Few readers of this column were alive before the 1914 creation of the Federal Reserve Bank. In the three and a half decades preceding that event, the purchasing power of the dollar had actually increased. Since the Fed started minding the store, though, it has been an almost non-stop ride to a greater than 95% decline in the value of America’s currency.
The Great Depression of the 1930s briefly triggered some deflationary action. President Roosevelt made sure that didn’t continue when he abandoned the gold standard in 1933. Executive Order #6102, A.K.A. the Gold Confiscation Act, made it illegal for normal citizens to hold gold.
gold-confiscation-act-of-1933
President Nixon closed the door on silver and gold-backed currency in 1971. Dollar bills stopped carrying the label "silver certificates" and started bearing the term "Federal Reserve Notes."
Why does our Federal Reserve Bank want inflation when it destroys the true value of the U.S. dollar? Inflation benefits debtors. They can pay back borrowed money with lower-valued paper. Who is the largest debtor in the history of the world? Our government is, with almost $17 trillion in debt plus incalculable trillions in unfunded promises for Social Security, Medicare and pension obligations.
The officially remaining buying power of those pre-Fed dollars is overstated. After the double-digit inflation of the late 1970s – early 1980s our Bureau of Labor Statistics (BLS) changed the rules used in calculating the Consumer Price Index (CPI).
These changes worked to lower the reported inflation rate. Hoodwinked citizens sometimes actually feel better being lied to. Politicians smile as they save billions in cost of living adjustments (COLA) that would otherwise have been due to workers and retirees.
What does all this mean for investors today?
Most obviously, don’t buy or hold TIPS, the Treasury Department’s version of inflation-protected bonds. The interest rates earned on these key off the less-than-trustworthy CPI data, always skewed to understate true inflation. TIPS have failed to accomplish their stated goal. TIPS’ ability to offset loss of purchasing power is an illusion.
Cash remains a necessary evil. We need it to pay bills and taxes. There is no suitable substitute except for barter. Keep one to two years of money liquid simply to deal with day-to-day requirements even though it will gradually lose purchasing power.
Inflation favors borrowers at the expense of savers. Bernanke’s Zero Interest Rate Policies (ZIRP) and his push for higher prices have removed any chance to profit from delayed consumption. Bank CDs and fixed income bonds are virtually guaranteed to be huge losers over the long term when measured in future buying power.
History tells us that the only real hope to preserve wealth will come from owning real, income-producing assets. That would includes rental real estate and profitable businesses that have the pricing power to pass along the effects of a weakening currency.
Unless you personally own a company that meets this standard, stocks represent the best way to play. Equities are liquid, often pay dividends and can adjust to future conditions. No matter what befalls our nation people will still need to get up, go to work, eat, seek shelter and even be entertained.
Present-day Japan gives us a clue to what happens when government officials set out to undermine their own currency. Last November’s election was won on exactly that platform. Over the 12-months through mid-July Japanese savers saw the Yen drop by 21.07% against the dollar and most other currencies. Everything imported into Japan now costs much more.
Smart savers got their money out of Yen and into stocks, which could be marked up as the fiat-based currency was marked down. Citizens couldn’t stop the actions of insane politicians. They could take steps to protect their life savings.
Over that same time period the Nikkei-225 index rose more than 70%. Those who were unwilling to "take stock market risk" were hurt badly. Owners of equities are actually ahead of the game.
American equity markets have been hitting new records even as QE programs are diluting away the value of the U.S. dollar. When the SHTF for real here at home you will want to be holding appreciating assets, not fiat-based garbage.
Hold some emergency cash. Avoid any fixed income but very ultra-short term bonds or CDs. Buy stocks. Prepare for a wild ride.
See my ideas on value investing here http://marketshadows.com/value-investing
The Great Depression of the 1930s briefly triggered some deflationary action. President Roosevelt made sure that didn’t continue when he abandoned the gold standard in 1933. Executive Order #6102, A.K.A. the Gold Confiscation Act, made it illegal for normal citizens to hold gold.
gold-confiscation-act-of-1933
President Nixon closed the door on silver and gold-backed currency in 1971. Dollar bills stopped carrying the label "silver certificates" and started bearing the term "Federal Reserve Notes."
Why does our Federal Reserve Bank want inflation when it destroys the true value of the U.S. dollar? Inflation benefits debtors. They can pay back borrowed money with lower-valued paper. Who is the largest debtor in the history of the world? Our government is, with almost $17 trillion in debt plus incalculable trillions in unfunded promises for Social Security, Medicare and pension obligations.
The officially remaining buying power of those pre-Fed dollars is overstated. After the double-digit inflation of the late 1970s – early 1980s our Bureau of Labor Statistics (BLS) changed the rules used in calculating the Consumer Price Index (CPI).
These changes worked to lower the reported inflation rate. Hoodwinked citizens sometimes actually feel better being lied to. Politicians smile as they save billions in cost of living adjustments (COLA) that would otherwise have been due to workers and retirees.
What does all this mean for investors today?
Most obviously, don’t buy or hold TIPS, the Treasury Department’s version of inflation-protected bonds. The interest rates earned on these key off the less-than-trustworthy CPI data, always skewed to understate true inflation. TIPS have failed to accomplish their stated goal. TIPS’ ability to offset loss of purchasing power is an illusion.
Cash remains a necessary evil. We need it to pay bills and taxes. There is no suitable substitute except for barter. Keep one to two years of money liquid simply to deal with day-to-day requirements even though it will gradually lose purchasing power.
Inflation favors borrowers at the expense of savers. Bernanke’s Zero Interest Rate Policies (ZIRP) and his push for higher prices have removed any chance to profit from delayed consumption. Bank CDs and fixed income bonds are virtually guaranteed to be huge losers over the long term when measured in future buying power.
History tells us that the only real hope to preserve wealth will come from owning real, income-producing assets. That would includes rental real estate and profitable businesses that have the pricing power to pass along the effects of a weakening currency.
Unless you personally own a company that meets this standard, stocks represent the best way to play. Equities are liquid, often pay dividends and can adjust to future conditions. No matter what befalls our nation people will still need to get up, go to work, eat, seek shelter and even be entertained.
Present-day Japan gives us a clue to what happens when government officials set out to undermine their own currency. Last November’s election was won on exactly that platform. Over the 12-months through mid-July Japanese savers saw the Yen drop by 21.07% against the dollar and most other currencies. Everything imported into Japan now costs much more.
Smart savers got their money out of Yen and into stocks, which could be marked up as the fiat-based currency was marked down. Citizens couldn’t stop the actions of insane politicians. They could take steps to protect their life savings.
Over that same time period the Nikkei-225 index rose more than 70%. Those who were unwilling to "take stock market risk" were hurt badly. Owners of equities are actually ahead of the game.
American equity markets have been hitting new records even as QE programs are diluting away the value of the U.S. dollar. When the SHTF for real here at home you will want to be holding appreciating assets, not fiat-based garbage.
Hold some emergency cash. Avoid any fixed income but very ultra-short term bonds or CDs. Buy stocks. Prepare for a wild ride.
See my ideas on value investing here http://marketshadows.com/value-investing
