A currency that rises in value over time incentivizes saving and thus investing for the long term.
The late 19th century provided a good example of this. Under the gold standard, money grew more valuable over time, thus rewarding long-term thinking and instilling that outlook in the culture at large.
Inflation has the opposite effect. It punishes saving. It forces a penalty on economic behavior that is future-oriented. That means also discouraging investment in long-term projects, which is the whole key to building a complex division of labor and causing wealth to emerge from the muck of the state of nature.
– Jeffrey Tucker, The Brownstone Institute
Inflation is more than just an index of the rate of price increases. When the state’s money, the nation’s legal tender, loses value, the people become poorer.
Last month, the head economist of the Bank of England told the British people that they “need to accept” that they are poorer. Double-digit inflation will do that to a country. British consumer prices have been steaming along at about 10% all year.
The people didn’t inflate the currency. The printing press belongs solely to the Bank of England. Nevertheless, the official, Huw Pill, said, “So somehow in the UK, someone needs to accept that they’re worse off and stop trying to maintain their real spending power by bidding up prices…”
Inflation doesn’t just make people poorer. It hollows out businesses, too.
Inflation’s Impact on Businesses
Warren Buffett told shareholders of Berkshire Hathaway last week that “the incredible period” for the U.S. economy is coming to an end. “The majority of our businesses will report lower earnings this year than last year,” Buffett said.
Buffett’s partner, Charlie Munger, told attendees to “get used to making less.”
Those wanting additional evidence of the cost of inflation in the business world need to look no further than the banking industry. Ambrose Evans-Pritchard in The Telegraph’s Economic Intelligence newsletter writes that it is a “dangerous evasion” for Washington to insist that the bank failures we have seen so far are “idiosyncratic”:
“Almost half of America’s 4,800 banks are already burning through their capital buffers. They may not have to mark all losses to market under US accounting rules but that does not make them solvent. Somebody will take those losses.
“’It’s spooky. Thousands of banks are underwater,” said Professor Amit Seru, a banking expert at Stanford University. “Let’s not pretend that this is just about Silicon Valley Bank and First Republic. A lot of the US banking system is potentially insolvent.’”
Big Banks, the Central Bank, and Inflation
Although fewer banks have failed so far than during the Great Recession, as the following chart shows, losses have already surpassed those of the earlier period and exceed a half trillion dollars.
It has clearly been a mistake for the authorities to overlook banking instability, just as it was a mistake to minimize the threat of inflation. Despite 10 consecutive interest rate hikes in a little over a year, inflation persists, running two and a half times the Federal Reserve’s target level.
It appears that it will be a similar mistake for Washington to ignore the threat that de-dollarization poses. In the first quarter, central bank gold demand was 34% higher than the previous record set 10 years ago.
Altogether, it is clear that we are at a financial inflection point. Forty years of interest rate suppression have come to a decisive end. Inflation continues at rates once unthinkable.
The New York Sun reminds us that President Richard Nixon toppled the whole post-World War II monetary system when inflation was only 4.6%, less than it is today! As U.S. debt becomes a bigger problem, foreign creditors are backing away from king dollar.
Gold to Push Higher Over Next Decade
What can one do to protect his wealth, his family, and his hopes for retirement in this time of change?
Gold will go up against the dollar for the next three, five, and ten years, says John Paulson. It will go up at a rate that will be determined by inflation and geopolitical tensions.
Paulson is a prominent hedge fund manager who made $4 billion by foreseeing the mortgage meltdown and nearly $5 billion in 2010 “primarily investing in the gold sector.”
“Gold is rising again,” says Paulson this year. “I say again because it’s been the reserve currency of the world for thousands of years, a legitimate alternative to holding the dollar or other paper currencies. There has been a significant increase in demand from central banks to replace dollars with gold, and we’re just at the beginning of that trend. Gold will go up and the dollar will go down, so you’d be better off keeping your investment reserves in gold at this point.”
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Red Rock Disclaimer
The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment or tax advice, and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.
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