Perceive to Predict

Perceive to Predict

I may have been able to predict the quick rise of inflation in 2023, if I had paid attention to what was happening to me and had multiplied it by the population of the US. This train of thought is just an example of how paying attention to what the world tells us can help predict a future trend.

It was March 2020 when it became known that the COVID-19 virus was air borne and highly contagious. We were advised to avoid crowds and isolate. Restaurants closed, flights were cancelled, and many private functions such as weddings and funerals were kept to a minimum. People started working from home and retreating from society. The pandemic was something new and unexpected, I did not know how it would play out. I read a big fat book on the 1918 Spanish flu, for some insight. The book did not help much in foreshadowing the outcome, but several things happen to me personally where I could have perceived at least the economic changes to come.

Skipping the Funeral

My uncle died during the pandemic. He was 96 and died of COVID in the care home where he lived after a fall the year before. He was fragile, and death was not unwelcome. During his working years, he was chief surgeon, well known and much beloved in the town. He also had a large family, four grown children and something like ten grandchildren and who knows how many great grandchildren. In regular times, his funeral would have had a large attendance, but because of the pandemic, it became a very small affaire. Nobody held it against me when I did not go. I stayed home and saved about 100$ on transportation and gifts.
For an individual this is not much. I assume that all people skipped at least one funeral, a wedding, or some other family gathering. If I multiply the savings of one gathering by the number of people in the USA (100$ times 331.9 million people), I get a total of 33.19 billion Dollars. These billions were not lost as when property is destroyed in war or from a natural disaster, it simply stayed in people’s pocket. It was money saved.

A Check from the Government

In December 2020, I received a check for 2000$ from the US government with a note from Donald Trump who was president at the time. Since I did not expect this, and my income had not changed with the pandemic restrictions, I put the 2k into the savings account. I understand that each household who declared taxes in 2019 received $2000. This means 169,684,000 checks were issued, in other words 339 billion Dollars were paid out (169,684,000 tax payers x 2000$). While some used this money to pay rent and buy food, many just saved it. In total, 844 billion Dollars was paid in three rounds of pandemic subsidies by the US government . Assuming that 50% of this was saved, it increased the private savings by 422 billion Dollars.

Paris was Canceled

Towards the end of the pandemic, I planned a trip to Paris. I bought the train ticket well in advance, organized a dog sitter, got my French COVID certificate, and reserved a hotel. A few days before departure, the virus cases skyrocketed due to a new variant. A four-hour train ride packed with international travelers became unattractive. I canceled everything. I received a partial refund for the train ticket and all other cancelations were free. I missed out on Paris, but I saved about 500$.
I am sure I am not the only one who saved on travel during the pandemic. If each household saved 500$ on travel, another 150 billion Dollars stayed in people’s pocket.

Burning a Hole in my Pocket

I listed above three instances where I saved money during the pandemic. I saved it because I simply could not spend it. Celebrations, family gatherings, concerts, theaters, travel, and even in person shopping shrank or were eliminated. My guess is that this was a universal phenomenon, and I assume that on the average each household had accumulated about 6000$ during 2020 due to the pandemic.
When I, who never had much savings suddenly had a few thousand Dollars, it burned a hole in my pocket. I wanted buy all the things I could not buy before. After the shops reopened, and the planes flew again. I bought that big screen TV and went to Paris. So did everyone else, and the demand exploded. But the truck drivers had been fired. The few trucks who had drivers were stuck on some border unable to go from one country to another, and there was no way to deliver those big screen TVs in urgent demand. The supply chain simply failed. People were ready to pay a little extra if that is what it took to get what they wanted. They had more money than they ever had. As the demand grew, the prices rose in line with the supply and demand curve, the holy grail of pricing wisdom. Soon inflation came with a vengeance.
Inflation hits

In 2021, inflation went from about 2% where it had been for the last 12 years to 9% in 14 months. This was a shock of enormous magnitude to the financial world . The Federal Reserve quickly intervened by raising interest rates to 5%. Bonds crashed and the S&P500 stock index lost 19% in 2022. I am still amazed what can happen if all the people at the same time save instead of spend. It is like a tidal wave to the economy, real power of the masses.
Inflation US 2014 to 2022

My main point though, is that if I had taken the time to think this through, I could have foreseen it. What was happening to me was happening to everyone else. A simple multiplication would have shown me where the economy was headed.
This is not the first time I thought if I had been more observant, I could have predicted a major economic shock. For example, in 2008 when people I know did not have lucrative jobs suddenly bought huge houses with swimming pools. Subdivision after subdivision of high-priced houses went up, and many friends upgraded from modest houses to huge ones. Refinancing was a subject at happy hour and family gatherings. It was hard to miss that subprime lending was in the air.

The only thing constant is that things will change. Dealing with change is hard. Paying attention and following up on the prompts from the world around us, can help us understand the changes ahead of us.

1. https://www.pandemicoversight.gov/data-interactive-tools/data-stories/update-three-rounds-stimulus-checks-see-how-many-went-out-and
2. https://tradingeconomics.com/united-states/inflation-cpi