How to Understand and Overcome Inflation
It’s rare in our distractively-busy culture for the common American to engage macroeconomic issues, but rapidly rising prices driven by highly inflationary policy are a present and notable exception. Engaging the public discourse on inflation, and knowing how to effectively overcome it, however, seldom marry, so let’s investigate why that is.
It’s fascinating to ask people what causes inflation because the answer is super simple, and no one knows the answer. No one knows the answer because the definition has been changed to hide the cause. Inflation is properly defined as “an arbitrary increase in currency units without a corresponding increase in the supply of goods and services”. As you might expect, more dollars chasing the same goods causes prices to rise, a primary effect. Today’s money conjurers have people believing inflation is defined as “rising prices”, so that the cause can be blamed on other things. Properly defined, we’re ready to consider inflation’s rotten fruit.
The arbitrary creation of currency units, or inflation:
Steals from the lower and middle classes by devaluing the currency they heavily depend on, always rendering them poorer.
Enriches the wealthy by causing the risk assets they own to rise, which is disproportionate to their cost of living, which is comparatively small.
Taxes all users of the currency dishonestly, since the government never has to say it’s raising taxes (on everyone).
Results in divergently rising prices.
Invigorates speculation and risk-taking leading to widespread malinvestment and asset bubbles, which are followed by systemic crashes; then it rinses and repeats.
Causes fixed income and cash savings vehicles to lose purchasing power.
Threatens the society in which the compromised currency prevails.
Many people understand the above, and yet fail to reflect it in their financial lives. I believe this is the result of a) financial illiteracy, since Americans are not educated on financial matters at home or in school, and b) fear is stronger than greed, and they try to hide in all the wrong places. Astute responses to a highly inflationary environment are:
Make more money. Whether this means working longer, harder or smarter, extra income is very helpful in maintaining a net positive cash flow in your home.
Spend less money. It has the same effect as more income (but on the other side of the ledger).
Invest in quality assets. Focus on capital efficient companies with consistently high free cash flow and strong pricing power.
Place a high priority on investments paying dividends and rents, especially those able to consistently increase the payouts. Income your investments earn is income you won’t have to.
Maintain an exit strategy on all trades to protect your capital from the occasional systemic crash, and don’t let these busts deter you from decisively returning to the above assets when prices stabilize.
Own some classic inflation (hard asset) hedges.
In closing, it’s important to distinguish inflation from hyperinflation, which is the widespread loss of confidence in, followed by the widespread abandonment of, a compromised currency. The former is objective policy action; the latter is a subjective response to that action. The former causes a rise in prices; the latter involves the total breakdown of a society. The former is sin; the latter is judgment on that sin.
Think about it, and I hope this information empowers and blesses your family. I’m sorry for the length this week, after many shortenings, it’s still too long! Shaun .
“The best way to destroy the capitalist (free-enterprise) system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.” ~Vladimir Levin
“A false balance is an abomination to the Lord, but a just weight in his delight.” ~Proverbs 11:1
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