Inflation is one of the most misunderstood economic concepts in the history of mankind. It’s been used to devestate entire classes of people, and reward the politically connected with small fortunes. It’s been used to rob entire generations of their dreams — without the victims even realizing it.
Sadly, this isn’t based on anything more than basic economic illiteracy. Even before the US dollar stopped being backed by gold, economists from the Austrian School of Economics understood how inflation worked, and warned people of how it worked — which I’ll explain below.
Secret 1: Inflation Doesn’t Destroy Money.
It’s a widely held myth that inflation is when wealth is destroyed — it’s not. Inflation is when money is transfered from cash to some other asset. It’s when the currency becomes worth less, but some asset will become inflated more than the rest of the market — this is how most mega bubbles are created.
For example, the Federal Reserve in the US created inflation throughout the 90s in order to encourage mortgage lending and other easy credit — this led to the dollar getting slowly worth less and less, but caused the real estate bubble. The same can be seen for almost every bubble in the last 50 years.
Right now, commodities are skyrocketing — including oil, gold, and silver — because the government is making more and more money. That’s how inflation works.
This means if you know where the government is going to dump new money, you don’t get hurt by inflation, you actually make money from inflation. That’s why the politically connected rich are getting much, much richer — even though the dollar is getting wiped out.
Instead of seeing inflation just as an attack on your portfolio, see it also as an opportunity — it’s a government forced bubble in some market somewhere. Understanding this is the first step to understanding how to turn inflation into profit.
This is why many contrarians are saying that we’re in the greatest transfer of wealth in the history of humanity — trillions of dollars are being transferred from the middle class to the politically connected and the economically literate.
Note that I didn’t say that the rich are getting richer — some are getting wiped out. It’s not as simple as that — but some rich certainly are getting richer throughout all of this.
Secret 2: Inflation Is Hit and Miss.
The above goes hand and hand with this principle, and that is that inflation isn’t uniform. All prices don’t go up about the same amount. Whenever inflation is hitting on sector of the economy, you can almost be certain that another sector isn’t getting hit.
“Any increase in the money supply not offset by an increase in money demand will lead to an increase in prices. But prices do not adjust instantaneously throughout the economy. Some price adjustments occur faster than others, which means that relative prices change.”
This means that some prices rise while others don’t. In other words, even though inflation is only 3% right now according to the government, the prices making that 3% go up are soaring food and energy prices. So sure, inflation is only up a little — but your budget is getting wiped out.
This explains why so many people are running out of money and are turning to credit cards right now. That’s scary. That means inflation is forcing people to go into debt, making the politically connected banks even more rich for years and years into the future.
In the end, these two principles of inflation are absolutely essential to understanding how the government manipulates the market to destroy some people while rewarding others. In a few days, I’ll be describing an investment strategy that will explain how this works and how you can actually adhere to an investing strategy that makes the best of it all. If you haven’t subscribed yet, do so here.
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