Naked In Davos

It took a host of topless women from Ukraine to spice up the Davos gathering but what lies behind the signs claiming Gangsters Party in Davos?  This quote provides a strong hint:

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

Henry Ford

Few people really understand what really happens their wealth when monetary policy seizes control of currency issuance.  In fact, no living person under 80 has lived in an era without the Federal Reserve so let’s step back for a moment and consider the impact of the bond purchases that is colloquially described as money printing.

When you purchased cereal five years ago, do you recall the price was lower?  If it was and the price has risen, you’ve just been punk’d by something called inflation.  Now you think that inflation is normal because you’ve seen it all your life.  But why should your cereal go up in price?  It didn’t go up in value, did it?  I mean, each morning the same cereal nourishes you to the same extent.  So, why did you have to pay more for it?

The reason for the higher prices was that more dollars were supplied and when the supply of anything increases the price drops to reflect the increase.  So, the dollar in your pocket dropped in value.  What perplexes the public is that the dollar looks the same, it feels the same and nobody changed the prices so dramatically overnight that you felt any differently about it when you woke up in the morning.  But each day, every day a small amount of your dollar is effectively being taken from you.  And to be more accurate, not your dollar so much as the amount it can purchase.

The key is that your purchasing power erodes little by little, day by day, year by year.  To really understand the impact, all you need observe is the compounded effect of all those little amounts over the course of a century and you will see that a dollar 90 years ago has declined in purchasing power by over 90%, in fact way more!

Ok, so what’s the answer?  One possibility is to borrow heavily because the debt you owe is fixed at a certain amount and you can pay it off with dollars that continually decrease in value.  The system is by construction set up to reward the debtor, which explains why people are indebted and the nation as a whole has a strong incentive to remain heavily indebted.

If you can purchase resources for a fixed price today and pay for them more inexpensively tomorrow why not do that!  In fact, if you think about foreign governments purchasing Treasuries or bonds, you will see they end up with a nominal return of a few percent but those extra dollars generated in return are offset to an extent by erosion of purchasing power.

Smart investors take advantage of this phenomenon not by taking on credit card debt that sticks them with 20%+ interest rates but by taking on debt at fixed rates and paying back the amounts in later years as inflation takes off.  There’s just one problem.  What happens when there is not inflation but deflation?  That’s when the game’s up for the borrowers as we saw in 2008.

To find out how to use the phenomenon to your advantage in a smart way regardless of an inflationary or deflationary market trend, join us at www.MarketTamer.com where we discuss smart ways to succeed.

 

 

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