Periods of excessive inflation have happened numerous times throughout U.S. history.
Gold and Silver have historically held value, even climbing during most periods of inflation.
Keeping money in a savings account during periods of high inflation actually taxes your money.
Cash generally loses value during periods of inflation.
Keep investments diverse during times of rising inflation.
Stock up on essential items that might cost more in the near future.
Supply and demand is something that mankind has tried to balance since the dawn of civilization.
Thousands of years of past economic data can be used as an amazing reference as to the type of commodities that perform well during economic downturns. After spending quite some time researching I was able to come up with 5 simple ways to protect wealth during a period of inflation.
1. Gold and Silver
The world has used gold as a form of currency in one way or another since approximately 550 b.c. As the old addage goes an ounce of gold can typically buy a tailored suit regardless of the time in history. While gold has experienced it’s own market cycles, owning some is almost always a safe bet.
2. Avoid standard saving accounts
During periods of high inflation keeping money in standard saving accounts is unfortunately not the route to go. With elementary math we can see that by “saving” your actually losing money every year. If inflation is five percent and the bank is promising two percent annual interest on a savings account, it’s easy to see that this money has had a 3 percent tax applied to it in a stelath manner.
3. Not too much cash
This one is fairly self explanatory as well. During periods of excessive inflation the purchasing power of money decreases at rates faster than wages increase. Always keep cash on hand but be mindful of the amounts.
4. Diversify Investments
Keeping diverse investments (including real estate if possible) is a good form of wealth protection regardless of the economic market. During periods of inflation the price of stocks can also rise as more money floods the market. This also protects cash from the hidden inflation tax.
5. Stock up on essentials
Once you have your financial well-being protected it might be a good time to think about stocking up on several months worth of groceries and supplies. The type of items that you would typically use anyways. Grocery and home improvement stores are usually the first place a person would actually notice inflation at the cash register.
Now you know 5 simple ways to protect yourself against periods of excessive inflation.
Having studied financial markets for several years, it’s fairly clear to me that the U.S. economy runs in boom and bust cycles. Nobody drives that point home better than famed investor Ray Dalio in his now legendary video How the economic machine works. In this presentation Dalio explains how interest rates and liquidity run in clycles. Dalio masterfully points out how the Federal Reserve attempts to balance inflation and interest rates by constantly tweaking the nations econmic knobs. This leads to boom and bust cylces in the US economy.
The time has seemingly arrived for another one of Dalio’s predictable ‘bust’ cylces so to speak. Except this time feels different, accelerated and drastic. Other factors such as a raging pandemic, trade wars and international supply chain disruptions have many Americans wondering, what if this bust cylce is the ultimate bust?
Unemployment numbers off the chart
Over the past six weeks the nation has experienced deep losses across the economic board, in what is seemingly only the beginning of the crisis. Interest rates have been slashed to near zero. The pandemic has sent unemployment numbers to heights not seen since the 1930’s, at the peak of the great depression.
At the height of the great depression America’s unemployment rate was over 25 percent
Over 17 million Americans have been laid off or lost their job since the COVID-19 pandemic/restrictions began. Last week alone 6.6 million Americans filed for unemployment benefits. April’s data is only beginning to come in, however the chart below illustrates the drastic rise in unemployment America saw in March. At this rate America’s April jobless figures will rival the heights of the worst economic crisis the nation has ever seen.
Unemployment claims are at levels never before seen in American history
One noteworthy hindrance to the overall figures is the fact that many Americans report not being able to file for unemployment benefits, becuase the lines are so overwhelmed with calls.
Similar to the 2008 recession, the early 1920’s was a time of great finacial turmoil. Industrial production had fallen by almost 30 percent. By 1921 unemployment was as high as 19 percent by some accounts.
Let the good times roll
The recession of the early 1920’s was short lived. Followed by a period of economic prosperity very similar to the 2010’s.
The mid 1920’s saw a surge in investments fueled by low interest loans and speculation. America’s stock market flew to new heights, an unprecedented boom and the roaring 1920’s was born.
Three women wearing fur lined coats getting into a convertible in the 1920’s. Photo courtesy of Hulton Archive/Getty Images.
The mid to late 1920’s are famously known as an era of excess, materialism and unprecedented financial prosperity. Money was cheap, electricity was becoming the norm in households and quality of life improved for the majority of Americans. For the first time (certainly not the last) in American history the average citizen began taking on large amounts of debt to speculate with in the stock market. From 1921 to 1929 the market grew by more than 4 times, similar to the the economic boom of the 2010’s
The exponential growth of the stock market in the 1920’s was unprecedentedThe 2010’s paint a very similar picture to the 1920’s
The Begining of the End
By 1929 many savvy investors were out of the market. Joseph Kennedy once famously said that he knew it was time to get out of the market when the shoe shine boy was giving him stock tips. The top was in and in September of 1929 the markets began to stumble. This became a self propelled downward spiral, fueled by declining wages and over-leveraged banks. A lost decade ensued, marked by bread lines that stretched for miles and an impoverished nation.
