Inflation is the most commonly cited example so we'll use it in the diagram below.
As you can see, inflation is a destroyer of wealth by corrosion.
All people rich and poor are affected. But this is easy enough to protect against if you simply buy gold investment bullion for the long-term which you will see why below.
The only good thing about inflation is that it makes existing debt cheaper (which is a story I'll save for another time).
Another way of presenting the effects of inflation is given by the global finance company PIMCO.
Why Doesn't It Seem To Be a Problem?
Inflation is caused by 2 factors.
- The primary factor is the creation of new money through the simple fact that our current money is a debt based fiat currency which is always generating new money and large events such as Quantitative Easing.
- The secondary factor is the movement of that money through the economy, known as 'velocity of money'.
Monetary amounts around the world have expanded at a massive rate, but there has been no real increase in inflation letting people fall into a state of complacency.
Furthermore, the government has been manipulating the statistics that are used as reference to identify inflation. An example is that they have deleted food price increases from inflation calculations as increases in food price are amongst the most visible to the general population.
So What's Wrong?
Currently the velocity of money is very slow and it's falling, which is why all the trillions of new US Dollars haven't hit the street yet with any meaning impact.
However, the rate of velocity oscillates (goes up and down naturally) and it is due for a turn to the upside. Normally this isn't a problem, but these aren't normal times.
Changes in direction of movement and speed have massive impact on inflation. So when the velocity starts to increase (likely to be very soon), so will inflation.
When the velocity of money starts to rise, the inflation rate will rapidly increase.
The Federal Reserve will have to combat this inflation by increasing interest rates, which they refer to as 'tighter monetary policy'. The government can't afford an increase in their debt payments (not that they can afford it at 0% either).
So the basic choices they have are:
- Let inflation rise unchecked, leading to hyper-inflation. Eventually destroying the currency.
- Increase interest rates, which will have to eventually go well beyond the 18% Volker had to do (he was a past Federal Reserve Chairman). This will collapse the financial system and force the government to default. Eventually, destroying the currency.
- Or both, by increasing interest rates and printing more money to prevent debt default - this then causes a massive feedback loop. Eventually destroying the currency.
A another impact is that the Federal Reserve will also like demand an increase of reserve requirements for the banks which they can't afford either, causing several financial institutions to implode (unless they buy gold investment bullion rather than the paper version they create).
Whatever the Federal Reserve chooses, the eventual interest & inflation rates will make you wistfully dream of the cheap days when you could buy half a Juicy Apple for $100.
So, bad news all-round then!
But you'll be laughing about it if you had the foresight to buy some gold investment bullion.