Prepper Economics: Part 2: What is Inflation?

If you haven’t read my first part of this series, please do so.  Prepper Economics: What is Money

Ok so nowadays and especially in prepper circles we continue to see talk of “inflation” that big black cloud on our horizon, the boogeyman of the economy.  Now some say that it is already here, technically it always has been and very much so since 1913 to the present, but I will explain why in a little while.

What is Inflation?

Many people think of this when they think of inflation…..

The Price Gun, that nifty little machine that goes around marking the price of items….You go to the store and see that same can of soup you bought a month ago is now .20 more or its the same price but theres 1 oz less in the can than there was before.

Technically by definition in most dictionaries and places you’ll look at on the web they define inflation as something like this…

The general increase in the price of goods and services (things you buy) over a period of time, meaning over time the amount 1 dollar can buy is less and less in relation to the price of the food.  They will also give lip service to the “erosion of purchasing power” of that currency but mostly due to the fact that the price of food went up.

That is true to a certain extent, but the inflation we are worried about, the inflation that is already here and will accelerate faster and faster in the future has nothing to do directly with the price of food.  Your dollar was worth 95% more in 1913 when the Federal Reserve was created than it is now, If you purchase something for around $23 today it would have only cost a buck then!  Does this mean that it was cheaper to produce corn then? or get meat to your freezer? No In fact it is more efficient and cost-effective than ever before, why do you think obesity is an issue? Because its harder to make food?

No the price of food has not increased, it has decreased, it is easier to buy something now than ever before in the history of this country.  This is due to inflation and not the inflation of food prices but of the devaluing of the dollar, the “erosion of purchasing power”.

Now a few caveats….

Are there times when food prices go up because of issues with the food production itself? YES

When a major drought hits, and crops go under on a large-scale, of COURSE food prices will increase, there is less to go around, thus less supply same or more demand so prices increase.

But food production has gotten so efficient we actually PAY farmers not to grow or to throw out crops so that the prices stay relatively stable, we have the ability to make so much food it would be extremely cheap to buy a bag of wheat or rice, we don’t so that prices don’t cause farms to go under…or should i say megacorps to make more money than what the market dictates…anyways wont go into that.

Now I have talked about how money is created in our modern economy, in that there is no set amount, it is decided by a private institution called the Federal Reserve, they put numbers into a computer program and that money now exists.

Now this isn’t a bad thing technically, a fiat system CAN WORK, The base of money (That is all the money in existence) needs to be expanded over time. WHY?

Because every day and every year there are more people coming into the world, more than are going out, that’s why populations increase. With that there are more people coming into the workforce, more business are created to meet that populations demand, current businesses expand, etc.  with all of this there is a need for MORE currency, more money to be available to pay these new workers, so that the growing population can continue to buy things, etc.  With this you can see why if we had the same amount of currency in circulation as we did in 1776, there wouldn’t be enough bills and coins for everyone to have even a little each.

Now this goes into the opposite end of the spectrum of inflation, and that is called DEFLATION, Prices go down, so instead using the same can of soup example, now what used to cost 1.50 now costs 1.25 Great thing right?

Perhaps in some cases depends on where you stand in your finances and life.  Deflation can be catastrophic to people who are trying to sell a home or anyone with debt in general, because now their debt exceeds the value of the home.  You have a 200k mortgage and now your house is only worth 180k, or you owe 5k in student loans and now you don’t get a raise you expected because the economy is experiencing deflation.  Sellers and Debtors lose in deflation, buyers and creditors lose in inflation, you may say screw the bank, but they are going to charge you more for what you want because of it.

You can see why it is so important for there to be that fin balance between inflation and deflation for the good of the citizens and the economy.

So now you may be asking WHY HAS OUR MONEY BEEN DEVALUED SO MUCH?

Its seems strange that the U.S. instituted the Federal Reserve to keep this from happening, to keep a tighter control on the economy to not let “Bad Things Happen”, but here’s the track record

• Devaluation of the U.S. Dollar by 95+%
• Great Depression
• 16 Trillion Dollars in Debt Funded by Federal Reserve in a large part
• 2008 Housing Bubble (and them forecasting that they didn’t “see” a recession coming as this was unfolding)
• Continued Recession despite massive printing (typing on a data sheet) of cash
• Etc. Etc.

So why with giving so much control to the Fed, to keep inflation “in check” have we seen all these things happen, completely contrary to “why we needed it” in the first place.

Well for two reasons

1) It gives MASSIVE power to the government and banking industry, unimaginable power

2) They want Inflation

WHAT????

