Inflation is here and it is likely to stay. I have written on Forbes for a long time that it was obvious, but apparently not for a lot of professional economists, that inflation would strike. Right now many say that inflation will be short lived as the Central banks of the world step forwards to stamp it out. I maintain this will not happen. The thing I focus on is that inflation has been and always will be a chosen government policy and this policy will always be invoked when there is no other alternative. For badly run countries it is a necessity because inflation is similar to a flat tax and when government cannot collect enough revenues via their fiscal infrastructure, they resort to printing money with which to spend, which in turn causes inflation.
You can see this across time and all over the world.
Beyond incompetence, the other cause for invoking inflation is when disaster strikes and countries lunge towards insolvency, with war being the classic mother of hyperinflation. When a country bankrupts itself in a struggle it has to inflate away it liabilities by printing money and this also plugs the fiscal holew of having little tax revenues. In times past when precious metals were currency, that money would be recalled and replaced by money with lower intrinsic value and you can see this even in the US as the the 1c coin once a ‘large cent,’ to small cent, to copper wheat and Lincoln cents, to the modern steel core clad coin far debased from the original 13g copper slug.
So many will now be worried exactly how you protect your wealth from 7%+ inflation especially if that is to be the norm for several years. With interest rates often nearly 0%, the scenario is set for savings to be drained away.
At 7% inflation and say 1% interest, in 5 years $100 will be worth just $73 after 5 years. If the real rate is nearer 10% and some suggest when you strip out all the ‘hedonic’ fudging it even more, then after 5 years that $100 of saving is now worth only $62.
Right now 7% inflation and 1% interest rates is a negative rate of interest of 6% and in around 10 years that cuts the value of savings in half.
The situation is ugly, so how can one protect themselves from inflation.
Way 1 should be make a portfolio of inflation protecting strategies so that you can afford some mistakes or outrages. So way one is onbious, but perhaps not for the young cohorts who haven’t a visceral connect to this asset.
Buy physical precious metals. This is not only a good defense but also carries an extra comfort for anyone hypnotised into paranoia from doom scrolling too much. Gold for is large sums, silver coins are for day to day transactions. As well as giving you that off-grid prepper buzz, precious metals will hold their own.
Property. Property is not as cheap as it was but it still offers a great hedge against inflation. If you buy to rent, the income will tend to keep up with inflation, as will the capital value, so you get protection and income. For many they will also get the buzz of ownership, which for many is one of their favourite pleasures. Many will say property will outperform inflation and that may be so if you believe the official figures. However you don’t need to stick to residential property, there are fields, forest, car parking spaces and the old job of buying wrecked properties and doing them up. This leads to a 3rd way, one which many will hate.
Borrow as much money as you can but make sure it’s a fixed rate. This is how you can fund the property or for that matter any asset you feel will protect you from inflation. Lets say you borrow some money at 3%-4%, right now you are making 3%-4% on that cash as its value dwindles. So you bought a house with that money and inflation is paying off your mortgage by making the debt less and less significant as the years pass. The world is full of old people that bought their houses for $30,000 to now see them worth hundreds of thousands, the bulk of that increase comes not from the real value appreciation of the asset but from the ravages of inflation on the value of $30,000.
Crypto. Now its been a meme that Bitcoin is an inflation hedge and that is not true.
Crypto can protect you from inflation but not by being a hedge. In any circumstance there is always some economic area outside of the hum-drum grind of normality. If you are in that world bad times don’t touch you. For instance, If you worked in Hollywood in the 1930s the depression wouldn’t have touched you. Crypto is such a development. Without doubt it’s a high-risk environment, but like all investing, it’s a skill game and if you can master it, then it’s a good game to play while ‘fiat’ goes up in smoke.
Simply do not let your cash sit around. If you have cash get it into assets, at least collect it up so you can easily apply it. Easily sold assets are good and assets you can get under a tax umbrella are even better. Buy a stock tracker if you like (dollar cost average it), pick up some high-class collectibles, stack as much food as your pantry can hold, replace you old broken-down car, push for that asset you’ve been saving for like a Classic Car, Picasso, collectible gold watch, that stamp you never dared afford and maybe take on some low interest debt to do it. Put your cash into a currency you don’t think will get crushed, perhaps the Yen or the Swiss Franc. Just don’t unnecessarily leave cash lying around to be munched on by the weevils of inflation.
You can of course stick to stocks. Stocks are liquid, user friendly and for many fun. They will do an OK job keeping up with inflation, but after an extended period of inflation the market may well dip into a bear market which will make stock picking extremely difficult. This is why now is the time to consider allocating your cash to a spread of inflation beating tactics to weld them into a strategy for the next 5 to 10 years.
When the realisation hits that inflation is not going away in a few months, inflation defending assets are going to pop. So now is the time to work out how you are going to avoid the age old haircut of currency debasement.