Board Highlights
Topic List Post New Topic


Rap Sheet


Perry Rod




09/17/14 at 8:01 PM CDT










Watch Out For Real Inflation

Today, the United States Federal Reserve decided to continue its strategy of aggressive money printing, now in its sixth year after the market meltdown. At that time, Bank of America dropped under four dollars a share. The government today notes that inflation is low and under control. But here's the fundamental economic reality from the perspective of a market professional (or, more sincerely, as someone who spends a lot of time on a laptop in his underwear):

The value of cash has been going down by an average of about 7% per year. Compounded over time, seven percent is a surprisingly large number.

Here's the analysis:
In 55 years, the total money supply rose roughly 39X; Gold rose roughly 37X; S&P rose roughly 36X; Oil rose roughly 33X
In 20 years, the total money supply rose roughly 3.5X; Gold rose roughly 3.5X; S&P rose roughly 4.5X; Oil rose roughly 6X

These numbers are relatively close and average out to around a 7% compound annual increase in the price of gold, which mimics the overall money supply. But the S&P number does not account for dividend yields of around 2-3% in those time periods, meaning that the market has outperformed gold and taken a higher portion of the increasing money supply. That of course suggests the rich are getting richer, but you already knew that. Perhaps these outperforming companies are creating efficiencies over time that have lessened the costs of many basic goods and services for the middle class, creating a lower (and somewhat misleading) compound annual inflation number of about 3-4%. But the bottom line is not 3-4%, it's a 7% increase in the money supply (and gold).

So here's the deal: if your cash doesn't rise 7% a year on average, you are actually losing money, relative to the overall economy. That's the way it works, and it's pretty frightening to consider how few people are anywhere near that rate of return on their annual investments. It means that more cash will be concentrated in fewer hands, until the government is forced to step in. In any case, the lesson is that cash is meant to be used, not stored away.

Copyright 2014 All Rights Reserved; Patent Pending