How to Protect Your Purchasing Power
I hope you have a fabulous Tuesday, despite the monetary shenanigans of the Fed.
Let’s get to today’s main idea: protecting your purchasing power.
The Fed Will Almost Certainly Mistime the End of the Party
I’ve always admired people who knew exactly when to leave a party. Their poise, maturity, and calm are worthy of admiration and emulation.
I never mastered that skill. Instead, I took immense but misplaced pride in closing down a bar. In my twenties, I mistook the pub for a depository institution. Unfortunately, the world’s de facto central bank feels the same way I do.
From Kevin Warsh, former Fed governor, in the WSJ:
The Federal Reserve announced a new policy doctrine almost a year ago. In essence, the Fed said it would no longer consider lags when making monetary policy, forsaking the policy of “pre-emption” that was standard under Fed heads Paul Volcker, Alan Greenspan, Ben Bernanke, and Janet Yellen. Jerome Powell’s Fed believes the party is just getting started and won’t remove the punch bowl until the fun is in full swing and the neighbors know it. Most in Washington can barely contain their enthusiasm for the new doctrine. Wall Street loves it too.
I hate to be an old so-and-so, but anything Wall Street and Washington are enthusiastic for should have you reaching to check your wallet.
There’s nothing in Warsh’s passage that should put you at ease. Far from it, this is the canary in the coal mine; the time to start planning for higher prices in unexpected, and some expected, places.
Mises Knew All About It – And Wrote It Down!
But before we do that, one great economist, Ludwig von Mises, not only saw it with his own eyes but wrote all about it to help us understand what’s going on and how to deal with it.
Here’s Mises writing in Interventionism:
The social consequences of inflation are twofold: (1) the meaning of all deferred payments is altered to the advantage of the debtors and to the disadvantage of the creditors, or (2) the price changes do not occur simultaneously nor to the same extent for all individual commodities and services. Therefore, as long as the inflation has not exerted its full effects on prices and wages there are groups in the community which gain, and groups which lose. Those gain who are in a position to sell the goods and services they are offering at higher prices, while they are still paying the old low prices for the goods and services they are buying. On the other hand, those lose who have to pay higher prices, while still receiving lower prices for their own products and services. If, for instance, the government increases the quantity of money in order to pay for armaments, the entrepreneurs and workers of the munitions industries will be the first to realize inflationary gains. Other groups will suffer from the rising prices until the prices for their products and services go up as well. It is on this time-lag between the changes in the prices of various commodities and services that the import-discouraging and export-promoting effect of the lowering of the purchasing power of the domestic money is based.
Here’s the issue – why price inflation is difficult to stop:
Because the effects which the inflationists seek by inflation are of a temporary nature only, there can never be enough inflation from the inflationist point of view. Once the quantity of money ceases to increase, the groups who were reaping gains during the inflation lose their privileged position. They may keep the gains they realized during the inflation but they cannot make any further gains. The gradual rise of the prices of goods which they previously were buying at comparatively low prices now impairs their position because as sellers they cannot expect prices to rise further. The clamor for inflation will therefore persist.
That’s right. The powers that be don’t want price inflation to stop because they lose their easy gains. Think how today’s stock market tanks whenever there’s talk of tapering. That’s now ingrained as a “taper tantrum.”
But on the other hand inflation cannot continue indefinitely. As soon as the public realizes that the government does not intend to stop inflation, that the quantity of money will continue to increase with no end in sight, and that consequently the money prices of all goods and services will continue to soar with no possibility of stopping them, everybody will tend to buy as much as possible and to keep his ready cash at a minimum. The keeping of cash under such conditions involves not only the costs usually called interest, but also considerable losses due to the decrease in the money’s purchasing power. The advantages of holding cash must be bought at sacrifices which appear so high that everybody restricts more and more his ready cash. During the great inflations of World War I, this development was termed “a flight to commodities” and the “crack-up boom.” The monetary system is then bound to collapse; a panic ensues; it ends in a complete devaluation of money. Barter is substituted or a new kind of money is resorted to. Examples are the Continental Currency in 1781, the French Assignats in 1796, and the German Mark in 1923.
“It’s not worth a Continental.” It’s an idiom that came into being thanks to the Continental Congress blowing up their currency. Have a read of International Man’s list of defunct currencies. It’s great history.
I’d also encourage you to read Mises’s entire passage from which I liberally quoted in today’s piece.
A Quick Review of the Monetary System Breakdown
The point of it all is this: there’s nothing new under the sun. It’s all happened before.
Let’s sum it up quickly:
- Central banks print money, causing monetary inflation.
- Debtors are advantaged, creditors disadvantaged.
- Price inflation happens, but unevenly.
- Debtors (students, spendthrifts, and struggling households) and benefiting asset owners (stockholders and homeowners) want the price inflation to continue.
- Creditors (bondholders) want it to stop.
- The purchasing power of currency is reduced.
- Debtors and asset owners require more inflation.
- The general public realizes the game.
- The minimum amount of cash is held.
- The monetary system collapses.
- Money devalued.
- Barter or a new kind of money (Bitcoin?) is resorted to.
What to Do About It
To be sure, it isn’t a pretty picture. So what do you do?
- Own real estate. You may as well buy a house if you haven’t already. Real estate will surely appreciate, in the right spots of course, over the next few years.
- Own commodities. Whether it’s gold, silver, copper, or a few other choice commodities, they’re a safe bet.
- Own stock. The SPX will continue north until the endgame. So owning stock is a smart bet.
- Own crypto. Bitcoin was actually designed for this mess. If you’re scared to jump into it, learn about it. Gather as much information as you can. Right now, it’s going down in value. This buys you valuable time for the next bull run.
- Own art. If you’re hoity-toity, buy art. It’s one of the great ways to preserve value while making your home a nicer place.
What don’t you do:
- Own bonds. This is the active way to burn off all your purchasing power. Bonds are dead.
- Own cash. This is the passive way to lose your purchasing power. Doing nothing, in this case, is almost certainly worse than doing something.
Remember, this is the intentional destruction of a currency, courtesy of a central bank. Soon, it’ll be unintentional destruction. That will happen when Jay Powell realizes he’s lost control of the situation.
You’ve got time. Take care of yourself. Examine your options and choose the best one. Then, invest wisely. This is a matter of your life and your family’s well-being. It deserves your utmost attention.
All the best,