First, some definitions –
conflate – combine (two or more texts, ideas, etc.) into one. Example: conflating clip and magazine when they clearly are not the same thing.
As I sometimes mention market investments, and then segue into things like metals and tangibles, people bring up ‘preserving wealth’. And then they go on to say that [xxxx] is a bad investment. Ya gotta keep in mind, investment is not the same as wealth preservaiton, broadly speaking.
I have $2000 cash in my hands. Let’s say, for the sake of argument, that $2000 will buy me six months worth of groceries…or gasoline….or health insurance. As inflation works its erosive magic, the price of things go up. Next year, that $2000 buys me only five months of groceries, gas, or insurance. So, I need my $2000 to suddenly have the buying power of $2400, since it now takes $2400 to buy what $2000 bought last year. How can I do that?
Really, only one of two ways: either take the $2000 cash and ‘put it to work’ in such a way that in a year it is $2400. Investing is one way to do that. So is gambling. So is buying something for $2000 and trying to sell it for $2400 next year. Or buying something for $2000, renting it for $33 a month for a year, and then having $2000 and $400 worth of rental income. You get the idea. As inflation rises, you’ve gotta hit that blackjack table for higher and higher wins in order to purchase the same amount of goods as you did last year. Inflation is a sneaky bugger.
Plan B is to take the $2000 and turn it into something that will, very broadly speaking, always be worth what you paid for it across different currencies. Meaning: $2000 of gold today, buys what $2000 of cash will buy today next year. It ‘held its value’. There’s a very well-traveled (why doesn’t traveled have two L’s???) ‘fact’ about how a hundred years ago an ounce of gold would buy you [a new suit/a Colt pistol/etc.] and how an ounce of gold today would buy you those same things, thereby proving that gold ‘retains its value’ over time. I think there’s some truth to that, but it’s not a sure thing.
I invest in the market. When I want my money to make money, to grow, I go to the market. The market has never hit zero, and so far it has always bounced back from whatever the crisis du jour was. Does that mean it’ll never go to zero? Of course not. It just means that I have enough belief in the unlikeliness of a market-destroying event that I’m comfortable investing in it. However, I am not comfortable enough to put all my eggs in one basket. For some people, the idea of ‘letting it ride in the market’ is akin to betting it all on black at the roulette table. For some, their idea of investing is something like real estate or a vending machine business or something that puts their money (capital) in one place and it makes money by collecting rent or sales revenue. Thats great, and I do that too… but, honestly, I’d rather spend three hours a week on my keyboard with a brokerage wesbite than chase tenants and customers for money. But..suspenders-n-belt….I do both. I don’t buy gold/silver to increase a value, I buy it to retain a value…
I invest in the market, but I keep my critical money in in metals, property, tangibles, and some cash (even though the cash loses a bit to inflation I find it is pretty necessary to have a certain amount of liquidity in case things come up that require money in a hurry. I’m willing to expose some money to inflation by just having it sit in the bank for convenience.) As I’ve gotten older and more deliberate in financial matters, I know how much I need to keep inviolate and how much I can ‘play’ with and expose to various degrees of risk. If the market crashed to zero, today, right now, would it wipe me out? Nope. Would it hurt? Oh heck yeah. But I’d still have property, precious metals, food, guns, some cash, and, of course, mans basic survival tool. I’d take a hit alright, but I wouldn’t lose my lifestyle…I’d still have a house, hot water, a vehicle, electricity, and food. I wouldn’t have to start from zero.
I mention all of this because, as I said, it seems like when I drift into this topic many people conflate investing with wealth preservation. Investing adds to your purchase power, preserving keeps it at the current level. Big difference..especially in strategy and tactics.
Look, you will never, ever, ever go wrong by having ‘too much’ money. I hate to use that term because it implies that there is a ‘good’ amount of money to have and beyond that is simply ‘extra’. Thats the thinking of Bernie Sanders and his fellow travelers. But, broadly, when in doubt…add to your stack of cash/gold/property/investments.
I’m a cautious person, with some bad experiences, a fierce sense of self-preservation, a little bit of head-knowledge, and access to the internet….and it is my personal opinion that, yeah, we’re heading for inflation, maybe stagflation, and you can’t go wrong by being too ready for it. Weimar-esque inflation? Seems possible, of course, but I think it’s unlikely. I think what you’ll see is a drifting towards the economic situation we saw in the Carter years…maybe not a full-Carter economy, but certainly leaning towards it.
If I were a fixed-income type, living off pensions and that sort of thing, I’d probably very slowly start moving what I could towards inflation-resistant forms like metals while trying not to dip into principal to deeply. If reported inflation starts ticking up consistently I might want to think about accelerating things a bit. But thats me. You do you, man.
Anyway.. investments /= wealth preservation. The two are different enough that they call for different strategies and ways of thinking. Don’t conflate the two. Thats my inflation-adjusted $.02 worth.
ETA: If you want a dramatized but rather plausible (IMHO) of how inflation upsets your apple cart, pick up a copy of this book.