Even children helped protest. The early 1930’s were a time of great unrest in America.
Welcome to the new age
Three women standing beside a Ferrari in the 2010’s
Mark Twain once so elegantly said ‘History doesn’t repeat itself, but it often rhymes.’ Fast forward to 2019 and life is good. The stock market has grown by over three times since the 2008 financial crisis. Home prices have not only recovered but achieved new, unheralded heights, especially in densely populated suburban areas.
But under the facade of stability, similar circumstances that caused the 1929 crash were festering ever closer to the surface. By 2019 U.S. comsumer debt had reached an all-time high of over 14 trillion dollars.
Most American’s are saddled with enormous amounts of debt. Student loans, mortgage payments and car loans leave the majority of people with very little to save. Any event that jeopardizes the next paycheck risks the entire house of cards falling for the average American citizen.
The coronavirus pandemic and the ensuing lockdowns are the type of catalyst that can kick-off an economic downturn. Similar to the market crash in 1929, the brief recession after the 2001 attacks and the housing bubble in 2008. COVID-19 caught the entire planet off-guard, accelerating Dalio’s unavoidable bust cylce. Most of the world’s nations are locked down. COVID-19 is ravaging the planet as scientists and doctors scramble to find a cure. With each passing day the world’s economy slowly unravels.
Hyper Depression?
By definition a depression is characterized as
A dramatic downturn in economic activity in conjunction with a sharp fall in growth, employment, and production.
Depressions are often identified as recessions lasting longer than three years or resulting in a drop in annual GDP of at least 10 percent.
By some accounts America is already in a depression. But, by definition that’s not possible, the recent decline would have to continue for several years. However, the severity of unemployment claims, loss of GDP and historic demand at food banks already paint a bleak picture.
Economist Stephan Moore warned that if the coronavirus lockdowns are enforced past May first that the world could be heading for an economic catastrophe.
Famed Wall Street institution Goldman Sachs is predicting that the U.S. economy will shrink by 24 percent next quarter. This loss would be 2.5 times bigger than any single decline in US history. Dwarfing the 10 percent decline the nation saw in one quarter in 1958.
Humanity’s crossroads
Now that we’ve had a chance to compare today’s economic situation to the one almost 100 years ago. We can see that the risky financial habits of the past are still prevalent, as the world’s economic outlook turns dim. This creates the perfect recipe for disaster, unrest and poverty unseen in America for almost a century.
Is the world driving head-on into a depression? Nobody can predict the future. The one conclusion that can be drawn from the data we have, is that the human race stands at a crossroads. One between saftey and security. Between poverty and prosperity. Between the future and the past.
The Federal Reserve has a 2 percent inflation target annually.
2020’s stimulus package injected historic amounts of capital into the economy.
The 1970’s was a time of massive inflation in the U.S.
In the 1980’s the U.S. changed the way inflation is measured.
The U.S. has accumulated historic amounts of debt during an economic boom.
The buying power the U.S. dollar has dropped dramatically since 1938.
The Federal Reserve has a target inflation rate of 2 percent per year. They have basically been in line with that according to the official methods used to measure inflation.
In March, an unprecedented action took place when the U.S. Treasury merged with the Federal Reserve. With the help of Congress and the President, a 2 trillion dollar emergency stimulus package was rushed through to assist American people and industries. Aside from the typical pork (which I could do an entire article on) the bill did include some funding that should prove helpful to corporate America as well as most citizens. High fives all around, roll the credits? Unfortunately, it’s not quite that simple. There is a distinct probability that the amount of money being injected into the economy has unintended consequences that rival the initial crisis.
Cause and effect
Newton’s third law of motion states that: ‘For every action, there is an equal and opposite reaction.’ The way that the Federal Reserve creates untold sums of money is by going to the bond market, buying bonds then crediting the sellers account. This ‘action’ creates money out of thin air, but too much ‘helicopter money’ causes the price of goods to rise at a rate far faster than wages. This ‘reaction’ creates an increase in poverty, a decrease in quality of life and a financial contraction that ripples across the world.
Too many Tulips
In the 1600’s the Dutch began using tulip bulbs as a form of currency. At the time this was thought to be a good idea. Counterfeiting was near impossible and inflation was controlled because each bulb can only replicate so fast.
Chart illustrating the the value of Tulips in the 1600’s
The chart above shows that the bulbs rapidly lost value after several years of exponential growth. Eventually the Tulips were basically worthless as currency, too many were in circulation. This rapidly inflated the cost of goods and services for the average Dutch citizen.
More recent examples
In the 1970’s several factors led to double digit inflation at times. The nation was facing an energy crisis, on several fronts. President Nixon unpegged the dollar from gold in 1971, when the U.S. halted the exchange of US dollars for gold from foreign countries. The FED then printed large sums sums of this new fiat money which led to substantial inflation, high unemployment and a reduced quality of life.
