Inflation Kills Wages

First, how does this inflation thing work?

Inflation is the decrease in the purchasing power of a currency (the dollar here in the good-ol- U.S. of A). How does it usually play out?

Currently interest rates, set by the Federal Reserve are unnaturally low to keep the economy afloat – hovering around 0%. But this coupled with the trillions of dollars recently pumped into the economy may soon spell rapid inflation – same amount of goods in circulation, a lot more cash, and prices mysteriously begin to rise (because that $buck$ is inherently worth less).

In order to offset this large increase in money supply consumer prices will inevitably rise, and when they do the Federal Reserve will most likely increase interest rates to put the reigns on inflation. The increase in interest rates will almost immediately bring down the value of bonds you own. Current or new bonds will look better compared to your current portfolio or even your shares of common stocks, making them too look less attractive.

Investors like yourself have already started looking for and getting into securities whose goal is inflation protection, and that has already propped up their prices. Unfortunately this can have an adverse affect as this fear shifts many investors into ever increasing hedges that then become overvalued themselves. If enough people get into any particular vehicle, it becomes over stuffed with a mini bubble and eventually isn’t worth the terrific premium you have to pay.

Commodities: Profiting from rising costs

MMMM Coffee

Again, inflation is the decrease in the purchasing power of a dollar, or whatever currency you happen to have in your country. So a cup of joe that once cost $1 every morning, now costs $2. One key point, prices AREN’T higher! Most people see this situation not as a decrease in the value of the dollar they are handing to their barista, but instead as a terrible, vicious increase in prices. Although this argument is somewhat based on semantics, it is only through understanding how inflation works, and how to avoid it, that you truly realize, your coffee doesn’t cost more, your paper bill just has less power.

With that said as these prices mysteriously seem to rise, one way to hedge your self again inflation is by getting into things that intrinsically rise with the prices. They can go down, but typically don’t because of scarcity. For example Between 1973 and 1981, when inflation averaged 9%, the Goldman Sachs Commodity Index, which tracks oil, metals and food futures, averaged a 13% annual return. During the last half decade (of which I’m sure all too many of you had your 401k’s and portfolio’s slashed by double digit percentages) commodity-based mutual funds have gained an annual average of 30%.

What Are Commmodities?

Commodities, explained by Wikipedia are: “some good for which there is demand, but which is supplied without qualitative differentiation across a market.”

Commodity Examples:

• Oil
• Coal
• Salt
• Sugar
• … AND GOLD!!!!

Moral of the story is, by doubling the U.S. money supply IN LESS THAN A YEAR, the fed has severly increased the chances of inflation in order to prop up the failing credit-based economy in the United States. This may soon spell rapid inflation so you need to protect yourself!