Sometimes I think about those moments in my childhood when my parents gave me $5 to spend at the store. I would be so excited because with that much money, I knew I could buy a ton of junk food.
Those days are long gone. You give a kid $5 now, and they’re going to say: What am I supposed to do with this?
That’s called inflation, and clearly we all experience it in our own lifetimes — even millennials like me.
The US economic response to the COVID-19 pandemic has created the possibility of rampant inflation in the near future. I want to discuss why I think that’s likely, and what you can do to protect your wealth.
The initial US bailout in Spring 2020 cost just over $4 trillion, which is four times the amount of the 2008 bailout. Now we have another $2 trillion package that President Biden will likely pass soon. We also have the US Treasury buyback programs, which amount to $120 billion a month.
That means the US is expanding the money supply. Theoretically, the greater supply of money out there, the more the value of the dollar diminishes. We have seen only muted inflation until very recently. Now we’re seeing US Treasury bonds sell off. That means there are big institutions and countries slowly but decisively selling US bonds.
When bond prices go down, interest rates go up. That’s why we’re starting to see commodity prices go through the roof, which will trickle down and affect consumer prices.
In the US, inflation is measured by the Consumer Price Index (CPI). US Secretary of the Treasury Janet Yellen and Chair of the Federal Reserve Jerome Powell both said they’re not worried about inflation.
I think they should be.
They don’t account for many things in their CPI measurements. Why not factor in the direct cost of gasoline, housing and food into the CPI index? In the last two months, wholesale gas prices in the US have increased from $1.30 a gallon to $1.90 a gallon. That’s a 50 percent increase in gasoline prices. If you own a car, that’s going to affect you. We see the same trend with corn and soybean prices, which also increased by 50 percent.
In other words, US government leaders have been picking and choosing their data points, and the market is calling their bluff.
The world has stopped drinking the US Kool-Aid, mainly because the pandemic is increasingly under control in other major economies while it continues to rage in the US.
Japan’s GDP went up double-digits last month. China is booming, and it’s the second-largest economy in the world. In March 2020, everyone was scared and used the US dollar as a safe haven for their wealth.
But now people are thinking: We don’t need a safe haven anymore. We’re going to redistribute our capital. We’re going to take our money back and invest in Europe, Australia, China and Canada, so that we don’t put all our eggs in the US basket.
This change could set the US economy back by a year, and in the 21st Century, that’s an eternity.
I have a lot of friends and colleagues that rely on me for advice about this. They want to know: What happens if inflation becomes 10 percent a year? That means a lot of the money in the bank is going to get inflated away. In the 1980s, inflation in the US reached nearly 15 percent. It was out of control, and it can happen again.
So how do we protect our wealth from inflation?
We should adopt the same strategies as many governments: that means trying to build assets while simultaneously inflating our debt away.
Borrow as much money as you can at the lowest interest rate possible, and buy a real asset, preferably farmland or gold and silver. The power move, if you can do it, is to buy productive farmland. That produces commodities, which are inflation-protected.
If you can, go buy yourself a productive asset. Another option is to buy a rental property. Buy something that you can maintain while receiving income. When inflation hits and you own your home, its value will increase, and you don’t have to worry about your money in the bank being worthless.
Finally, always keep a little bit of gold and silver. Put it in the vault. If possible, spend two to three months of your expenses in gold and silver. It’s another failsafe. If $1,000 isn’t what it was yesterday, at least you have silver or gold to help you through the hard times.
Remember: Wealthy people stay that way by protecting their assets, not their money.