The U.S. Misery Index in the 1970’s illistrates rising inflation and unemployment
It wasn’t until the late 70’s that interest rates finally began to rise. This was followed by a brief but sharp recession in the early 80’s. Unemployment briefly hit 11 percent before the economy finally stabilized and settled around 5 percent by 1987.
By the 1980’s the U.S. standard of living was on the rise.
How did we get where we are today?
In the 2000’s several socioeconomic situations arose and the FED again purchased large sums of bonds. The 700 billion dollar bailout and ensuing rounds of ‘quantitative easing’ created a financial boom that has been called the ‘greatest economy in history.’ This ‘action’ caused a ‘reaction’, the Herculean debt of today.
Chart illustrating U.S. debt before the 2020 crisis
2020 has been a crisis filled year for America’s economy. The FED finds itself buying historic amounts of debt and by their own account the liquidity currently being provided is ‘unlimited.’ At this points it’s clear that money is being pumped into the US economy at unprecedented levels, to prop the markets and people back up.
What could happen in the future?
With past examples it’s easier to see what can happen when excess amounts of capital is pumped into the market. Unfortunately, the good times cannot roll forever. If we look at the chart below we can see how the creating of money has accelerated at a rapid rate from 1960 to 2010.
Creating trillions of dollars in credit will in theory improve the financial outlook for the U.S. economy, especially in the short term. Jumpstarting money velocity is very important for the world’s economic gears to turn. The process has been repeated quite successfully for decades now.
US debt to GDP chart projected to 2029
The fatigue and stress of this process has resulted in America being trillions of dollars of debt. The U.S. economy has been in the longest bull market in the nation’s history and the national debt has rose to unprecedented levels during that time. What will this debt look like when world’s economy takes a substantial downturn?
Chart illustrating the actual inflation rate in the U.S.
Image displaying the loss of purchasing power of the dollar over the past 82 years
The U.S. is creating untold trillions of dollars what prevents the nation from hyper-inflating like Venezuela? One factor that is often overlooked in the big picture is that oil is traded predominantly in U.S. dollars on the world market. This fact alone creates demand for the dollar, making it a desired commodity for most of the planet. Hyperinflation? Probably not, but the above chart eloquently demonstrates what current monetary policy has done to the purchasing power of the dollar and I expect the trend to continue.
From 1792 to 1932 the U.S. dollar was pegged to gold.
For 140 years gold was stable at about $20 an ounce.
Executive order 6102 made gold owenrship illegal in 1933
In 1974 gold was once again a legal commodity.
The median annual salary in2020 will buy 5 more ounces of gold than in 1932.
Gold is the first commodity many investor’s transition too in modern periods of economic turmoil. This finanacial waltz is akin to assets being shuffled in and out of a deck depending on the sentiment of the moment. But buying physical gold has not always been legal in the United States.
How has financial policy affected the cost of gold in dollars over the past two century’s? Let’s have a look at the good, the bad and the ugly of the pair’s complicated history.
1792-1932: Ratio $20 for 1 ounce
In 1792 the first U.S. Secretary of Treasury Alexander Hamilton set the price of the dollar at 1/20 an ounce of gold. This set the initial gold standard in the United States. Over the next 140 years the price of gold remained remarkable steady. and Up until 1933 the price remained $20 per ounce.
1933-1974: Ratio $35 for 1 ounce
On April 5, 1933 President Franklin D Roosevelt signed executive order 6102. This order essentially outlawed the owenrship of gold in America. The effects of this act are debatable but the reason given at the time was to stop the outflow of gold from banks and stimulate the economy.
From 1934 to 1970 America tried to keep the price of gold at around $35 per ounce. If the cost started to rise to much the treasury would sell gold, the price dropped and they bought. This balance was kept until 1970 when the price of gold began to rise substantially versus the dollar.
2020: Ratio $1735 for 1 ounce
On December 31, 1974 President Gerald Ford repealed executive order 6102. The order stood for almost 41 years. During that time watching the price of gold was less entertaining than watching paint dry. Since 1974 the cost of an ounce of gold has grown exponentially. The chart below beautifully displays what happened when the free market is allowed to participate in the price discovery of gold.
*The average cost of an ounce of gold in U.S. dollars since 1792.
Gold wins?
If the data stopped there then yes gold would win hands down. But let’s complete this investigation by comparing the price of gold to median income over the years. By dividing the cost of gold by average income from various years we can see what the actual cost of gold is.
*Chart displaying how many ounces of gold the median income will purchase from 1932 until today.
The above chart is a compelling piece of data. As we can see that since gold has decoupled from the dollar the value vs the dollar has actually fluctuated like all commodities in a capitalistic society tend to do. If the average person took a years salary and bought gold he would recieve about 5 more ounces of gold today than he would have in 1932.
Conclusion
When accounting for wage inflation the dollar is stronger today versus gold than it was in 1932. However, gold has been an excellent investment and has more than held it’s own since 1974 when compared to other commodities.
*All historic price data for gold in this article was aquired from onlygold.com. All income data used in the above charts is from infoplease.com
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