When I was in college our university hosted an annual spring carnival called “Spring Fling.” It was a weeklong event which included several real carnival rides in addition to food booths and games.
While I didn’t realize it at the time, the event was a great demonstration of the effects of inflation and crony capitalism on the free enterprise system in a microcosm. In summary, the effect of these two forces is to steal money from people who produce things and generally aggravate everyone except for the chosen few who benefit. When people speak ill of capitalism, they always cite examples of crony capitalism (for example, the bank bailouts), rather than true free enterprise.
In Spring Fling, the different clubs and organizations on campus were able to set up a food or game booth at the fair in order to raise money for their group. To reduce the risk of theft (and actually, as it turns out, to give the individuals in charge of the event a way to control the clubs participating), money was exchanged for tickets at central locations. The clubs would then collect the tickets as they provided goods and services and turn them in for cash.
The event was run by the Greek houses on campus. To avoid competition, there were a limited number of spaces available for the different products that could be sold, with the organizers deciding who gets to sell which items.
This is where the crony capitalism came in. With the Greek houses organizing the event, guess who always got the really profitable booths selling things like Pepsi and cotton candy? Yep, you guessed it – the Greek houses. This meant that everyone else had to think of something else to sell and probably would spend just as long out in the hot sun but would earn significantly less money.
So what about inflation? Well, the organizers would also choose people to perform roles like providing security. As far as I could tell, this meant wearing a red shirt that said “Security” on the back and riding around on an electric cart with sunglasses on. Once again, the friends of the organizers were the ones who would get these jobs (while there were calls for people to pick up trash and man the ticket booths, I never remember a call for volunteers to work security).
In exchange for this “service”, the organizers would give their friends free tickets to spend at the carnival. They would also take some themselves as payment for all of their hard work in organizing the event.
At the end of each day the clubs would turn in their tickets for weighing. The weight of tickets for each club was divided by the total weight of all of the tickets to determine how much each club would receive from all of the money collected for the day, minus a sizeable fee.
Finally, here is where the inflation comes in. If each of the tickets had been purchased for real money, then there would have been an equal exchange of value. The customers, who had bought the tickets, would be exchanging something of value for the good or service of the booth. If each ticket were worth a quarter and a soda cost 8 tickets, then the club would be receiving something of value – $2 – for something of value – the soda.
But not all of the tickets were purchased – some were simply given out for free by the organizing committee. This meant that the clubs no longer received something of equal value for their labor or goods. They were providing a soda that the customer agreed was worth $2, but they actually only received $1.80 for it when they redeemed the tickets.
In the US economy, when the Government prints money and issues it but there is no good or service provided to earn the money, the value received by everyone else for their goods or services is diminished by a like amount. This can be a very small effect, but over time a great deal of wealth can be lost. For example, one could buy for a dime in 1920 what would cost a dollar now. If you had $1 million sitting in the bank in 1920, you would only have the equivalent value of $100,000 now – not even enough to buy a house in many areas.
Looking back, the smartest thing we could have done at Spring Fling would have been to simply reuse the tickets themselves to buy things we wanted at the carnival rather than turning them in. In that way we would have received an equivalent value for our efforts.
Likewise, when inflation is very high the way you protect yourself is to trade goods and services in barter rather than exchanging money. If inflation is more tame, as it has been in the US for many years, it is sufficient to make sure your wealth is in “things” that will go up in value with inflation rather than cash if you are going to save it for a long period of time. This means buying real estate, equities, or other like assets.
This is why money that is not needed within 10 years should be invested, rather than kept in a bank account or under the mattress. Even while it sits there in your sight it is silently being wasted away by the devaluation of the currency.
I doubt that the goal of the campus was to provide a lesson in economics through the carnival, but for those paying attention, it certainly did so. Remember to keep an eye out for crony capitalism in your investing where there are giveaways an regulations made to protect those of political favor. Avoid investing in such areas because such a system defies logic, therefore making it very difficult to select which companies to buy based on a fundamental analysis.
Also, factor in inflation when making your investment decisions and make sure you have protection.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.