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Inflation Isn’t Temporary, It’s Permanent Theft

by | Nov 22, 2021 | Money

Inflation is the one money principle you need for survival.

The topic is hotly debated right now as the US hits 6.2% inflation. If you use the pre-2020 inflation formula then you’ll get a number over 10%.

Inflation matters because it causes prices to rise. The illusion that’s happening is far deeper. Inflation is really the devaluing of a country’s currency. When you think of it like that it’s a lot more harmful than many people make out.

The devaluation of your dollars makes you get poorer.

The title of this article, which comes from money guru Steve Burns, calls it theft. I agree. You pay tax, then you pay for inflation. The rate is different for everybody and the rich can easily avoid inflation.

Inflation, the value of money, the amount of currency, what things are worth — all of it isn’t transparent. You have to be a financial expert or dig through a lot of information.

Even when you do you’ll get left confused and with more questions. Let’s dig deeper so you can better understand inflation and overcome it.

The greatest lie of the stock market

Stocks are worth $100.

Print a lot of money, stocks are now worth $200.

Tax the unrealized gain of $100 Rinse, repeat.

— Matt Huang, Sequoia Captial

Many of you are aware of the phrase “money printing. It’s where governments create money out of thin air to pay for problems, like a global health crisis. Thanks to 2020 most of you are now experts.

What Matt Huang points out in this tweet is something I’ve read at least 100 times. When trillions of dollars are created out of nowhere, it ends up in stocks. Why?

The rich know they need to outrun inflation.

Stocks going up are how they stay ahead in the race, although even that technique is being questioned now. When stocks go up and you make a gain as an investor, you pay tax. So inflating the money supply, to force people into stocks, so they end up paying capital gains tax is an interesting chain of events when you analyze it.

There is a bill in America to introduce a tax on unrealized gains. All this means is that instead of paying tax after you sell your stocks, you’ll pay tax before you’ve realized the gain.

The legislation will never get through and many believe it’s a joke. But it illustrates how bizarre the stock market many of us invest in is.

Why stocks are soaring

There’s euphoria in the streets.

The stock market is soaring and investors are roaring.

Iconic investor Paul Tudor Jones, notable client of self-help celebrity Tony Robbins, says the demand side of the US economy is $3.5 trillion greater than it would normally be because of all the money created out of thin air.

This may seem innocent. It’s not.

Jones goes on to say those trillions of dollars are “just sitting in liquid deposits that can go into stocks or crypto or real estate or can be consumed…It’s waiting to be utilized, which is why inflation will not be temporary.”

Shrinkflation equals consumer theft

Many of the consumables we buy hide inflation. Check out these examples.

Image Credit: Jessie Walczyk via Quora

The packaging changes over time to reduce how much product we get. None of us bats an eyelid. We just accept it. Again, this may seem silly. Let me join the dots for you.

The calculation used for inflation doesn’t factor shrinkflation in. So the theft from inflation looks smaller than it is.

The million-dollar question that keeps us awake at night

What’s my inflation rate, mate?

That’s what we secretly should want to know. The idea we all have the same inflation rate is stupid. Only sheep people fall for this nonsense.

A lot of why inflation sparks heated debates is because everyone spends their money differently so there’s no single inflation rate.

Your inflation may be very different than someone else’s, then people get angry that others don’t see what they see. — Morgan Housel

American Federal Reserve chairman Jerome Powell and his team are responsible for the monetary policy that speeds up or slows down US dollar inflation, the currency most of the world’s goods are denominated in.

In a recent video it became clear that Jerome used a different inflation metric to help make inflation seem less than it is. Instead of looking at the last twelve months, he focused on the last eighteen months’ consumer prices to minimize the effect of the 2020 coroni-macaroni.

Well-known investor and star of the movie “Big Short” Michael Burry got extremely pissed off with Uncle Jerome when he found this out. He went on a rant about it on Twitter.

Inflation is often thought of as a measurement of the cost of a basket of goods. The truth is it’s way more complicated. These factors are forgotten:

  • What time horizon are we using to measure prices?
  • Who’s inflation index are we using?
  • How old are you?
  • Where do you live?
  • Do you own a home?
  • Do you have financial assets?
  • Do you drive and how much gas does your car consume?

