Defending wealth against the great enemy: inflation

When it comes to defending against inflation, there are reasons to have a strong strategy to protect against the enemy. But what exactly is the enemy? How does the enemy operate? Why is inflation the enemy? How can wealth be defended against it?

When inflation is reported in the mainstream media, many numbers are thrown around and acronyms such as CPI are often referred to. What is the CPI? Is there really an accurate measure of inflation? Let’s start with a working definition of inflation.

True inflation (known as monetary inflation) is an increase in the money supply. This includes: the rise of fiat currency printing, any bank lending money it currently has no possession of (whether to another bank, a country, or an individual), and simply paying interest on these loans with money that has been printed for this purpose. The US Federal Reserve measures monetary inflation using what are called money aggregates, or M1, M2, and M3, with M3 being the most inclusive measure of the real money supply.

The US Federal Reserve uses the CPI as a measure of inflation that is given to the public. According to the US Department of Labor, Bureau of Labor Statistics, “The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a basic basket of consumer goods and services. The value assigned to the basket of consumer goods is determined “using hedonic quality adjustment methods.” Or rather, the basket is made up of categories of goods and the lowest priced good in a particular category is used in the CPI calculation.

For example, if meat is the category and chicken and beef are the products in the meat category and chicken is the least expensive, then only the price of chicken will be part of the CPI for the current month. If the following month beef is the cheapest, only the beef price will be used. Therefore, the CPI could change 3% over a period of time and the price of chicken could increase 9% over the same period. According to the CPI, chicken rose 3% but according to his pocket, the price of chicken rose 9%. Because true inflation is an increase in the money supply, an increase in the price of chicken and not beef is due to supply and demand, not inflation.

The most common method the Federal Reserve uses to increase the money supply is by lowering the federal funds rate. This is the interest rate at which the Federal Reserve lends money to private banks. When the interest rate is low, there is more incentive for banks to borrow from the Federal Reserve and then lend the newly acquired funds to businesses and individuals.

The Federal Reserve can create money available for borrowing out of thin air by adding money to its credit column. This is what could be called Creative Accounting and only the banking system can get away with it. This practice is also used when the United States government borrows money from a foreign bank. The interest payment is simply created on the books and then the payment is made. Any private individual who tried to use this type of method to create money would be prosecuted for fraud under the RICO law.

Monetary inflation becomes very attractive to a government when taxes are already high and more money needs to be raised for further expansion. When the Federal Reserve increases the money supply, the private individual is the one who gets stuck flipping the bill.

For example, if there is already $10,000 in the money supply, the total amount of goods for sale can be purchased for $10,000. This is naturally resolved through the free market. If suddenly another $10,000 is flooded into the money supply, all the goods that are sold can be bought for $20,000. The purchasing power of the original money in the money supply has been effectively cut in half and those less fortunate people who have held on to their hard earned money have just lost half their savings. The effects of an increase in the money supply are not realized until six months to a year after the increase has occurred. This is usually attributed to the weather or some ridiculous event that has nothing to do with the general price increase.

The increase in the money supply has had numerous side effects. You can no longer support a family on one person’s income just to survive, much less have enough money to send your kids to college. Social Security has been completely depleted and the money paid to Social Security retirees is not worth enough to allow for survival. The retirement age is getting higher and the number of people who continue working after retirement is increasing. The US (including individuals) in 2006 is more in debt than any other country in human history. More and more people are filing bankruptcy and savings are at an all time low. Look around you and ask if this is because “inflation” is supposed to be 3% a year or is it because the true inflation rate is much higher.

As it happens, there are ways to protect yourself from the unpleasant effects of monetary inflation policy. Currently, the precious metals market is growing at a rate that exceeds inflation. This is for a number of reasons, one of which is that people are starting to see not just the US dollar drop, but also any fiat currency that has a devaluation policy behind it. Countries around the world are exchanging their reserve currency for gold and silver to protect their wealth against inflation from the fiat currency of most countries.

There are several ways to invest in precious metals, but a solid investment strategy must first be developed. Part of developing a strong strategy is identifying weaknesses and clarifying some basic objectives. Let’s examine fighting inflation with gold. Not only can we protect our wealth against the dollar and other fiat currencies by buying gold bullion, but we can also take an offensive position by buying shares in a gold mining company. This leverages the investor’s investment and as the effects of monetary inflation become more severe, the portfolio becomes increasingly aggressive. The key to this is no longer holding a broadly diversified portfolio (ie buying the S&P 500), but assessing needs and exploiting weaknesses.

If I am 30 years old and have a limited amount of capital, and I recognize the weakness of inflation, I can choose to protect part of my wealth by investing in gold bullion and transferring the rest of my assets to small and medium-sized gold mining companies. . I can minimize the risk of such leverage by intensively researching the history and management of companies to determine the likelihood of large returns on invested capital.

Patience is the key to a solid strategy. Remember, the strategy was developed during a period of relative calm; a period during which good judgment prevailed over strong emotions. Make sure your strategy includes plans for times of high stress and excitement. This plan could be as simple as knowing the type of market you are in. If you are in the gold market and you know that gold is a bull, then you can be sure to buy rather than sell when the value drops slightly. This not only protects against emotions, but also increases profits when gold continues to rise. Be patient and confident in your strategy to stick with it and not give in to uncertainty and excitement. Remember, if you’ve made big profits, it’s okay to sell and buy in the next big market: buy low, sell high.

Permission is not required to reproduce an unedited copy of this article, as long as the About Author tag is left intact and direct links are included.