The Reasons Behind Inflation & What It Means For Investing
Protect Your Wealth When Times Get Tough.
Gasoline ↗️ + 43%
Used cars ↗️ +39%
Houses ↗️ +15%
Food ↗️ + 5%
These are just a few numbers that show how prices increased over the last 12 months in the US. Other countries have seen similar developments.
Inflation now poses a significant risk to people’s wealth.
And make no mistake about it: Inflation is here to stay.
In this article, I will explain the following two things to you:
- Why we are now seeing high inflation in all areas.
- How you can protect yourself from the negative consequences of inflation by investing in cryptocurrencies and other assets.
What Is Inflation?
Inflation means that prices for goods and services are increasing over a period of time. This is a normal process. However, it becomes a problem if prices increase too fast. High inflation reduces your buying power, meaning that the value of your money decreases, you can buy fewer things with the same amount of money. In other words: Inflation makes you poorer.
Why Is There High Inflation Today?
There are two main reasons why we see inflation spiking higher in recent months.
- Inflation is a consequence of government-imposed lockdowns.
- Inflation is a consequence of unrestricted money printing.
They are both interlinked but in order not to go beyond the scope, I will keep things simple.
Let’s take a closer look.
1. Inflation As A Consequence Of Government Imposed Lockdowns
The most drastic action by governments around the world to combat COVID-19 was to impose lockdowns. With regard to the medical benefits, I do not want to make a judgment for or against this step.
But one thing is clear: the lockdowns did lasting damage to the economy.
The global economy was already in bad shape prior to the break-out of the virus (more on that below). So what the lockdowns brought about was an acceleration and worsening of already existing problems.
When the world’s economies shut down, a lot of things happened. Producers of raw materials cut their output. Companies laid off staff. Factories stopped producing goods. Supply chains broke.
This was bad.
Because when economies started up again after several months, some unpleasant things became clear:
- 🛢️ There are shortages of raw materials.
- 👷 In many industries, there aren’t enough workers left to do things.
- 🏭 Some producers have gone out of business while others are unable to fill the gap.
- 🚢 Broken supply chains have not been mended.
All of this makes it much harder to produce and ship goods. And in our overly complex, just-in-time world, failure in one place causes failure in other parts as well. Once underway, this process cannot be stopped easily.
What we end up with are price increases in goods and services.
Makes sense so far, right?
2. Inflation As A Consequence Of Unrestricted Money Printing
The second reason why we are seeing high inflation today is more complex. Simply said, another reason why prices increase is that governments are printing too much money.
But why are they doing that?
The reason is energy. Or better said, a lack of cheap energy.
Let me explain.
As described above, when the crisis hit, the production of raw materials was cut. This was also the case with energy production.
But energy sources are not like a water tap.
When you take off an oil well or gas well, you can’t simply turn them on again once you need them. It takes time.
As a result, a lack of high-density energy (fossil fuels) causes energy prices to go higher. When energy costs increase so do prices for everything else. That is because we need oil, gas, and coal (which make up 80% of the global energy mix) to run things. Without cheap fossil fuels, essential things like heavy-duty transport, food production, and manufacturing become more expensive.
This is the short-term view about how energy influences the economy and how the COVID-19 crisis affected the system.
But there is another issue when we look at a longer time frame.
When there is not enough cheap high-density energy available, economic growth stagnates. While the lockdowns made our energy situation worse, the problem is actually not new. Overall, the production of conventional oil in developed nations has gone down for the past two to three decades. This coincides with only minimal growth in developed countries for the same time frame.
To illustrate this, let’s take a look at the graph below.
After the year 2000 (when production of conventional oil started to decline both in the US and UK), official numbers for GDP growth in major developed countries never went higher than 4%. In reality, numbers are maybe half of that.
This is an issue because our whole economic system rests on constant growth.
Without growth, the capitalist system withers and dies.
So what did our leaders do to solve this problem?
To battle vanishing growth, governments tried to stimulate the economy by injecting ever-increasing amounts of money into the system. They did this by allowing households and businesses to access cheap debt. In the last decades, governments printed trillions of US Dollars, Euros, Yen, etc.
This created a new problem.
Stagnating or shrinking economies can’t absorb all the newly created money. Financial bubbles start to form everywhere. As you can see in the graph below, for the last 20 to 30 years these price increases mainly affected essential things such as housing, education, and health care. Until COVID-19 came along.
Taken together with the shortages caused by the lockdowns imposed on already weak economies, you get strong price increases in all areas.
To be precise, what we are seeing today is so-called stagflation (stagnation+inflation). That is an inflation of prices while the economy is stagnating or getting smaller.
We are in big trouble.
How Will Things Develop From Here?
Note how economic growth has NOT come back over the last decades even though governments pumped enormous amounts of money into the system. Without enough cheap high-density energy available, this approach does not work. At the same time, there are no signs that monetary policy will change.
Taken together with the fallout coming from the COVID-19 lockdowns this means that inflation will stay. It is not „transitory“ as the FED and other central banks claim.
