“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” – Ronald Reagan
By now, you’ve heard about inflation.
And you probably know…
It’s getting worse.
The Federal Reserve is printing trillions of dollars.
Are we headed to hyperinflation?
What is the way out of this?
We’re going to cover all these questions as well as what you can do to prepare yourself so you don’t get destroyed by inflation.
Instead, you’re going to preserve and grow your wealth.
Why Inflation is Getting Worse
Money supply is a lot like a balloon.
You have a certain fixed number of dollars.
Now, take the money balloon and expand it.
When you do that, the size grows bigger and bigger.
Now everything in that balloon costs more to accommodate that bigger size.
Food costs, housing, energy, everything!
Here’s another example:
Let’s say you have an economy with $100 in total and you’ve got 100 goods, each worth about a dollar.
What happens if you have $1,000 in that same economy with only 100 goods?
Everything costs 10x as much.
Now everything is worth $10.
The purchasing power of the dollar has lost 95% of its value in the last hundred years or so.
It’s not that things cost more.
It’s the dollars themselves that are worth less.
If you look at more recent history, the money supply has seen a 400% increase in the last 20 years.
In general, things should cost about 4x as much.
It hasn’t caught up yet, but we’ve been doing lots and lots of printing.
Even in the last 12 months, we’ve seen a 40% increase in the money supply.
That’s absolutely staggering!
People talk about inflation now and wonder if it’s transitory.
Whatever the case may be, it’s here to stay because of the increase in the money supply.
We see it in prices right now.
We’re experiencing spikes in construction materials, food, and groceries.
Inflation really punishes savers.
So if you have a lot of money stored in the bank, you’re getting no interest.
Whatever your rate, it’s eroding at a substantial rate.
We don’t know exactly what the numbers are right now – it could be 5-10%.
It’s probably much higher than what the Federal Reserve is saying.
Inflation Punishes Savers and the Lower/Middle Class
When the value of the dollar goes down, it really punishes the middle and lower class.
The reason is because they don’t own assets.
Assets tend to hold their value.
You have a certain number of assets that retain their value because they have value in themselves.
For example: Bonds are a fixed rate investment.
They’ll return a certain percent per year.
These get destroyed over time.
During times of inflation, particularly as interest rates rise, bonds become worth less over time.
If you’re interested in learning more, I did a video about bonds and why I think they are about to crash.
Inflation is Not an Instant Process
Let’s take a little history break!
In the 1960s, Lyndon B. Johnson created a lot of new social programs in the U.S.
A lot of new spending happened.
It took until about the late ‘70s, but inflation did catch up.
Inflation got pretty high and peaked in 1980 at over 15% per year.
That’s pretty wild!
What does this history lesson teach us?
Is inflation instant?
Do you print the money and immediately get inflation?
The answer is a resounding NO.
It can typically take 10 years or a little more.
Over time, the buck does come due.
Literally!
Inflation is not instant.
It takes time to develop.
Costs will continue to rise more and more and more.
You can see inflation at work again in 1918 and 1921.
Countries like Germany printed money quickly and it worked well for a little bit.
Then they kept printing and it didn’t work so well.
Over this three-year period, they increased their money supply by 10x.
By 1923, they printed money into oblivion.
So what can we learn from Germany during this time?
Inflation is going to get worse.
If you want to learn more about inflation and the CPI lie, you can check out a video I did on the topic here!
But for a quick recap: You can’t trust the government to give you a good number on inflation.
They’re like a used car dealer who wants to sell you a car you don’t need.
They want to sell you information.
That’s not necessarily good for you.
And they may even be lying to you.
The Gold Standard
Once upon a time, we used something called the gold standard.
All of our money was in gold and dollars were essentially claim checks.
That means you could use your $20 bill to claim one ounce of gold.
That lasted until 1933.
Gold is really unique because it’s desirable.
It’s a store of value.
It’s very difficult to counterfeit.
You can’t just go create a whole bunch more gold.
The gold supply only increases by around 1.5% per year.
There’s also a cost to go get it.
With those things in mind, it’s a really great way to keep things under control.
