In my last post I raised questions about the prudency of my son including designer sneakers in his investment portfolio. While I may have reservations about what my son invests in, at least he understands the importance of financial planning and the basics of investing. This raises him above others in his age group.

A recent survey of 700 Germans between the ages of 14 and 24 conducted by the Federal Association of German Banks found that 44% of respondents did not know what the term “inflation rate” means. 86% were incapable of accurately approximating the current inflation rate, and 68% had no knowledge of the role of the European Central Bank in ensuring price stability. 85%, however, knew what a bitcoin was. Shocking.

Is it really a bad thing, however, that six times as many respondents have some knowledge of bitcoin than those able to correctly state the current inflation rate? I believe it is.

A simple explanation for the above knowledge discrepancy is that bitcoin, and other crypto currencies, are one of the biggest monetary revolutions in recent history. They are continually covered both in the financial and general press. In comparison, the inflation rate in the eurozone has been low to nonexistent for over a decade. Last October it was minus 0.3%. As such it has received comparatively little press coverage.

People consider what they know to be more relevant and acceptable than what they have never encountered. If you have never heard about inflation, why worry about it? Crypto currency is young, hip, and hyped. My sneakerhead son for example also has money parked in Dogecoin.

The problem is that inflation eventually comes back. In September it was 3.4%. Milton Friedman once said that inflation is taxation without representation. Just because we are unaware of something doesn’t mean that it can’t hurt us.

Proponents of crypto currencies argue that they are the perfect response to inflation because of the inherent limited money supply. I question if volatile assets which can lose half their value in weeks are good investments in times of rising inflation.

What are your thoughts? Are you concerned about the general lack of knowledge of old-school financial basics? Are crypto currencies a good response to inflation? Leave a comment.

Image by Clker-Free-Vector-Images from Pixabay.

5 thoughts on “Taxation without representation

  1. Bruce, this is something I’ve thought about in the past few weeks. If I were a gambling man, and I’m not, I would be taking a serious bet against the companies who’s entire business model relies on the sort of sub prime lending that almost brought the financial system to its knees a decade or so ago. In particular, it doesn’t take a genius to recognise that the number of young people driving Audi’s/BMWs, wearing Rolex watches, having a constant line of new clothing …is indicative of companies running their entire business model on finance (buy now pay us later). There are striking similarities between the sub prime lending from mortgage companies, and the sub prime lending from car/luxury good manufacturers. It’s a house built on sand.

    1. A rise in inflation will surely see this model collapse to its knees and bring about a wholesale change in how lending/credit is handed out in the future.

  2. The financial literacy of the young generation is extremely shocking. A few days ago a friends couple of us where at our place and for some reason we were talking about money. Usually, we do not talk about such topics but in this evening, we did. It completely confirmed the lack of financial literacy of the young generation. I also have to say that we have not talked very long about it because they immediately recognized how poor their financial literacy is and they wanted rather avoid this topic instead of expanding their horizon. When they left our apartment, I gave them a good book for night reading – hopefully, they will give the book a chance 🙂

    Concerning the crypto currencies, in our opinion, it is a good investment alternative provided that you like risk. However, it is too unstable to be a perfect response to inflation and especially the currencies are not yet ready to replace the currency of a state except the domestic currency is more volatile than for example bitcoin (look to El Salvador).

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