Knowing all this, what should investors do?
Use These Assets As Hedge Against Inflation
The answer to inflation is simple. All you need to do is to change your money into an asset that keeps its value or an asset that appreciates in value.
There are several options that you can choose from:
Crypto is a hedge against inflation simply because cryptocurrencies are appreciating in value so much when compared to FIAT money.
To give an example. While the US-Dollar lost about 10% of its worth since 2019, Bitcoin gained 800–900% in the same time frame.
There will never be more than 21 million BTC. But there is no limit to how much money a government can print.
But there are practical reasons as well.
While regulatory hurdles exist for investments in many traditional assets such as companies and pieces of land, anyone can invest in cryptocurrencies and Crypto projects with comparatively little effort. For many people, putting their money in Crypto is the simplest form of investment available to them.
One aspect that speaks against cryptocurrencies as a protection against inflation is their high volatility. However, this is a risk that more and more investors are accepting.
Gold & Other Precious Metals
Precious metals are generally regarded as a good investment in inflationary phases or when economic crises occur.
Well-known examples are the price increases in gold and silver in the late 1970s and early 1980s when the last inflationary crisis hit due to energy shortages.
In the years around the great financial crisis, the price of gold tripled. After a slump in the middle of the 2010s, gold saw another big price increase in 2019 and is now in a consolidation phase. It looks promising for a breakout.
I expect precious metals to play an important role in the coming years.
Land & Property
As the above chart about inflation shows, prices for houses and land just knew one direction in the past 30 years: Up.
Make no mistake about it. The housing sector is in a bubble. But that doesn’t mean that certain pieces of land and certain kinds of properties aren’t a good hedge against inflation.
It all comes down to quality. Or, as investors in this space like to say: Location, location, location!
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While I am having doubts about the long-term performance of this asset class in general, I think that pieces of land and properties in good locations are a very good investment.
For example, farmland and forests in close proximity to population centers will always be in high demand. By contrast, you should probably keep your hands off newly developed properties in the suburbs with no easy access to public transport, shopping centers, schools, and other important facilities.
As a rule of thumb, everything that requires a lot of energy to maintain the status quo is probably not a good investment.
Simply Buy And Forget?
Does that mean all you need to do is buy Crypto and you will be fine?
Because what gets lost in the whole “INFLATION!!!” narrative is another threat to your wealth. What I am talking about is a market crash.
The Short-Term vs Long-Term View: Inflation, Crash, More Inflation
I think that in the next few months most assets will see a strong bull run. Crypto will soar to incredible heights. The same will be true for stock markets.
As described above, the real economy is in a bad shape. Without ongoing intervention by central banks, the financial markets would collapse. Already, cracks are appearing everywhere, and eventually, the system will break down.
It’s is not the question of if this will happen. But when.
What follows will be a massive correction.
This strong move downwards will affect most assets. Do not assume that Crypto will be untouched by this. As a reference, take a look at what happened in March 2020 due to the outbreak of the COVID-crisis. What we saw then was a major correction in ALL markets.
I think that after this strong deflationary move we will see several months of depressed prices.
The underlying problems that caused inflation won’t go away. This means that strong increase of prices will eventually pick up again.
How you react to these developments is a decision you will have to make for yourself. Personally, I am following a 4-step plan:
- Let my cryptocurrencies and other assets appreciate in value during the ongoing bull run which I expect to last for a few more weeks to months.
- Convert a significant part of my Crypto holdings into cash and wait for the crash to happen.
- Pick up assets (cryptocurrencies, land, etc.) at cheap prices when the correction takes place.
- Move out of most cash before inflation will push up prices again.
I don’t know if it will work out like this. But I believe there is a good chance.
I am aware that there is a lot to unpack in this article. I plan to go into more detail about certain points I made in upcoming publications.
As I said, inflation will stay with us for the coming years and decades. That’s why investing a part of your FIAT money in Crypto and other assets is a good choice.
But the right timing is crucial. Eventually, a big market correction will happen. You should know in advance if you want to sit this one out or if you want to cash out first so you can enter the market again at a later point.
Let me know what you think and how you plan to protect yourself against inflation in the comments.
For more articles I wrote on economics and inflation, please check out my list:
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Dmitry Orlov - Peak Oil Is History, http://cluborlov.blogspot.com/2010/11/peak-oil-is-history.html
Tim Morgan - Needed: A New Model Tin-Opener, https://surplusenergyeconomics.wordpress.com/2021/10/21/214-needed-a-new-model-tin-opener/
Gail Tverberg - Energy Is The Economy. Shrinkage In Energy Supply Leads To Conflict, https://ourfiniteworld.com/2020/11/09/energy-is-the-economy-shrinkage-in-energy-supply-leads-to-conflict/
Tim Watkins - What If Growth Cannot Return, https://consciousnessofsheep.co.uk/2021/03/03/what-if-growth-cannot-return/