In 1971, Nixon came off of the gold standard.
They started printing, printing, printing more money.
Then we came into the period of high inflation I mentioned earlier.
It’s a safe bet to say that inflation is coming.
I mean, it’s not even a roll of the dice, right?
We know it’s coming.
We know it’s going to keep happening.
There are three things that governments are doing right now that are going to continue to cause inflation to get worse:
1. Unprecedented Money Printing!
You see it in the U.S., the U.K., India, and Japan.
All countries throughout the world are printing, printing, printing.
We’ve never had a time where everybody’s printing at the same time with more and more currency.
2. High Levels of Borrowing
The Federal Reserve’s balance sheet is over $8 trillion.
There’s also other unfunded liabilities such as Medicare and Social Security that take up more than $120 trillion.
When Biden says we’re going to spend 45 trillion on an infrastructure plan, where does that money come from?
It’s not coming from taxes.
It’s being borrowed or it’s being printed.
Borrowing over time becomes the same thing as printing.
If you have a printing press, it’s hard not to print the money when you know you owe it.
3. Decrease in Productive Output
This one can really be seen through COVID.
More people than ever are receiving money from the government.
There’s so much unemployment, there are stimulus checks…
All kinds of money is going out to individuals.
My friends, who are small business owners, are having a hard time finding workers.
It’s hard to find people to work at small businesses.
It’s hard to find people to drive Ubers.
The productive output is shrinking.
Why is that important?
It doesn’t seem to relate directly to money.
In fact, it really does!
Wealth is really not gold or money or assets.
It really is the idea of production.
When a country produces a lot, that country is a wealthy country.
If you own assets that produce, you have cash flowing assets.
You own productive assets.
If the world stops producing as much and we start handing out checks, we are all collectively getting poor because now there are less goods.
There’s less productivity going out there.
There’s less to go around, even though there’s technically more money out there.
I know you might be on the edge of your seat thinking:
Oh my gosh, this is just so depressing!
But let me tell you: There are two things that governments can do
There is a way out of this!
Two Ways Out of Inflation
There are only two ways out of inflation.
Neither of them are going to be great.
Just to illustrate, here’s another story for you:
I used to go fill up my tires at a gas station and it was free.
Now it costs $1.50.
That’s what I call inflation!
Okay, that’s my dad joke for the day.
Let’s get to the two ways we can get out of inflation:
1. Hyperinflation
When you say hyperinflation, everybody thinks of taking a wheelbarrow down the street to go buy bread.
This happened in Germany in 1918 to 1923, which we touched on earlier.
People were burning physical currency in their ovens because it was worth nothing.
They had around 1,700 printing presses going full-time to print day in and day out.
Thankfully, we’re not there yet!
Things like COVID relief and universal basic income don’t increase productivity.
They lead to more dependence on the government.
A lot of politicians really believe you can simply print your way out of it.
The people these programs are trying to help often are the ones getting hurt.
They are hurt because they don’t own assets.
They simply have more fiat currency, which is just more cash.
When you increase the cash, it creates destruction over time.
Not long after Germany’s economic crash in 1923, Hitler came to power.
Many think the destruction of currency played a part in his rise.
It allowed for dictators to come to power not just in Germany, but around the world.
When the economy is in turmoil, people are desperate for a stable government.
This is something to really be aware of.
When we are irresponsible with currency, not only the currency is destroyed – sometimes, entire societies also collapse.
2. Pain
I can hear what you’re thinking:
Bronson, why would you say pain is a solution to inflation?
No one wants to go through pain.
Why can’t we just print a little more money here and there?
Well, the challenge is:
Because we’re so addicted to printing, it’s very hard to stop.
If we slowed down a little bit and stopped passing aid packages, we would start experiencing a lot more pain.
We would see more unemployment.
More people would not be working.
There’s a lot of pain involved.
What we often look for is the easy way, right?
The easy way of printing more money and inflation works great until it doesn’t.
It becomes hyperinflation.
There is an inflection point that happens.
It can happen very quickly.
So to elaborate on what I mean by ‘pain’, I can draw from my medical background.
