INFLATION STRATEGY PART DOS
In 1929 we had less than $1 Billion in circulation in the US because we were tied to the gold standard. This meant we could not print dollar bills and pretend it was money. Each $20 of US paper money was backed by an ounce of gold from 1833 when the standard was set and that relationship was unchanged until 1930. From 1930 until 1970 our government gradually weaned us from the gold standard by increasing the exchange rate to $35 an ounce and thereby artificially increased the number of dollars in the economy to about $10 billion. In 1971, after years of over-spending on the Vietnam War and The Great Society, Nixon took us off the gold standard. By 2000, in just 30 years, the government added $990 billion to the money supply. By 2008, after the 9/11 shock, a severe stock market drop and the recession of 2001-2003, the money supply dropped and then rebounded to $1000 billion. Since then, in one year, the Bush and Obama governments have doubled the money supply to $2000 billion. In one year they added more dollars to the economy than in the previous 30 years of inflationary spending.
This money was printed. It wasn’t earned by inventions that save labor and materials. It was printed and tossed into the economy. The impact hasn’t hit yet but it will. As lending opens up, there will be more demand for products and more demand for higher wages. You can not have a free lunch. If all you had to do to become a wealthier nation was to print money, Zimbabwe would rule the earth. They printed billion dollar bills. And now it takes $30 billion to buy a loaf of bread. That is the impact of inflating the currency. Eventually the money becomes worthless.
So what do you invest in when that happens? You invest in things that are necessities and things that can raise price as their costs of labor and materials rise. For example, food is a necessity. The cost to grow food depends on the price of oil because farmers use oil-based fertilizers and drive big tractors that burn a lot of diesel. Oil is being consumed at a rate that is depleting the remaining reserves at 7% per year. Without a big oil field discovery, in ten years there will be half the oil there is now. Can you imagine where oil prices will be and thus food prices?
Oil. Food. Farmland. Mining operations. Railroads. Coal. Anything that can raise its prices as its costs go up. For example, Burlington Northern railroad has a near monopoly on moving coal from the west to the east. It will raise its shipping rates as union wages and diesel fuel costs rise and the shippers will pay it because they have to have electricity and coal is the fuel for energy plants. Farmland will rise in price as commodity prices rise.
And what about gold? I’ll write more about that next. And how to find the right investments for these categories. Oh, and whether you should be buying companies in the US or in China while all this is going on.
Now go play says Phil Town.