Mind-bender: inflation is deeply personal. Calculate your own inflation rate.

Inflation can make us do dumb stuff

Once you know your inflation rate it can be a blessing or a curse. I calculated my inflation rate for the last twelve months and it’s well over 20%.

When the truth about inflation is in front of your eyes, you get angry. That’s where the problem can start. To beat the rate of inflation the only solution is to invest your money.

Investing = Risk

In the old days your savings account paid a nice amount of interest and the risk of the bank rolling up your $100 bills and smoking them was low. Now the bank can’t save you from inflation.

When you’re on your own and have to invest, it’s easy to make dumb decisions or become too arrogant.

I’m guilty of this.

Inflation can easily become the trigger for us to make a series of dumb decisions that will hold us back for years, and even destroy our families.

Inflation turns owning a home on its head

Paying off your mortgage used to be a badge of honor.

Now it’s a sign that you don’t understand how money printing and asset price inflation works — Mike Alfred

When the way we value money changes, everything else changes with it. Paying off your home used to seem smart. When you calculate the benefit of doing so using inflation, things can quickly change. Getting debt for a home allows you to access leverage. Once you pay off the home you no longer have that leverage.

You may still want to pay off your home though despite inflation.

Daniel Vassallo on Twitter said it better than I can:I paid off my mortgage because I don’t need to worry about how money printing and price inflation works.”

Don’t forget: No Debt = Less Stress.

Still, money created out of thin air fogs up the price of everything, including your home. So when you think your home has gone up, it probably hasn’t — due to inflation and money printing.

The forgotten salary theft

Inflation often doesn’t lead to any increase in salary. Businesses know that the friction and discomfort to leave your job is too much, so you’ll likely stay and continue to accept a salary that isn’t adjusted for inflation.

Even if you get the typical 5% increase, with inflation at 6.2% in America, it’s useless.

You still lose.

Then if you don’t invest that money you go even further behind.

Inflation won’t ruin the US dollar

Hyperinflation is going to change everything. It’s happening — Jack Dorsey, Twitter Co-Founder

With all of this inflation talk it’s easy to get carried away. As much as I love the visionary Jack Dorsey, I completely disagree that the high inflation we’re seeing will lead the US — and other major economies that have copied them — into a world where hyperinflation takes over.

Instead, investor Willem Middelkoop calls this normal than high inflation Super Inflation. It’s more logical that we won’t see the end of the US dollar any time soon or complete mayhem in the streets, so rest easy.

Don’t let inflation talk ruin the 2020s.

All the inflation talk boils down to this

You can only fix the inflation problem when you take life into your own hands and buy financial assets. There’s now no choice.

Confident investing (like this) beats inflation

  • Know what you’re invested in. Don’t give your money to some investment firm and hope for the best. Know the assets you own. Know exactly how much.
  • Diversify. Don’t YOLO every dollar into Dogecoin or some other popular trend. Spread your money around various assets in case you’re wrong or a random event occurs that you could never predict (like 2008 or 2020).
  • Make investing a habit. Invest money every month. That way if the markets are down or up, it doesn’t matter so much. Some months you’ll get bargains, other months you’ll overpay. Nice.
  • Have an emergency fund. Don’t put all of your money into any investment. Assume an emergency will happen and have at least six months of money to pay for it.
  • Lower your expenses. Take the savings and invest them.
  • Have multiple sources of income. Risk management is key. Assume you’re going to lose your job. Start a side hustle. Make money from more than one place. Focus on increasing the number of income sources you have as you get older. It’s never too late to start.

Even if you invest your money it’s still not enough.

Your personal inflation rate is likely quite high, and stocks or bonds aren’t enough to outpace the rising prices.

The only solution is to add some volatility to your investment portfolio. The simplest way I’ve found is to add in a tiny amount of Bitcoin and Ethereum. This will increase your overall investment returns and help lower the effects of inflation further.

Bottom line: Go from relying on luck to beat inflation — to a rock-solid plan.

This article is for informational purposes only, it should not be considered financial, tax or legal advice. Consult a financial professional before making any major financial decisions.

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