The Silent Killer

Satish Joshi

This was some time ago. I happened to get into a conversation with a friend of mine – much younger than me – who was talking about how the cost of getting your children married is escalating day by day. I asked her how old her daughter was. She said “Fourteen”.

I said “Then you have a good 8-10 years before she decides to get married because surely you will wait till her education is completed and after that she may want to settle down in her chosen career before getting married. So, you can start saving now and accumulate enough to pay for whatever extravaganza she wants. How much do you think you will need to accumulate?” I asked.

She said “Recently some cousin’s daughter got married and they spent just under 20 lakh rupees. So, I think I should plan to put aside about 25 lakh considering that in 10 more years things will cost a bit more than at present”!

I said, “when you say a bit more, have you any idea how much that might be?”. If you are ready to spend 20 lakh today – for exactly the same sort of an event 10 years from now you will need about 36 lakh (assuming RBI is able to meet its stated inflation target of 6% or less) i.e. you will need about 45% MORE than the amount you are thinking of! And if the inflation does not stay within the desired target that RBI has set, then you will need much more!”

Her jaw dropped to the floor when she heard this! But she isn’t alone in not realizing how much damage inflation can do to your future – by silently eroding your financial wellbeing, like unseen termites eating into the wooden pillar holding up your roof which you notice only when the pillar and the roof collapse!

Let me just illustrate with a very recent experience. I was in Argentina in February. Buenos Aires is a wonderful city – Cleaner, more hi-tech and modern, more opulent than ANY city in India! But it took me a few days of travel in the country to learn about the soft underbelly of all that apparent modernity and opulence. The first inkling that something was amiss came on the first evening itself in Buenos Aires while watching a local news channel on TV. The ticker tape running at the bottom of the screen was showing (among other news highlights) exchange rates for Argentine Pesos to various international currencies. What was curious was, for Peso to US Dollar there were two rates – one in white letters, the other in blue. And the “Blue” rate was almost twice the “white” rate. At that moment I did not realize what it meant.

Next morning, we went out for sightseeing, and I asked our guide to take me to a bank for exchanging a small amount of dollars which I had into local currency. I expected to usually pay for everything using my credit card but sometimes – especially if you go a local street market – having local money is useful.

The Guide said “Don’t go to a bank; they will give you only white rate. I will take you to a local money changer (NOT officially licensed) who will give you the blue rate which will be much larger. And in fact, you do not even have to do that because most shops and restaurants would prefer to get paid in US Dollars and will translate their prices displayed in Pesos to Dollars at or close to the blue rate! So effectively in Dollar terms you will get everything at a 40 to 50% discount! So don’t pay by credit card if you have cash dollars because the credit card company will translate the Pesos only at white rate!!”

I did not realize then why there existed such a bizarre system – and how people could afford to transact (and in fact PREFER to transact) at an exchange rate almost double that of officially declared exchange rate (the white rate)!

I mean theoretically, I understood why this must be happening. The inflation in Argentina was running way over 100% when I was there (I just looked it up and at present it is said to be 147%). Therefore the “value” of Argentine Pesos was going down faster and faster and therefore people would prefer to hold their money in currencies like the US Dollar to preserve value rather than in Pesos.

However, intellectual understanding of logic like this does not always translate to real enlightenment about the implications of this bizarre state of affairs. The dire reality hit me in the city of Ushuaia at the southern tip of Argentina. I was in the city on two occasions during this trip – about 10 days apart. On both days I had a cup of the same coffee in the same coffee shop at the same time of the day. But on the second occasion I wound up paying for the coffee about 20% more in Peso terms (but the same amount in Dollar terms!). So out of curiosity, I went to the same shop nearby where I had bought a T-Shirt. And yes there too the same T-Shirt which I had bought now had a price tag about 15% higher!

This made no difference to me really because my source of money was dollars (which is what I had carried with me from India by converting Indian Rupees from my bank in India) which in fact was appreciating against the Peso. But imagine the plight of someone whose only source of income is his salary which is paid in Pesos – literally EVERY DAY he his purchasing power is eroding such that for the same can of milk and the same box of eggs and the same bread he must pay a larger and larger portion of his income, month on month! That inflation will literally kill him eventually!

Most often (and I have seen most of the people I know, INCLUDING Myself) make this mistake when planning for our future. It’s like hypertension – if your blood pressure starts going beyond healthy limits, nothing noticeable happens to you. You are able to continue to do the same things you were doing before, live the same lifestyle until one day, you have a stroke and then all hell breaks loose but by then it’s too late.

Planning for your financial future should be first and foremost, not about how to become rich or about protecting your capital but about how to prevent inflation (the silent killer) from making you poor! Because you can become rich if and only if you avoid becoming poor in the first place!