The value of your money is changing. No matter where you are in the world, you’re going to be affected by the enormous changes coming to the worldwide economy. We’re moving from an inflationary economy to a deflationary one, so it’s really important to understand the difference; it will affect your wealth dramatically over the next decade (and beyond).
From the large amount of reading I do, it’s obvious to me that many people (even economists) don’t understand deflation, what causes it, and how to use it to their advantage.
In fact, I’ve read many articles predicting hyperinflation on the horizon, but if you read history (yes, it does repeat! … over and over again) or understand our current banking system, you’d know that hyperinflation is almost impossible to implement, and certainly isn’t going to accompany the coming depression. Depressions always result in deflation. They have throughout history, no exceptions.
For the past one hundred years (and beyond), except for depressions in the 1800s (there were several) and the Great Depression of the 1930s, we’ve existed in an inflationary environment. To understand the coming changes, let’s look at some examples.
1971 was my first year at university in Toronto. A “24” of Labatt’s Blue (a Canadian beer) cost five bucks. I can remember hauling it back to my dorm on a hot summer’s day. Ahh … the things I learned at University. That was 48 years ago, I was much younger, and didn’t understand the long-term significance of that experience.
But think about that price: Five bucks for a “two-four!” That means a bottle was worth only 20 cents. Now, it’s 2.00. A two four today is about 45 dollars. But it’s the same beer — the same product. Now, they want 9 times as much for it!
That’s inflation. The price of beer has increased 900% in 38 years.
Before 1971, inflation wasn’t a really big issue. That’s because money was tied to gold. You could always go to the bank and exchange your money for gold bars. An ounce of gold in those days was worth about $35 and it stayed at that price. So the value of money was relatively constant.
But in 1971, President Nixon changed all that and decided to go off the gold standard. He cut the ties to gold and let the US dollar float in value. It became fiat currency – not tied to the value of anything. The value is now subject to supply and demand, just like anything else.
Governments have resorted to fiat money over and over again throughout history. It always fails and ends in a financial revolution.
An ounce of gold today is worth about 1300 dollars US — forty times its original value. But the gold itself hasn’t changed. A gold brick doesn’t change over time; it’s static. Not very much gold is produced every year and so the supply is constant.
Beer is more or less the same as it always was. There’s really not more or less of it and yet its price is 9 times what it was in 1971.
Check out this great old house. Worth 250K in the year 2000, but now they want a million dollars. But the house itself isn’t more valuable … it actually needs a whole bunch of work done, mostly from wear and tear (and some water leaks). The land hasn’t changed at all … still the same pile of dirt.
In all these examples, the asset didn’t change in value; the money did.
Let’s dig a little deeper. Compared to a hundred years ago, our money today is practically worthless. A dollar is now worth four cents compared to 1913, or so (when the Federal Reserve central bank in the US was created). Since then, value of our money has been inflated away by the government. That’s why we’re all broke. Your government steals from you. Big surprise!
Below is a chart of the American dollar and how inflation has reduced its value by 96% over the past century.
In the chart above, you can see how inflation can been fairly consistent except for the period from about 1920 to 1936 and again around 1940. Originally the dollar was worth 100 cents (1913). Deflation started in 1920 and lasted through the mid 30s (the value of currency went up), but from about 1937, inflation began again and now our dollar is worth less than four cents.
Supply and Demand
Supply and demand affects fiat money in a really big way. Too much money in society leads to inflation – money goes down in value. Too little leads to deflation – it goes up in value.
When the economy is good, more loans are made, more money flows into the economy and when there’s more of anything, its value decreases. Interest rates are low which leads people to borrow more, which puts more money into the economy. But the downside is that these loans flood the economy with money, which lowers it’s value. People get sucked in to the idea that “cheap money” is a good idea. It’s not.
It’s resulted in the four cent dollar we have today and all assets (cars and homes, for example) have sky-rocketed in price, as a result.
That’s about to change.
To see the effect that supply and demand has on price, you just have to look at the practices of airlines. As the plane fills up, the remaining seats go up in value — the airline jacks up the price because they know how to play the game. It’s the same with wide screen TVs. In the early days, they were much more expensive. Now they’re all over the place and stores are competing against each other to sell them while prices continue to drop.
Money reacts to supply and demand just like everything else. More and more businesses are going bankrupt these days. The real estate market has topped all around the world in 2018 (as predicted — it’s a well-known cycle). As loans and mortgages start to default, that digital money disappears out of the economy (ninety percent of today’s money is digital, so it doesn’t really “exist”).
When the stock market drops, as it will soon, those billions of lost dollars go out of the economy. But our money becomes worth more, because there’s less of it around. The demand for it increases. That’s deflation.
When money increases in value, assets like houses and cars plummet in price. In the next downturn, we project they’ll lose 80% of their value, just like they did in the 1930s.
When that happens, you want to be in cash rather than “stuff,” like cars, paintings, houses, for example. Cash is going to go up several times in value over the next ten years. You’ll be able to buy much more for fewer dollars. What a nice change!
I’m waiting for that Labatt’s Blue to get to around twenty cents. Then you’re going to want to be in beer! No, just kidding.
Deflation is where we’re going and you want to make sure you learn as much about is as possible. Pay attention to what’s happening in the economy over the next couple of years, because when banks say everything is just fine … that’s when you want to worry. As money disappears out of the economy, it disappears from banks … and that can affect you in a very big way.