Have you noticed that the cost of life increased a lot over the last few months? That means the money you have in your bank account and the money you earn have every day less purchasing power. One word summarises it all: INFLATION.
The worst thing is that inflation will most likely persist for good, at least until there a very severe global turmoil would force the financial system to abandon the current monetary system.
We highly recommend you read this short article till the end, in which we will explain the following:
- Why is your money losing value as time goes by and why that’s never going to stop for the rest of your life?
- Why do the rich get richer and the poor get poorer?
- Is the current monetary system always bad or can we benefit/profit from it?
- What is the best solution to fight the eroding purchasing power of inflation and actually make money from it?
1. Inflation and quantitative easing (money printing)
We all know what is inflation but what causes inflation? There can be various reasons behind a short-term price increase of goods and services, but there is always one reason why we will always have inflation in the long term: money printing. But what is money printing, what does it mean?
That’s very simple. When the economy lags, governments or central banks print money to push the economy and avoid economic recessions. This is also called quantitative easing.
This mechanism became possible after the central banks stopped backing hard currency to gold (to learn more about this topic read www.investopedia.com/articles/forex/122215/bretton-woods-system-how-it-changed-world.asp).
In fact, in the previous monetary systems that lasted between the end of the Second World War and Bretton Woods in 1971, money could not be printed unless the Central Bank had increased its gold reserves as the currency value was pegged to gold value; everything changed after Bretton Woods (see arrow in the chart below).
Central banks have now the authority to (electronically) print money and use that newly created money to purchase Treasuries (government debt) in the open market.
This sounds complicated, but it is essentially just injecting liquidity into the system. Only during COVID-19, after the Global Financial Crisis, the US Federal Reserve has created 5 trillion US dollars, more than has been spent on all wars since 2001.
If you print money out of thin air and inject it into the economy, the value of the existing money will decrease. There is nothing simpler than that, of course, they won’t tell you that on television!
2. Why rich get richer and poor get poorer?
With the current monetary system, there are people who lose out (the majority) and people who profit from it.
In a money-printing bonanza, the injected liquidity pushes prices up, which means that food, housing, materials and even elementary services become more expensive but also that assets increase in value.
Therefore, if you are in a situation where most of your income goes away in expenses and you have no assets to hedge, you are slowly crushed by the eroding power of inflation.
On the other hand, if most of your wealth comprehends houses, financial assets, lands, commodities etc. you get the benefit of rising asset prices. The rich get richer, and the poor get poorer.
3. How to gain in this current monetary system
Financial assets may fall in a recession, but usually nowhere near the level they rose by.
To give an example, the S&P 500, the common metric used as a proxy for the stock market, is nearly 7 times higher from its lows in 2008. A fall of 50% would amount to a nasty recession, yet that would still represent a 350% return in 14 years.
Asset owners do not enjoy these returns because of how hard they worked, or because they were exceptionally skilled, but for one reason and one reason alone: they started out with these assets. OK, so some worked their way up, but on the whole of it, whoever has assets benefits.
4. Why do some companies make so much money no matter what?
We spoke about the importance of holding assets to actually benefit from the current monetary system that helps the rich and crush the poor, which means starting a life strategy that encompasses two things:
1. Build a mindset to spend less than you earn; start saving.
2. Invest the cash you do not need but always leave a liquid fund for rainy days.
For more investment tips read: 15-investing-mistakes-to-avoid
Okay but – you could argue – if I do both, what’s the best way to invest and make meaningful returns?
Okay so, have you noticed that no matter what happens in the world, Ukraine WAR, COVID-19, surging energy costs, and so on and so forth there are companies that make so much money no matter what?
We will not dig into the details now, all you need to know now is that if you have the right attitude, the best way to make money is to invest in a few, best of the best companies with great potential and solid financial health.
Most would now wonder: agreed, but how can I find these great investment opportunities?
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Investing in the traditional way is never going to generate very high profits, why? Because with a fund or ETF, you are investing in a large number of securities (grouped together by some characteristics these securities have in common, like their geography, sector, company size, etc.) However, naturally, investing in many things means putting money into very good companies but also in average and bad companies. So…is there a way to invest only in good companies?
Yes! There are two ways to discover great companies to invest in: 1. Learn superior financial skills and spend your days undertaking financial analysis or, and we get to the point, 2. hire somebody who does it for you. These people are said to perform investment research.
Yes, that’s the great news, there are websites where you can find all the best investment opportunities and all you have to do is pay a small subscription fee.
To learn more about this topic, watch what we do at Gainshore.
SOURCES:
Ashmore, Dan. Bitcoin, Money and Human Beings: A meandering tale about economics, history and the curious experiment that is Bitcoin.
https://www.thebalancemoney.com/bretton-woods-system-and-1944-agreement-3306133
https://www.nasdaq.com/articles/money-printing-and-inflation%3A-covid-cryptocurrencies-and-more
https://www.investopedia.com/articles/forex/122215/bretton-woods-system-how-it-changed-world.asp
