Friday, April 11, 2008

#117 - Beating the Inflation Monster

I think Jubak explains really well some of the inflation issues in this segment. What I love about Austrian Economics is that aside from trying to come up with the most efficient and stable economic theory like any economic school, it also factors Liberty and it's relation economic policy.

What it ends up boiling down to

- Liberty is intrinsically tied to the citizens ability maintain a standard of life in which they can exercise their Liberty
- Economics is intrinsically tied to Liberty in the sense that freedom to enter the market create the competition that creates the innovation that enable the market to expand and see Economics growth

So if one falls the other does to, and if one is improved so does the other as well. So when inflation is beating away at your purchasing power whether it be cause of increased foreign demand (which is a natural effect of a free market) or cause of artificially increased money supply (an unnatural source of inflation)

Some products will go up in price do to free market forces of supply and demand, which is natural and also naturally the market will adjust to it. Although, when other factors cause purchasing power to decrease faster the market can naturally adjust you'll see adverse reactions which is the current state of the US economy so wonderfully exhibits.

Despite what's going on in the nation economically and politically you can still protect your own personal liberty and standard of life through investments that can beat real inflation numbers. As Jubak pointed out, taking Food and Energy prices into account in current CPI methodology you see a current inflation of 4%.

So basically, by the end of the year that $20 bill in your pocket will have purchasing power of 19.20. If your rich you probably have enough foreign investments that your wealth can stealthily maneuver current US dollar declines but if...

- If you live paycheck to paycheck unless you get a 4% raise a year, your actually see purchasing power decrease in wages which will effect you ability to save maintain the same standard of life you have.

- If your near retirement and your nest egg is seeing anything less than 4% increase each year, your retirement is shrinking.

As Jubak pointed out, due to the focus on the Core rate of inflation by most institution which don't consider Food and Energy prices Treasuries, savings accounts, are guaranteed loss of your money. You'd actually realize more yield from spending you money right now.

So this leaves the equity market (stocks) despite what you hear int he news as the best place to beat inflation. Whether you have a Stock Broker (which I will be in a week :)) guide you in buying growth stocks to see value grow or into dividend yielding stocks to gain income, Equities is your best bet of preserving your liberty and fighting the inflation beast.

Protect your liberty now, it'll help you fight for it tomrrow.

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