Inflation Is Built Into Our Monetary Policy
How is inflation avoided in fiat currency? First thought, increase the money supply. However, the actual mechanism is an artificial interest rate, usually below the rate of inflation. If inflation exceeds the interest rate, the value of the currency will be eroded. This is expressed in consumer price index (CPI). The CPI is just the average change in price of a basket of consumer prices, thus the term indexed. It is used to measure inflation and the cost of living.
The CPI and various governments, both democratic and autocratic, have been using the CPI for years as a gauge of the cost of living, thereby increasing wages and various submission costs and creating inflation. You can see that CPI is built into our monetary policy.
This all explains why even if you never touch your investment portfolio, it will still lose real value, and why we need to be vigilant about where our money is invested. Hidden within your statement are market risks and inflation risks. This can be compounded if you are in an investment program that locks in earnings for a specific period of time.
Two of the key reasons for the three-decade bull market were globalization and the information technology (IT) revolution. However, these two key pillars are no longer valid.
Inflation Is Relentless
Since the end of World War II, the US government has increased the money supply by a factor of 60. During this period, inflation has averaged 3.5% per year, and thus price levels have doubled in less than 20 years.
The mechanism by which money is created by the government… open market operations and the purchase of securities… has contributed to the increase in inflation to the detriment of ordinary citizens.
The U.S. Congress recognized the effect of the balance of payments deficit on the supply of money and the budget deficit. The Humphrey -Hawkins Act of 1978 intended to curtail the money supply by requiring that the Fed balance its requirements for bank reserves with Federal debt.
This law was passed as a result of the gold standard where a nation’s money supply was tied to the quantity of gold it held in its reserves. The US dropped the gold standard in 1936, after most other countries had already played it. This slight of hand has allowed the US government to accumulate more debt than it could pay off plus interest.
So what does all this have to do with inflation?
Taxes And Inflation Have The Same Net Effect – Reducing Your Purchasing Power
Investing – The Ultimate Solution To The Inflation Problem
Inflation is a tax which is hard to avoid as a home owner.
It makes your mortgage payments higher, which means that you will spend a higher percentage of your income just paying off your property.
If you are like anyone else and looking for an alternative way of beating inflation, then you should consider investing.
There is no way that you can avoid taxes in your day to day existence, but you can definitely minimize your tax liability by investing.
The very basic principle of investing is to diversify your stock portfolio, making sure that you are able to reduce the overall risk and maximize your returns.
As a general rule, growth stocks are expected to perform better during inflationary periods.
Low price to book stocks that are trading at the discount price should be avoided and you should only consider high and low price to book ratio stocks as possible investments.
In order to be a successful investor, you will have to learn and study the fluctuations of the market.
It doesn’t matter whether you research shared or individual stocks, as long as you are able to identify whether you are trading at a discount or a premium to the market.