The Mandables is an excellent book. How Money Dies is also a good book about fiat money.
In a hyperinflation situation those that can keep shelter and family fed are the winners.
Thanks for your information.
Couldn’t agree with you more on most points. The only question that I have is more to do with the “Carter” years inflation, as opposed to Weimar-esque inflation.
With our present levels of debt in this country, would not even a “carter” style inflationary cycle be disastrous? During the Carter years the fed had some options left in their play book, and we sure didn’t have a 28 trillion dollar deficit.
I read an article back before Covid, that talked about the fact that 53% of Americans lived paycheck-to-paycheck, and could not afford a $1000 dollar hit to their budget. Another article talked about the fact that with Covid, and the slow-down to the economy, that we could see foreclosure rates in the 15% region – which the banks couldn’t absorb. Now, as we start to emerge into a time of inflation, we will see if these things come to fruition.
As has been mentioned by yourself before, it is the slow but steady increase in the dominoes falling. How many dominoes need to fall before it becomes an exponential avalanche? Predicating possible outcomes comparing Carter era inflation to todays situation can be comforting, but in many ways unrealistic, as the changes within our society/infrastructure are as great between those two different times, as the Carter era would be to the Weimar Republic.
I think at this point the budget deficit is literally unpayable without purposefully inflating the economy, having another WW2, or trading Alaska and Hawaii to the Chinese. A renunciation is, I suppose, on the table if we ever did have a war with China or whomever holds the most of our debt but the mess that coes afterwards would be spectacular.
Just got done reading that book based on your recommendation. So, I mention you when I email the metals pimp, right?
You *could* but don’t expect anything to come of it.
Most of the U.S. debt is held here. Only about 7 trillion is foreign held. China holds about 1 trillion of that and had been selling T bonds to reduce their exposure. That is the major reason inflation helps Uncle Sam, the hammer falls at home.
The US borrows from itself as well. Currently of the 29 trillion, they have barrowed 2.9 trillion from social security, 1.01 trillion from military retirement, 304 billion from Medicare, 955 billion from office of personnel management retirement fund. 1.09 trillion are held by state and local government retirement funds. Mutual funds hold about 3.5 trillion. These are just a few of the areas that would be hurt if we try to inflate our way out of this. China would take only a small hit with their 1.06 trillion holding. Like someone said above it would be the American people taking the hit not China or other foreign nationals. Make sure your investment portfolio doesn’t include treasuries to start with!!! Overall everything CZ has said is on the money about wealth preservation and growth.
The US does NOT borrow from itself! It borrows from the Federal Reserve Bank – a PRIVATE banking company with the Class A shareholders being foreigners. The entities you just mentioned hold notes. A Federal Reserve Note (like all notes) is a promise to pay. So, in effect, Social Security, Medicare and all of the others ‘borrowed’ promises to pay. This means that interest is due on the interest. The whole thing is a giant Ponzi scheme. How this finally resolves itself, nobody knows. What is known is that the nation is destitute, and when it finally reaches the climax, the US will be like Egypt, Rome, the Aztecs and a hundred other forgotten civilizations.
The more things change, the more things remain the same. History does often repeat itself.
Doc ,
You might want to research before posting. I gave specific examples that can be verified. These entities purchased US treasuries directly the from the US Treasury, which are different then federal reserve notes!!! State pensions and mutual funds also do not purchase FRNs (dollars) for investment, they purchase US treasuries also know as government bonds. So, yes the Federal Reserve does hold some of the debt but not the way you have stated, the US government has also funded the debt by using government bond as IOUs in house to drain federal retirement funds and other sources of income from the market.
https://www.nasdaq.com/articles/what-are-treasuries-and-why-do-they-affect-stocks-so-much-2018-02-23
Gold as a store of wealth still has its own problems. Let’s say gold’s spot price is 1900. Buying gold coins will cost 2000 an ounce for the 1 ounce coins all the way to 3100 an ounce for 1/10 ounce coins.
Selling goes the other way. Selling those 1/10 coins means a lower than spot sale price.
In all, you lose ten to thirty percent on the buy, then another ten percent on the sale. Nearly half your wealth disappears.
As opposed to, say, 95% of your wealth disappearing from inflation? I regard the premium as an ‘insurance expense’. If I buy homeowners insurance and my house never burns down, do I feel that I wasted my money? No, because I had the piece of mind of knowing I was covered and that the risk has been transferred. If gold is 1900, and I pay 100 premium, as far as I’m concerned I just paid 100 for ‘inflation insurance’. Since the gold, unlike insurance, doesnt ‘expire’ I see it as if I’d bought a 100 dollar policy to insure 1900 dollars from inflation. Amortize it out over however long you think youre going to hold the gold and it becomes a cheap insurance premium.
That’s if you bought ‘last week’, and sold ‘next month’.
You *should* have been stacking 10 years ago when gold was $1,000/oz. In 2 years it could easily be $3,000/oz.
Does anyone actually expect the price to go ‘down’?