Rising inflation is something that neither consumers nor investors have had experience with in decades. For years official inflation rate figures have hovered at or below 2% annually. Federal Reserve officials have long bemoaned this “low” rate of inflation. But now inflation has returned with a vengeance, and it shows no signs of stopping.
Fed officials tried to tell us over the summer that inflation was merely “transitory,” something that was the result of temporary factors that were going to ease come fall. But here we are months later with inflation still at over 5% and growing every month. Something is obviously very, very wrong, and our supposed leaders in Washington seem to be completely unaware of what is causing it.
As with inflationary crises throughout history, we’re hearing all sorts of excuses out of Washington. Blame is being placed on all sorts of factors, from market concentration to consumer demand to profit-seeking by corporations. But no one seems to want to point to the real source of the inflation.
Without knowing how inflation is caused, it cannot be combated. And if there’s no ability or desire to combat it, inflation could severely impact your ability to save, invest, and accumulate wealth.
What Causes Inflation
It’s important to understand the historical definition of inflation versus the modern definition of inflation. Historically inflation was understood to be an increase in the money supply, the effect of which was, all other things being equal, an increase in prices.
Today cause and effect have been confused, so that inflation is defined as a rise in the general price level. Thus, instead of looking to the root cause of inflation as a monetary phenomenon, either through the actions of the central bank or the government’s fiscal authorities, economists and analysts often pretend that there could be many varied sources of inflation.
How often do you hear that rising consumer demand, shortages of crucial goods and inputs, or government restrictions on certain industries or activities could be causes of inflation? Yes, those things can cause prices to rise, but they’re not the cause of inflation.
As Milton Friedman famously stated, inflation is always and everywhere a monetary phenomenon. Other factors can certainly play a role and either mitigate or exacerbate the effects of monetary action, but at the end of the day it’s an increase in the money supply that is the major cause of inflation.
When the Federal Reserve increases the size of its balance sheet by more than $4 trillion from one year to the next, you have to assume that at some point that monetary creation is going to show up in the form of higher prices. And now we’re seeing that come to pass.
How Bad Could Inflation Get?
The major problem we have to confront is that we’re seeing a perfect storm of rising inflation, labor and input shortages, and supply chain disruptions. The effects of the COVID lockdowns have been long-term and pervasive, and supply chains still have not fully adjusted and returned to normal.
Combine that with rising consumer demand, likely caused by panicking consumers rushing to buy up as much as they can before prices rise, and you have a recipe for an absolute disaster when it comes to inflation. Just imagine prices continuing to rise, shortages continuing to get worse, and consumers continuing to panic about both of those things, and you have a view of what the future of the economy might look like.
While the Fed has indicated that it may taper its asset purchases, so much money has been pumped into the economy already that it could be many more months, if not years, before we see the effects of that money creation finally fading away. And before that happens, we could very well see some new economic crisis rear its head, spurring the Fed to create even more money.
Not only is inflation not transitory, it could very well continue and get worse for a long time to come. If you remember the 1970s, and the double digit inflation that occurred, that’s what we could be in for.
How Inflation Can Erode Your Wealth
While most investors look at the figures in their retirement accounts and figure things are fine as long as the numbers are going up, very few try to calculate their real returns. If you’re making a 6% annual gain in your retirement accounts, but your cost of living is rising 5% every year, you’re only making a real gain of 1%. And if your gains are less than the 5% rise in your cost of living, you’re actually losing money each year.
You may not know it, but the annualized growth rate of stock markets over the past 20 years is only about 6%, and that’s with stock markets at all-time highs right now. With annual inflation pushing up to 5.4% right now, that doesn’t leave much room for actually increasing your wealth. And if inflation continues to grow and stock markets undergo a major correction, your conventional investments could become a money loser.
We’ve seen this before, during the stagflation of the 1970s, a decade in which stock markets gained about 5% total over the course of the decade, while inflation caused prices to rise almost 100%. If you’re nearing retirement today, can you afford for the 2020s to look like a repeat of the 1970s?
How You Can Protect Your Wealth
Of course, not everything was doom and gloom in the 1970s, as precious metals like gold and silver performed phenomenally in response to the economy’s weakness. Both gold and silver had annualized gains of over 30% over the course of the decade, far outpacing both inflation and stock markets.
If the economy of the 2020s ends up looking like a rerun of the 1970s, there’s every reason to expect that gold and silver could perform similarly. And that’s why so many investors today are turning to gold and silver to help protect their assets and hedge against rising inflation.
Gold and silver have always been in demand from investors looking to protect their wealth, but never more so than during times of economic crisis or market weakness. The worse the economy gets, the better gold and silver tend to perform.
Now that the US economy is showing real signs of weakness, more and more people have decided to invest in gold and silver. The range of options available for those looking at buying gold and silver has grown in recent years too.
Those with existing retirement accounts whose assets they want to protect often opt for a gold IRA or silver IRA. These precious metals IRAs are subject to the same rules as conventional IRAs, but they have the ability to hold gold and silver coins or bars. And if you fund your precious metals IRA from your existing 401(k), TSP, IRA, or similar retirement accounts, you can roll over or transfer assets into your precious metals IRA tax-free.
If you don’t want to touch your retirement accounts, you can always make direct purchases of gold and silver coins. With dozens of options to choose from, there’s something to appeal to everyone.
Don’t wait until inflation has already ravaged your retirement savings before you start thinking of how to protect them. Call Goldco’s precious metals experts today to learn more about how gold and silver can help safeguard your savings against rising inflation.