- It’s not something that registers in your mind year after year
- Nobody talks about it
So if you don’t think about it or talk about it, it’s not really there, right? Nope, that is definitely not how this works. A simple definition of inflation is this: a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of the currency.
Simply put, as more money is printed, the less value each unit has. All money is debt (that is why our dollar has the word “note” on it). So money is credit. For our economy to expand, so does the money supply.
Three things have dramatically changed the course of our economy over the last 100 years and have led to a deterioration in the purchasing power of our currency:
- 1913 – The Federal Reserve Act gave the Fed the ability to print our currency.
- 1971 – We fully left the gold standard. Money is decoupled from gold. The gold supply only increases at 1-2% annually which is one of the main reasons it had such a historically long run as money/currency.
- The 1970s through today – Explosion of debt. Federal debt, corporate debt, and consumer debt products and instruments have led to increasing asset prices.
Will all this continue in the future? It seems highly probable. Let’s take a look at a few graphics that tell the story of inflation in recent history.
This image shows how the money supply has dramatically changed over time since the 1970s. M1 Money Stock is currency readily available for spending. M2 Money Stock includes M1, along with savings deposits, small-denomination time deposits (time deposits in amounts of less than $100,000); and balances in retail money market mutual funds (MMMFs).
And beyond nostalgia, the image to the right shows us what we paid for basic staples in a bygone era. But think of what you pay for things now. Inflation means that stuff costs more, so the money we save today won’t have the same power in our retirement.
The best ways to hedge against inflation as you age is to obtain assets that increase with inflation. Here are some examples:
Gold – Look at the price of gold in 1913: it was $20 an ounce. When the government confiscated gold in 1933, they immediately moved the value of 1 oz from $20 to $35 monetizing a huge portion of the national debt in a single move. Now, gold is trading near $1,500 an ounce.
Real Estate – Real estate that produces cash-flow is a great hedge against inflation. With real estate, you can borrow with fixed-rate, low-interest debt and charge rent which increases over time. This means you are leveraging your money and protecting yourself as the landlord against inflation. This would include short and long-term rental properties, apartment buildings, farmland, and commercial properties.
Business – Business is also a great way to protect against inflation as you can raise prices for goods and services and turn a profit in today’s dollars, hedging against inflation and protecting purchasing power. So, while when McDonald’s started, the price of a burger was .05, now it is well over a dollar, with plenty of premium options for well over $5.00. And the McDonald’s franchise is stronger than ever.
Stocks – Owning McDonald’s stock has been a great way to outpace inflation and collect income through dividends. The stock market is a collection of for-profit businesses that allow others to invest in their future and collect growth and income as those businesses prosper.
You don’t have to behave like the proverbial frog in the kettle. It’s important to think about inflation and talk about its impact. There are many ways to take inflation into consideration and make moves to protect yourself from a future where your dollar does not buy what it used to.