a dollar is a dollar”-that “a franc is a franc,” that all money is stable, just as centuries ago, before Copernicus, people took it for granted that this earth was stationary, that there was really such a fact as a sunrise or a sunset. We know now that sunrise and sunset are illusions produced by the rotation of the earth around its axis, and yet we still speak of, and even think of, the sun as rising and setting!
We need a somewhat similar change of ideas in thinking about money. Instead of thinking of a “high cost of living” as a rise in price of many separate commodities which simply happen, by coincidence, to rise at the same time, we shall find instead that it is really the dollar, or other monetary unit, which varies.”
-Irving Fisher, the ‘Money Illusion’
Unfortunately, there is widespread ignorance about our economy and monetary system.
This ignorance persists despite (or because) the fact that the public education system is supposed to provide a foundation of knowledge that is useful in everyday life.
Understanding the economy and monetary system would certainly be useful, as it impacts each of us at every moment of our lives, and can make the difference between achieving our dreams or being locked into a desperate existence.
Though it can sound trite, there is truth to the saying “knowledge is power.”
And, since governments don’t want people to have too much power, it’s perhaps no surprise that so many people are bewildered by an economic system and monetary system that is deliberately presented as being overcomplicated and opaque.
Tricking the public
There are three main ways that governments trick the public when it comes to the economy and monetary system, and I go into each one below:
GDP
Governments love nothing more than to claim that GDP is rising.
Yet, the way in which GDP rises is where the real importance lies.
For example, if one country has a yearly population increase of 0.5%, a national debt increase of 1%, and GDP growth of 5%, the bulk of their GDP increase is coming from higher productivity. That is a good thing, since it means it that the same amount of work is producing more value. That is the only way an economy can truly grow and advance in the long-run, and is closely linked with technological advancement.
However, consider another country. Imagine the country had a yearly population increase of 2.5%, and a national debt increase of 10%, while seeing 5% GDP growth. The same GDP growth as the previous example, but is it really sustainable?
Governments can’t run up debt forever without consequences, and if a large portion of GDP is based on a higher population, that isn’t making a big difference for each individual citizen.
And yet, both of those GDP numbers would be reported the same way, often without any context.
It’s often even worse than that.
At times, Canada’s yearly GDP growth percentage has been lower than our population growth percentage. This means that while the government can technically claim the economy is bigger, most Canadians are poorer on a per-capita basis.
A focus on per-capita income growth would make more sense, since that is what really matters to each individual, but that would make it tougher for governments to claim their policies are working.
Jobs
Politicians love to talk about jobs, even as they put in place policies that discourage work.
Claiming strong job growth is often a path to re-election.
So, the reported ‘unemployment rate’ is purposely designed to give the best possible picture.
For example, in the latest Labour Force Survey from Stats Canada, the unemployment rate is listed at 6.7%.
This is the rate that the media and the government will talk about.
Yet, it doesn’t show the true picture.
The Labour Force Survey includes this sentence:
“The adjusted unemployment rate—which includes people who wanted a job, but did not look for one—was 8.7%, the lowest rate since the onset of the pandemic.”
Wouldn’t it make far more sense for the ‘adjusted’ unemployment rate to be the one that is actually reported?
After all, someone who is unemployed and looking for a job, and someone who is unemployed and wants a job, but didn’t look for one, are both unemployed.
Ironically, the official unemployment rate is the one that seems to have been ‘adjusted,’ and adjusted in such a way that lets the government claim things are better than they actually are.
Inflation
This brings us to inflation and the money illusion.
While we generally see inflation as ‘prices rising,’ this is really because we can only see the value in other things relative to the value of our fiat money.
When the value of the Canadian Dollar goes down, we see that as increasing prices.
The money we see in our bank account still has the same number, so it can be tough to see how our purchasing power is being taken away.
First described by Irving Fisher in 1928, ‘The Money Illusion‘ is the idea that people think about their wealth in nominal terms, rather than in real terms:
“The money illusion is psychological in nature – individuals falsely believe in the accumulation of their wealth, but they do not account for inflation. Due to such fact, and assuming that inflation is persistently positive, an individual’s wealth will often be overstated.”
Courtesy of the Corporate Finance Institute, here are some examples of The Money Illusion:
“To provide a concrete example of money illusion, assume the following:
- Annual inflation: 2%
- Real accumulated wealth (excl. the current year): $600,000
- Net annual income after expenses: $100,000
An individual who falls for the money illusion trap will believe the following:
- That the $600,000 will persist in its value (will be equal to $600,000 by the end of the year).
- Assume the $100,000 does not need to be adjusted for inflation, thus the individual would’ve accumulated another $100,000 by the end of the year.
- Therefore, the individual will believe their wealth is $700,000.
However, the individual’s actual wealth is:
- The $600,000 will deteriorate by 2% or the rate of inflation, which means that the $600,000 will be equal to $588,000 by the end of the year.
- Assume the $100,000 does not need to be adjusted for inflation, thus the individual would’ve accumulated another $100,000 by the end of the year.
- Therefore, the individual’s wealth will be $688,000 ($12,000 below what they would believe to own if they fell for the money illusion trap).
Another interesting example of money illusion can be derived from the following situations:
- An individual will usually see a 2% cut to nominal wages as unfair (or they lose 2% of their purchasing power).
- An individual will usually see a 2% nominal increase in wages, while inflation is 4%, as fair (or they lose 2% of their purchasing power).
Both situations result in the same financial outcome, but individuals do not usually see it that way.”
Why statists love The Money Illusion
The Money Illusion allows big government statist politicians to expand the size of government through fiat-backed deficit spending, erode the earning power of individuals (thus creating more dependence on the state), all while seemingly avoiding direct responsibility for the resulting rise in the cost-of-living.
The pain from inflation is felt when people interact with private sector businesses. As a result, people often think that it’s ‘the greedy capitalists raising prices,’ when in reality it’s the government eroding the value of your money.
Exposing The Money Illusion, and encouraging people to learn how governments & central banks are eroding our earning power is an essential step in pushing back against statism and returning to limited government & sound money.
In this case, knowledge truly is power.
Spencer Fernando
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