A surgeon doesn’t cut into someone to harm them, right?
It would be to heal.
I still believe this is possible with inflation.
The first thing you have to do is balance the budget.
Balancing a budget is pretty tough.
There’s a reason they say the worst name for a hair salon is Budget Cuts.
The joke doesn’t ring quite the same coming from a bald man, but I digress.
If you balance the budget, you will have a reduction of welfare.
You will have a reduction in benefits.
The lower and the middle class will hurt.
Retirees specifically will be affected.
Interest rates and unemployment will go up.
It’s very difficult because you’re reducing the amount of spending that the government is doing.
There’s just pain all around.
That’s one challenge.
Let’s take a step back because I want to talk for a second about one of my heroes, Paul Volcker.
He was the chairman of the Federal Reserve in the ‘70s and early ‘80s.
During his time at the Federal Reserve, inflation was as high as 15% in a year.
He wanted to find a way to cut down inflation at any cost.
And he did!
He increased interest rates to above 15% in one year.
This sounds painful, right?
Asset prices went down.
A mortgage at that time was maybe 5-7%.
After his changes, it went up to 15%.
Fewer people could afford houses.
This also affected the value of current bonds.
If people had 5% bonds and now there are 15% bonds, it destroys the value of bonds.
There’s no more easy money as these rates discourage borrowing and debt.
It’s very, very painful to go through this stuff.
But it paid off.
In 1982 to 2001, we had one of the biggest booms that we’ve ever had in our country.
Some of it was because we were able to get this inflationary spiral under control.
Now that we’ve talked about the solutions, I want to share with you what you can do about it!
There are a couple things you can do that can really change your financial future.
What Can You Do About It?
How can you make money and also protect yourself during this time?
It’s been said the best time to buy something was last year.
It’s really important that you have a good strategy going forward.
A lot of people have no strategy at all when it comes to how they’re going to take advantage of inflation.
They just watch what happens and don’t actually see what they’re doing.
It’s really important that you make a strategy.
Before I get into it, I wanted to give a little disclaimer:
I am not your investment advisor.
I am not giving you advice on what you should do with your investments.
What I’m telling you is for educational purposes.
Get Out of Dollars
I try to get as much out of physical dollars and savings as I can.
What exactly do you do with that?
What does that mean?
Well, there are a lot of things you can do that are outside of physical dollars.
You can get into precious metals.
You can get into houses or multi-family apartments.
You can invest in cash flowing assets.
After doing one or more of these things, you then want to short the dollar.
What does that mean?
Well, if you buy a pair of shorts with a dollar printed on it…
That’s one way you can short the dollar.
All jokes aside, when you short the dollar, you believe the dollar will continue to go down in value.
We’ve seen this consistently over the last 100 years so that’s not even a gamble.
We know what’s going to happen.
A way to short the dollar is to use debt.
You use debt to buy cash flowing assets like a house or whatever you like.
There’s a guy that did this really well named Hugo Stennis in Weimer, Germany,
He was a business guy who owned a bunch of companies.
He took out as much debt as he could and bought everything he could get his hands on.
When all the money came due, he paid it off with future money that was worth much less.
If you want to learn more about him, check out this video we did!
Now, let’s get back to the present and talk about what we can learn from guys like Hugo.
The Debt is the Asset
You can go buy a house now at a low interest rate for 30 years.
It’s not just having the asset; it’s having the debt.
The debt is actually the asset, right?
You’ve got this long-term fixed rate debt of 3-4% or less on a house.
This is true especially if inflation rises and you pay it off in future dollars.
It’s really amazing!
Here, we do a lot of multifamily investing, which has a lot of tax benefits.
There is an inflation hedge built into it.
There are higher than normal returns.
You can check out a video we did on the benefits of multifamily investing here.
The biggest thing you can do is take action now!
If you don’t have a strategy, you’re going to feel like you’re out there spinning the wheel and leaving everything up to chance.
And when you do that, you’re really doing yourself and your money a disservice.
Now I want to hear from you!
What are you doing to protect yourself from inflation?
Leave a comment down below and share your stories.
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