Musings Report 2018-31 8-4-18 What Can We Own that Will Survive Inflation?
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What Can We Own that Will Survive Inflation?
I'm in the middle of a series of blog posts on inflation, and why I consider its rise inevitable. As noted below in the Market Musings, high inflation (i.e. loss of the currency's purchasing power) has already destabilized many developing nations, including Venezuela, Brazil and Iran.
At this moment, inflation is considered negligible in the US, Europe, Japan, etc. As I explained in this week's blog, most of the inflation has manifested in assets such as stocks and housing. But once governments must address soaring wealth-income inequality, inflation will bleed very rapidly into the real world.
Trade wars may hasten this, as "cheap" goods from overseas may no longer be cheap, and over-capacity will finally dry up as marginal producers go bust and shutter their production.
The ultimate foundation of "cheap" goods and services is cheap energy. If energy becomes expensive, so does everything else.
The conventional forecast is for inflation to stay subdued essentially forever, based on 1) limitless cheap energy 2) technological advances that reduce costs 3) central banks repressing interest rates to near-zero.
But the imbalance between what's been promised by governments--healthcare, education, pensions, etc.--and what's generated by the economy to pay for these entitlements / obligations--is widening.
The political path of least resistance is to fill the gap with borrowed money (deficit spending) or money created out of thin air by central banks. This works splendidly until the financial buffers give way, and the system suddenly breaks.
Maybe official inflation stays near-zero for a few more years, but it's difficult for me to believe the system can follow the current trajectory with no consequences for 5 or 10 more years.
So it behooves us to ask: what can we own that will hold its value should inflation start stripmining the purchasing power of our earnings and savings?
The basic answer is scarcity: whatever is intrinsically scarce and difficult to create/mine/produce will hold its value far more than whatever can be created easily/at will, such as fiat currencies, debt, promises, etc.
Things that are transportable have intrinsic advantages over things that are immobile, as immobile assets tend to be illiquid, i.e. hard to sell when things start unraveling.
Things that produce goods/ services that are essential or in permanent demand (for example, energy, food and clean water) will hold more value than things that produce nothing or only produce non-essentials.
Gold and silver are historical hedges against inflation because they are intrinsically scarce (costly to mine) and transportable. But they don't generate income, they are solely a store of value.
Land that produces timber or food is productive, but immobile. In eras of extreme disorder, ownership or use of land might be difficult to hold.
Scarce / intrinsically useful skills are transportable, of course, and can't be stolen or expropriated like gold or land.
Although skepticism runs high, for all the obvious reasons, cryptocurrencies with hard limits on their issuance (like bitcoin) may well become desirable hedges against inflation, as they are scarce and transportable.
In other words, there is no one ideal hedge against the destruction of a currency's purchasing power. Precious metals, productive assets, skills and perhaps cryptocurrencies all offer advantages and disadvantages.
Had a resident of Venezuela transferred whatever wealth they had into these hedges--investing some in each of the four hedges, precious metals, productive assets, scarce skills and bitcoin--he or she would still possess some of their previous wealth, and perhaps even have more than they started with.
Diversification is itself a core hedging strategy. It's something to put in the back of your mind as we develop our personal/family/enterprise plans for the next decade.
Highlights of the Blog This Past Week
Here's Why Rip-Roaring Inflation Is Inevitable 8/3/18
The 21st Century Misery Index: Labor's Share of the Economy and Real-World Inflation 8/1/18
Best Thing That Happened To Me This Week
I received several letters/emails of support and praise from readers and correspondents--thank you, your encouragement is what keeps the blog alive.
Market Musings: Currency Crises and Inflation
As noted above, I'm currently focusing on the dynamics of inflation. In the US and the other countries with reserve currencies, the dynamics are based on the expansion of credit-money outpacing the expansion of goods and services. Eventually this asymmetry leaches into real-world inflation.
Trade wars can also exacerbate inflation by raising the cost of "cheap" obverseas goods.
But in developing nations, the dynamic is a currency crisis that wipes out the purchasing power of the local currency.
These nations can't "print their way to prosperity" because their currencies aren't in demand as reserve currencies like the US dollar, Japanese yen, the euro and the Chinese RMB / yuan.
As currencies devalue, the home populace experiences this as rampant inflation. Iran is the latest in a long string of nations suffering severe currency crises:
Iran's Rial Is In A Death Spiral, Again
In my view,
the core cause is the global reliance on debt to fund everything from government pensions to investments to consumer purchases.
Debt incurs interest, which eventually becomes a drag on savings, investment and spending.
This slowdown increases public demands for fiscal and monetary stimulus, in effect creating money out of thin air to pay for continued prosperity..
This mechanism works if it's used sparingly, and withdrawn once the economy has started growing organically, i.e. by increasing productivity and making productive investments that not only pay for themselves but generate a positive gain in new jobs, profits, etc.
But this requires a discipline that elites and the political class lack. So they continue to print money (or borrow it into existence) as the path of least resistance.
Eventually this expansion of new credit-money waters down the value of the currency, and people lose faith in the stability and purchasing power of the currency. Selling begets more selling, and a currency crisis gathers momentum.
Rampant inflation destroys currency, the economy and political-social stability.
From Left Field
Price Of College Increasing Almost 8 Times Faster Than Wages -- clearly, the solution is to load students with another $1 trillion in debt-- at least that's the status quo "solution"...
Life's a struggle as Venezuela inflation heads for one million per cent.
Meet the Anarchists Making Their Own Medicine:
The Four Thieves Vinegar Collective is a network of tech-fueled anarchists taking on Big Pharma with DIY medicines.
Extreme global weather is 'the face of climate change' says leading scientist
The Utility of the RussiaGate Conspiracy: New McCarthyism allows corporate media to tighten grip, Democrats to ignore their own failings
'Looks like a Ponzi scheme': China's debt mountain is growing
Carbon Ironies
Why Workers Are Losing to Capitalists: Automation and offshoring may be conspiring to reduce labor's share of income. -- these are important, but not the whole story--the system is rigged to favor capital by the way money is created and distributed to the top of the wealth-power pyramid...
Immunity and Impunity: Corruption in the State-Pharma Nexus
The Marxist and the Gamers: Reading, Fortnite, and My Students’ Identities -- long read about the impact of reading and books on young minds....
The Magical Thinking of Ecomodernism
Surrendering to Rising Seas: Coastal communities struggling to adapt to climate change are beginning to do what was once unthinkable: retreat
The Long And Winding Road (3:33) -- the original piano-only version...
"Never argue with stupid people, they will drag you down to their level and then beat you with experience." Mark Twain
Thanks for reading--
charles
