Over the course of history, dozens of once-prosperous nations have collapsed under the pressure of hyperinflation. Today, the U.S government is $29 trillion dollars in debt and inflation is at its highest rate in over 30 years. Now, more than ever, is a good time to clarify what inflation is, why it is never a good thing and what you can do to protect yourself.
History Lesson: History doesn’t repeat itself, but it does rhyme. Just over 100 years ago, in 1913, Germany’s economy was thriving. With a booming export business, Germany was one of the world’s wealthiest nations. Ten years later, in an attempt to pay back enormous wartime debts, the government began to print German marks.
Hyperinflation soon followed and prices ran out of control. By November of 1923, the price of a loaf of bread was 200 billion marks. Paper bills became so useless that they were burned as a cheaper alternative to firewood. With hyperinflation ravaging the economy, crime exploded, poverty became the norm and rebellion began.
What Inflation Is: Economists will tell you that inflation is a sustained rise in prices. However, this definition hides a much more sinister truth. By lowering the purchasing power of your hard-earned dollars, inflation means that you must continuously spend more time working to purchase the same amount of goods. Since money is the way that we value human time, inflation of the money supply is government-sponsored theft. It is the theft of your most precious asset… time.
The Real Inflation Numbers: For anyone who has looked at prices recently, it is clear that the government-reported 6.2% inflation rate is a gross underestimation. The problem is that the government has made it incredibly hard to reliably calculate this information.
Over the last two years, the number of circulating dollars has increased by 40%. Using this metric, you could estimate an inflation rate of 18% annually. If, instead, you measured inflation using the 1980s CPI basket, you arrive at 14%.
However, if you have been looking to buy a home or a used car, inflation for you may have been much worse. Although it is uncertain what the exact rate is, it has clearly been greater than 10% annually since the beginning of the COVID-19 pandemic.
The Cause Of Inflation: Although the Federal Reserve will often use words like “transitory” or “quantitative easing” to confuse the public, the record high inflation rates are a direct result of the expansion of the money supply. To put it simply… the more the money printer goes brrr, the higher the inflation.
Why The Government Won’t Stop Printing: By having the sole right to print money, the government is able to create something out of nothing and play god in the economy. With these newly-created dollars, the government is able to prop up politically-favored sectors and make fiscally-irresponsible promises to win votes. We have become so indebted and addicted to these government handouts that any slowdown of the infamous printer could lead to a collapse of the entire economy. The government won’t stop printing because it can’t.
Why Inflation Is Bad For The Economy: Inflating the money supply allows the government to spend money that it has not earned and exert an ever-growing influence on the public markets.
In 2020, 44% of the U.S. GDP was comprised of government spending. Having such a large and fiscally-irresponsible force in the market leads to a gross misallocation of resources. You may be asking yourself why medical services, housing and university costs are getting so expensive, despite the fact that technology seems to make everything cheaper. The answer is simple: the government has propped up these sectors and prevented the free market from acting efficiently.
Why Inflation Increases Inequality: Although the government often promises to distribute printed money to the poor, inflation is extremely regressive. By causing dramatic rises in the prices of assets such as stocks and real estate, inflation actually benefits the rich. Meanwhile, the rise in the price of staples such as food and gas disproportionately affect the poor, as spending on these goods constitute a much larger percentage of their income.
Why Inflation Is Bad For Society: As wealth inequality widens, and the poor lose hope for the future, society deteriorates very quickly. This happened in Germany in the early 20th century, Venezuela in the early 21st century and it is my belief that it is already happening in the U.S. today. Increased political divide, crime, looting and overall tension are symptoms of a society that has lost hope for the future. This is what inflation does… it robs us of our civility.
Why Inflation Is Bad For The Future: Inflation leads to higher time preference. Since dollars are going to be worth less in the future, we are incentivized to quickly spend them before they lose any further value. This has disastrous consequences as inflation discourages long-term investment and encourages us to sacrifice the future to benefit the present.
My Prediction: If money printing remains unchecked, I believe inflation will not stop and instead will rise to levels previously unimaginable. This will lead to increased wealth inequality and a destruction of the fabric of society. Poverty, looting and crime will become more and more commonplace, and the U.S. will become increasingly divided socially and politically.
What Can You Do About It: The answer is simple, you must buy hard assets that are resistant to and even benefit from the money printer.
For decades, the mega-rich have been doing this by buying hundreds-of-millions-of-dollars-worth of paintings, beach front properties, gold and equities. Although this strategy has been successful, each of these asset classes suffers from one or many of the following problems: illiquidity, high barriers to entry or dilution risk.
However, there is a new emergent asset class that offers a far better protection to inflation. This asset class is bitcoin. Although critics will be quick to dismiss bitcoin as a store of value due to its volatility, this is misguided. Bitcoin has and will continue to offer the best long-term performance of any asset class. In inflationary times, you want to own assets that can’t be diluted. Bitcoin is dilution-proof money.
Ultimately, my intention is not to be overly pessimistic, but instead to inform you of a scenario that may likely be coming. With foresight and preparation, the worst of these outcomes can be avoided. Unfortunately, for decades we have been led to believe that inflation is a good thing and so many people will be unprepared. I hope you are not one of them.
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