Many in the media and financial world are predicting Inflation. Because the Fed is devaluing the U.S. currency, many assume that inflation will come.
Inflation
What is Inflation? I am glad you asked.
Inflation is the gradual or rapid loss of purchasing power. Many of us have seen this at the grocery store or gas pump. When I first started driving, gas only cost $0.99 per gallon. I recently filled up at over $4.00 per gallon. I used to be able to buy a candy bar at the checkout counter with 2 quarters. Today it will likely cost you closer to $1.00.
In both of the examples above one dollar ($1) lost it’s ability to purchase an item. One dollar used to purchase a whole gallon of gasoline, now it only buys 1/4 of a gallon. A dollar used to buy 2 candy bars, now it only buys you one.
Inflation occurs when an abundance of money chases after scarce resources.
Effects of Inflation on Wealth
Inflation can ravage the wealth of an individual. If an individuals portfolio does not grow at a rate faster than inflation, the portfolio is actually losing the ability to buy services, food, and shelter.
In the example above a $1,000,000 portfolio used to buy 2,000,000 candy bars. Now it can only purchase 1,000,000 candy bars. If the rate of inflation remains the same, the same portfolio may only buy 500,000 candy bars in the near future.
Exchange the candy bar for bread, water, electricity, or healthcare and you can see the devastating effects that inflation can have on the wealth of an individual.
Protecting Against Inflation
Kyle Bass is the founder of Hayman Capital, a hedge fund. He made quite the fortune by short selling the sub-prime mortgage market. He spoke to a CNBC reporter after a conference about his thoughts on inflation. A link to the video is below.
In the video Mr. Bass says at the 2:05 minute mark that he expects inflation. At the 2:22 mark he suggests owning productive assets (apartment buildings). At the 2:35 minute mark he also recommends securing long-term fixed rate financing on those assets.
http://video.cnbc.com/gallery/?video=3000143907
If you want to learn more about purchasing hard assets to protect your wealth, please contact Peter at 925.385.8798.
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