Inflation is coming, time to get ready.

Posted on March 19, 2009
Filed Under General Insanity |

I have received criticism from several friends and family for not discussing my analysis of the economy and what to do about it here in the family blog. I recently finished reading the book “The Richest Man in Babylon.” I am pleased to say I have spent my life living by most of the rules in this book and going forward I will live by all of them. This book, written in 1924, describes how everyone can make and grow wealth regardless of their income and current circumstances and regardless of the state of the economy. As an add-on to this, I will add a comment section later that summarizes the points in this book. Two key points of this book for this discussion though is: Live within your means; and protect your principle.

Our federal government has no understanding of these concepts. Except for two years under Richard Nixon and four years under Bill Clinton, our government has not been able live within their means for well over 50 years. Here is some basic economics for everyone; “in any country there is only so much money that is available for borrowing.” Money availability in a society is not infinite. Three groups consisting of individuals, companies and governments share the total amount of borrowing available in a society or country. The more one group borrows, the less that is available for the other two groups. This means that a total society will always live within its means even if individuals, companies or governments cannot. Remember this concept, as I will come back to it.

Unless you are over 50 years of age, you likely do not remember the Gerald Ford/Jimmy Carter presidential years. This is the period from 1974 to 1981. Inflation started under Gerald Ford and became much worse under Jimmy Carter. Does anyone remember the “WIN” buttons President Ford tried to get everyone to wear? It stood for “whip inflation now.” The idea was that the inflation rate was caused by some kind of national psychological issue and if we could all just get over it, inflation would go away. Does any of this talk sounds familiar today? The inflation problem in 1975 was not psychological then and current economic crisis is not psychological today.

The inflation rate under Carter hit nearly 15% on an annual basis. This means in real dollars, if you have $100 in the bank on January 1, a year later on December 31 it would only be worth $85. Many Americans in the last 6 months have watched their investments fall about 50%. This was only the first shoe to drop. This was caused because many Americans, American banks and certainly our American government have broken the rule I mentioned above about living within their means. Americans in general have also broken the rule: protect your principle. Well, the second shoe is about to drop because inflation is coming.

If you think the money deflation and the recession you have seen to date is bad then hang on because you haven’t seen anything yet. Nothing is as damaging as inflation on your money and if it hits 25%, most economists will conclude it is the dreaded “H” word, hyperinflation (a quasi-defined measure).

A year and a half ago I took all my IRA investments out of the mutual funds we had them in and put it 100% in Treasury Securities. We went from 10% returns in 2007 to 2% in 2008 as a result, but I protected the principle for our retirement investments. Last week I just took all the funds out of the Treasury Securities and put it into Indexable Treasury Securities. Indexable Tbills change their rates based on the inflation rate (Consumer Price Index) but has a general lower base interest it pays.

Things are going to get real bad in this nation financially in the next few years. People who have worked and saved for a lifetime are going to get wiped out. Many have already lost 50% over the last six months and the second half of their investments will get eaten up in the coming inflation. The world governments have dumped $11 Trillion unbacked money into the world money supply to try and prop up banks and large businesses that are “Too Big to Fail.” That money is now out there in the money supply and the only possible result will be inflation. The course is now set and the damage done.

So, what should you do? I have several suggestions:
1.    If you have cash in the bank, buy gold. Do not sit on cash.
2.    If you have lots of cash, buy land (it is the only thing we are not making more of).
3.    Move your 401K or IRA investments into something that is inflation protected.
4.    Buy and store six months of basic food staples for you and your family.

Throughout all of history, what happens during hyperinflation in every fiat money based economy like ours, is that the shelves of stores run out of goods to sell. Under hyperinflation is you have too much money chasing too few goods. Everyone will have cash, it is just there will just be less and less to buy and what is available will be very expensive. So, buy food now and store it, especially canned goods, rice, sugar and such.

Earlier  this year I was making fun of the government statement “Too Big to Fail” as I thought this entire concept was ludicrous. I am not finding it so funny anymore. We will all be forced to live within our means on a national level (I said I would get back to this). We cannot just fabricate money to prop up failing banks and businesses, as it will only devalue the currency to the same levels it would have been anyway due to the resulting inflation. This coming inflation will mean that people will be going hungry in this country, many of whom have never gone hungry before. Don’t let it be you. As a last thought remember that putting money into the world money supply is an easy thing. We do not need printing presses to do this any longer as we have computers. Unfortunately, like in the Ford/Carter years, once the money becomes inflated, it takes 10 years to get the excess back out. Ten years is a long time to be hungry.

Clayton

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