I got very concerned last week.
By now I’m sure you know all about the conflict in the Middle East… and that the US government has gotten involved.
I’m not here to comment on the politics of it all, other than to say that there’s nothing more stupid than war. Like governments and bureaucracy, it’s a relic of the Bronze Age. We’ll need to put it in our past if we wish to build a civilization geared towards human thriving.
That said, war is a major threat to our economy and our finances.
Some of these threats are obvious. Potential supply chain issues and rising oil prices are easy to anticipate.
But the biggest threat is hidden in the shadows… and they will never be honest about it.
That threat is inflation.
I know we’ve all had to grapple with consumer price inflation over the last few years.
Homes, rent, cars, groceries, and household goods have all skyrocketed in price. It’s nearly impossible for a family to get out of the grocery store without spending over $100 these days.
As bad as these rising prices are, that’s not what we’re talking about when we talk about inflation. Rising prices are just the symptom. And they mask even deeper structural problems.
Inflation is the act of expanding the money supply. Said more directly, inflation is the act of creating money from thin air. It’s the act of printing money. And this is the only way that governments can pay for wars.
Inflation destroys the purchasing power of the currency unit being inflated—dollars, in this case.
That’s why we see consumer prices rise. It’s not because things are getting more expensive to produce and distribute. They aren’t. Those costs tend to go down over time.
Instead, inflation causes the currency to constantly “leak” value. When our grocery bill goes up, what we’re really seeing is that our dollars buy less than they used to.
And the impact inflation has on our economy and thus civil society is even more insidious than this.
Inflation makes it impossible for individuals and businesses to plan with certainty. I’ll give you a few examples of this…
Let’s suppose somebody named Billy makes $100,000 a year.
Because Billy is wise, he has a robust investment plan in place. Billy is going to save 50% of his income and direct it into specific investments over the next five years. He calculates that this will put him in a bulletproof financial position.
The problem is, Billy is treating his $100,000 annual income as if it is static. As if that $100,000 is a strict measurement of value.
But it’s not. That $100,000 will buy less and less every single year – because the purchasing power of the dollar is being destroyed by inflation.
The dollar is currently losing well over 10% of its value each year. And with the US government seemingly content to support multiple wars on multiple fronts, we can expect the dollar’s fall in value to accelerate. This does two things to Billy…
First, it makes his $100,000 income worth less and less. He’ll see this as his cost of living rises up to consume a greater portion of his income each year. And that will make it harder for him to save his target 50%.
Second, Billy’s investments will need to increase in value equal to the rate at which the dollar is losing purchasing power just for Billy to maintain his current financial position.
Said another way, if Billy’s investments don’t appreciate faster than the inflation rate, he’s actually losing net worth in real terms… even if investments aren’t going down in nominal terms.
Now take this same dynamic and let’s apply it to an enterprise looking to make a strategic investment in the US. It could be anything. Maybe it’s a nuclear power plant. Maybe it’s a semiconductor fab.
Whatever it is, the enterprise must invest a huge sum of money up front to get the new operation going. And to do this, management must be confident that the new operation will make enough money over the next 20 or 30 years to justify the investment.
Well, if the US government ramps up inflation to fight multiple wars, that makes this kind of cost-benefit analysis impossible to do. Because there’s no constant.
Our measuring stick – the dollar – is constantly leaking value. So how can any enterprise possibly know which investments will pay over a 20 to 30 year period and which won’t?
We could explore this dynamic all day long, but I think you get the point.
Inflation destroys the dollar, which in turn hollows out the middle class and reduces the capital investment we need to drive economic activity and maintain our infrastructure. This is the recipe for eroding civil society… and we’re seeing plenty of evidence that it’s all happening right now.
Fortunately, we do have a solution at the individual level. We can structure our finances such that we make inflation work for us, not against us.
And that’s exactly what we do in our Finance for Freedom program. We first identify the threats, then we mitigate them… then we leverage them.
For more information, just go here: Bulletproof Your Money
-Joe Withrow