Did You Ever Think You Could MAKE Money From Inflation?
After 1971, the U.S. dollar was no longer money, but rather a currency. As a consequence, savers became losers. The U.S. government was allowed to print money faster than it could be saved. Inflation and deflation are caused by governments and banks attempting to control the economy by printing and lending money out of thin air—that is, without anything of value backing the money other than the “full faith and credit” of the United States.
Take a moment to think about how much inflation has affected your life. You may recall that not too long ago people began flipping houses because prices were going up so rapidly. During that same period, the prices of gasoline, a college education, food, clothing, and more were climbing steadily—but incomes weren’t. Many people did not save because it was smarter to spend today rather than pay more tomorrow.
This Was Inflation In Action
It is important to understand that taxes, debt, inflation, and retirement are kept alive by the Federal Reserve System’s license to print money. Prior to the Federal Reserve, Americans paid very little in taxes, there was neither national debt nor much personal debt, there was very little inflation, and people did not worry about retirement because money and savings retained their value.
Inflation is caused by the Federal Reserve and the U.S. Treasury borrowing money or printing money to pay the government’s bills. That’s why inflation is often called the “silent tax.” Inflation makes the rich richer, but it makes the cost of living more expensive for the poor and the middle class. This is because those who print money receive the most benefit. They can purchase the goods and services they desire with the new money before it dilutes the existing money pool. They reap all of the benefits and none of the consequences. All the while, the poor and the middle-class watch as their buck gets stretched thinner and thinner.
A Government-Sponsored Cash Heist
When the Federal Reserve was created in 1913, a deal was cut between the bank and the U.S. Treasury—a government-sponsored cash heist. Without a solid understanding of history and how money is created, true financial education is not possible. To simply say to a child, “Get a job, save money, buy a house, and invest for the long term in a well-diversified portfolio of stocks, bonds, and mutual funds” is a script right out of the central banker’s operating manual. It is a success myth propagated by the super-rich.
When people wonder why the gap between the rich and everyone else is growing, some of the blame can be placed on our banks, the fractional reserve system, and of course, the lack of investing in our schools… schools that actually encourage students to save money.
Inflation Makes People Poorer
Now, to some, inflation is bad news because they don’t know how to use inflation to get richer. So, instead, inflation makes them poorer. For instance, employees are hurt by inflation because they can only sell their time, and time generally does not hedge against inflation well. Raises, if they come at all, generally come on an annual basis after inflation—not with it. And as I shared below, now they’re only coming for those who are highly-skilled and hard to replace (for now).
Additionally, people who are deep in credit card debt or who have interest ARM loans are hurt by inflation because the Fed generally raises interest rates to combat inflation. Much bad debt is based on adjustable interest rates that go up during times of inflation, making debt payments more expensive.
Finally, people who play by the old rules of money are hurt by inflation because they believe it is wise and prudent to save money in the bank. But the bank is smart, not dumb. And the bank plays by the new rules of money. They pay interest on money that doesn’t keep up with inflation. Money loses purchasing power as the bank uses your money to make more money.
No matter where you turn, things look grim for the middle-class worker. But rather than focus on the negative, I want to share what my rich dad taught me about how to thrive in an economy with inflation.
Using Inflation To Get Richer
I use a very simple formula to get richer from inflation: leverage and hedging.
I play the bank’s game. I borrow money from the bank at a fixed rate, buy a cash-flowing asset that covers the debt payment and using less of my own money to increase my return on investment.
In an inflationary economy, if the debt payment is fixed, it becomes less of a cost as the dollar loses purchasing power and my investments and income grow.
The reason my investments and income growth is because I purchase assets that hedge against inflation. For instance, in inflationary economies, rents generally rise. When I purchase an investment property, the debt payment stays the same while my rents rise due to inflation. This creates more cash flow. I owe the bank only the agreed payment. The rising costs for rent flow straight into my pocket.
The same thing happens for businesses. As the cost of goods rises for consumers, businesses can adjust their pricing and benefit from inflation.
This works because business owners and investors aren’t selling time. They’re selling a product that hedges against inflation. They are in control. Employees aren’t in control of their product—time—nor are they in control of their money (the bank or mutual fund is).
One other thing I do to hedge against inflation is to invest in commodities. Recently that has been energy products like oil, a great investment when there is inflation. Not great when there’s deflation.
Therefore, while I believe they are good investments for me, they’re not good investments for everyone—especially people who are still learning about the economy and investing who may not be able to react quickly to changing economic conditions.
At the end of the day, what I’ve been preaching all along—invest for cash flow—is the safest and soundest strategy that will serve you well in an inflationary economy. It’s a sure way to grow richer.
Editor, Rich Dad Poor Dad Daily