Using Inflation To Create Wealth
April 7, 2011 4 Comments
Those who learn from history, have the ability to PROFIT from it.So here is some history:
Inflations start out slowly.Governments will not openly admit to debasing the currency. They will cite other reasons for why inflation is going up. In Weimar Germany,for example, government officials and those within the finance community blamed their trade partners and foreigners for the Reichsmark depreciating. German writers and politicians at the time had said that “paper inflation was not the cause or consequence of the external depreciation of the Reichsmark. The depreciation of the Mark was held completely independent of the condition of paper circulation between 1921 and 1923″ – even though money in circulation went up 23 times within 2 years ! Prices of imported goods back then – denominated in US dollars – went up 344 times. The official view from within the government of the Weimar Republic – the chancellor, the head of finance, the head of the Reichsbank – was to blame it on the excessive burdens thrust on the German people with war reparations, the violent policy adopted by France (when France invaded and took over an entire industrial section of Germany), and they also blamed it on increases on the price of imported goods.Conversely, the view held by those outside of Germany was that the depreciation of the Reichsmark was due to the government’s huge budget deficits, which required Germany to continuously print paper money. I guess people around the world will recognize the current day parallels to this scene from history.Quite a few governments are doing something like this today.
History also shows that inflation doesn’t affect all goods and services and different classes of people in the same way.Inflation is felt most with energy and food, because they are necessities. Manufactured goods do not go up in price so much because wages do not keep up with inflation and this results in a fall in the purchasing power of wage earners who allocate an increasing proportion of their income to essentials like food and energy.Inflation however offers great opportunity for well – to – do people to better themselves.They can multiply their wealth in the early stages of inflation when the economy seems to be on steroids,store their wealth in foreign currencies and bullion and when all hell breaks loose buy properties and businesses cheap, often on loans that can be inflated away.
History repeats itself but hardly in the exact same way.Reading history is important in that it helps us quickly catch onto what is happening and grab the opportunities thrown up while taking the right precautions to avoid being wiped out .
The first principle to remember is that inflation kills savers who keep cash lying around as the currency loses its purchasing power. Secondly inflation is a boon to debtors since they need to pay back in depreciated currency. Thirdly wages do not rise as fast as inflation and so being a salaried worker is tough as inflation rises.People on fixed incomes too such as retirees on fixed pensions are in an unenviable position.Fourthly, owning businesses , especially those selling essentials , and where end prices can be bumped up to keep up with increasing prices of inputs, is a good idea.Businesses where cash is paid upfront by customers are winners.Fifthly,farms do well as food demand never collapses and agricultural produce can be priced up.Sixthly,debt – funded income producing real-estate tends to be a good buy especially if a fixed-rate loan can be negotiated.Also in times of distress governments try to pump -prime the economy by keeping the interest rates artificially low.This makes taking on loans at such times so much better.Seventhly,it’s best to put one’s money into anything that is durable and in somewhat limited supply: bullion, gemstones, art-work, good quality hand-made goods, land etc.Avoid industrial goods especially electronics.They don’t do well in case of inflation.Lastly,consider locking in the low labour charges by acquiring assets where labour costs are a larger proportion of the asset eg. grand houses.
The first thing a person needs to do to benefit from inflation is increase his/her ability to be granted loans on favourable terms .This means increasing one’s income,acquiring assets that can be offered as collateral and having a good credit report.Here is more on credit reports http://wealthymatters.com/2011/04/03/cibil-and-your-cir/ .Acquiring or building businesses is a good way to increase income to be eligible for more credit.At the same time business ownership allows a person to ensure income security in inflationary times. Storing money as cash is not a great idea in case of serious inflation.So its important to learn about and start investing in bullion,gemstones ,art and/or property etc. to keep inflation from eroding away wealth.Also it’s a good idea to maintain assets in liquid form to take advantage of irrationally low prices of unpopular assets if and when the inflation position gets totally out of hand.