THE PICTURE – Your wealth is being stolen due to inflation, period. Whether you like it or not, central banks continue to churn out a ridiculous amount of paper currencies thereby robbing you of your savings. This is a crucial issue which you must understand if you want to survive and prosper over the coming years.

The global economy has severe imbalances with the US heavily in debt and facing record-high deficits. The total debt monster in the US has now grown to $46 trillion, the trade deficit now exceeds $800 billion and the American consumer is swimming in debt. Similar imbalances can be seen throughout the “developed” economies of the West. Therefore, bankers and governments who want to stay in power at all costs have decided to resort to accelerating the rate of monetary inflation. “But why would they do that?” you may wonder. The answer can be summed up in the following words –

Inflation makes debt less formidable and easier to handle. 

Allow me to explain. I want you to imagine that your grandmother took out a loan of $50,000 in 1950. Back then, this was a lot of money and your grandmother would have found it quite hard to service and repay this debt. However, due to inflation over the past 56 years and its consequence (decline in the value of money), your grandmother’s debt is now much easier to repay as $50,000 isn’t worth that much today. So, you can see that with time and inflation, debt becomes more manageable.

Our world has faced inflation and nothing but inflation since the Great Depression of 1929 as the money supply has increased constantly. However, what concerns me is the fact that the rate of inflation (money supply growth) is likely to sky-rocket over the coming years. Below, I present the money supply growth rates around the world –

Australia         + 8.1%
Britain            +12.2%
Canada            +6.4%
Denmark         +24.0%
US                   +8.0%
Euro area         +8.0%

Looking at the above figures, you can see that over the past year, a significant amount of money has been introduced into the system. The thesis is that the surging money supply will cause the value of money to drop and make it easier to repay the mountains of debt. “But what about my savings?” you may ask. Frankly, the establishment does not care about your savings. In order to remain popular, the officials almost always cater to the needs of the majority. Today, the majority of the population is heavily in debt and with its back against the proverbial wall! Therefore, you can bet your bottom dollar that the rate of inflation will continue to surge and hyperinflation may not be far away.

Some argue that inflation is a good thing, a necessity in the modern economy as it facilitates trade. Personally, I don’t buy into this concept because throughout the 19^th century, we witnessed mild deflation, yet our world made huge progress over that period. Next time when somebody says that inflation is okay, ask them if they would like to own shares in a company, if this organisation issued and gave away new shares every year? Would they be interested in owning stock in this great company if roughly 10% new shares were being added to its share capital every year? The truth is that nobody in their right mind would invest in such a scam! Yet, people find it absolutely normal when the same thing happens to their money stock otherwise known as savings! 

Money is supposed to be a store of value that acts as a medium of exchange. Well, the paper in circulation today does act as a medium of exchange because you can go to Starbucks and buy a cup of fancy coffee but it surely isn’t a store of value! How can it be a store of value when it buys less and less with every passing year? In fact, the US dollar has proven to be such a great store of value that it has lost 92% of its purchasing power since the Federal Reserve was established in 1913! Figure 1 clearly demonstrates the consistent decline in the purchasing power of the US dollar. Unfortunately, this trend is going to worsen in the future, thanks largely to the loose monetary policy of the central banks. So, you can be rest assured that parking your wealth in the “safe haven” of cash is the quickest route to the poorhouse! It is sad but true – cash is trash! If you want to protect your family’s wealth, you have to use the system to your advantage. Put simply, you must get rid of your cash and invest in appropriate assets.

Figure 1: Decline in the US dollar’s purchasing power (1800-2005)

Source: Barron’s 

Now that we’ve established that cash is probably the worst asset to own, we need to figure out which assets are undervalued and worth owning. During highly inflationary times, cash declines in value against everything and this is what we are witnessing today. Real-estate is soaring, commodities are rising and the global stock-markets are also enjoying the liquidity-induced party. Now, I am sure that in a few years from now, all these asset-classes (with the exception of bonds) will be higher than where they are today at least when measured in dollars or euros. In other words, I expect paper currencies to continue losing their purchasing power. Furthermore, if my assessment is correct, commodities and equities of emerging markets will outperform property as well as bonds over the coming decade. The advance will be punctuated by severe corrections but the primary trend is now up.

Furthermore, it may well be that due to hyperinflation, the Dow Jones Industrial Average goes to 20,000 within the next 10 years (too much cash chasing too few stocks). However, I can promise you that if that happens, gold will be at $2,000 per ounce and crude oil will reach $200 per barrel or more. The point I am making is that on a relative basis, I expect tangible assets to outperform stocks and bonds by a long way.

Several analysts are now calling the end of the primary bull-market in commodities. Below, I present a list of some bull-markets we’ve seen over the past 35 years -

’70’s – sugar went up 45 times
’70’s – oil went up 30 times
’70’s – gold went up 24 times
’70’s – silver went up 24 times
’80’s – NIKKEI went up 8 times
’80’s-’90’s – NASDAQ went up 50 times
’80’s-’90’s – Dow went up 14 times

As you can see from the above, these previous bull-markets in the past took the various items to unprecedented highs as prices surged several-fold. Coming back to the present situation, in the current ongoing bull-market in commodities, gold and silver have doubled in value, oil has increased six times, sugar has risen three-fold and stuff like corn, wheat and cotton haven’t even moved. Moreover, the public remains oblivious and hasn’t even started investing in this area. These factors combined with the industrialisation of China leave very little doubt in my mind that the current boom in commodities is still in its infancy. How high will she go? All I can safely say is that when the public gets worried about its savings and turns to tangibles, the ’70’s bull-market in commodities will look like a blip on the radar-screen.

© 2006 Puru Saxena
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