They want inflation? I thought inflation was bad?

Yes its true

But like I said expanding the supply of money is needed to keep up with growing economies and growing populations, however when you expand it further than that it leads to inflation, that is the devaluing of the currency, and eroding your purchasing power, where you have to spend more to buy the same amount, making it needed to pay you more, and the cycle continue to increase when the base is expanded to cover the “growing” economy plus some as they have continued to do.

However there is another reason, it isn’t an “accident” more is created than what is needed, this is because of DEBT.

If there’s anything I can harp on about is about how everything…everything wrong and everything behind why our economy works the way it does and why it F’s up so badly is because of debt.

We are a debtor nation, in regards to not just our government but our business and individuals.  The average American carries massive debt as does our government, the reason we do is for a lot of different reasons, Home prices are so high because money is so available that prices increase because of massive demand created by debt, not because the house is really worth that much, but that’s a subject for a different day.

In regards to the government who is in an incestuous relationship with large corporations and banks as well as the Federal Reserve who is controlled by these same banks, they hold Massive debt, and not debt held by China who holds about 1.1 Trillion. Japan holds about 1 Trillion as well, but the largest amount is held by who?

You guess it the Federal Reserve and the U.S. government itself, between 6 and 8 Trillion Dollars, we owe it to ourselves.

So back to the question why does the U.S Government want inflation? Think about it if you owe someone money and if every year that dollar is worth less than you can pay off old debt which is worth more with new dollars that are worth less! Presto! You have an engine that seems to be able to work….for a while.  This system has worked great for a long time, we have always been able to have people or ourselves buy more and more debt to pay off the old debt, up until now.  Now we are seeing people, nations and investors shy away from our debt, so we have to buy it up ourselves in larger and larger quantities.  This works for awhile as well, since there is always a demand for dollars because we are the Reserve currency for purchasing Oil.

Not to get deep into that, but in the Bretton Woods conference after WWII the U.S. economy was booming we were the best show and most stable show in town so we finaggled for ourselves to be the sole currency for purchasing oil. So if China wants to buy Oil from Saudi Arabia they have to get dollars to do that, if Mexico wants to buy oil from Venezuela they have to get dollars to do that, so on and so on.  So there is high demand for dollars, with that it keeps a lot of the dollars that have been created out there, being held by foreign governments and states, which keeps the dollar’s value higher.  When you have people holding onto the dollar it makes it worth more, if they all decided not to do that anymore allllllllll these dollars would come pouring back into the country flooding the world with unwanted US dollars and we would be…in deep poop.

Anyways, that s just another facet to the whole equation…kind of complicated right? In a way yes

What you really need to understand is that price increases are due to many things, but what we have been seeing and what we will see soon in the future is not inflation of prices due to food being more expensive but the fact that dollars are worth less, that is the real inflation.

There are more dollars than are needed they are printed to fund debt and the repayment of debt.

Inflation is the fact that every year we have to work more to buy the same stuff. Because you have to remember yes, wages go up but they don’t go up every day based on inflation, they may go up every year or few years to keep up but they always lag behind and when big inflation hits they lag farther behind.

Other than acts of nature or war, price increases are due to weakening currency, that is why the standard definition is not really true when it comes to what inflation really is.  Inflation is the weakening of our dollar due to bad monetary policy by our government and its cohorts, that is all.

So when you hear about inflation this is not really the prices of food going up, but that dollar shrinking in your wallet.

So now you know the basics of inflation and how it affects you but now you are probably asking…how can i Protect myself and family from it?

Well if you think about it, from what you have already learned prices increase over the long term because of a devaluation of your dollar, its value goes down, so prices go up. So if the value of the dollar goes down over time, any investment you have HAS to be at the level of inflation to just keep its value and outperform the level of inflation to ‘increase’.

So if inflation is 4% you have to earn 8% to truly earn %4, etc etc.

If inflation starts to skyrocket to 10-20% no investment is going to keep pace with that, so your money is going to be devalued, in your wallet, in the bank, in you 401k, etc.

So if Inflation is 10% and your and you had $500,000 dollars in your 401k, and it made 5% that year, you 401k statement says $525,000.  But in reality the value of he 401k is now $472,500 (this was a quick figure i know compounding interest through the year and everything else will come out with a slightly different number, but its a rough estimate ok!)

That’s the danger, when inflation is rampant…and it will be, EVERYTHING you have denominated in dollars will be valued less, anything that is physical will be prized more.

So that’s why preppers and myself in particular are very involved in precious metals ‘investing’

Now using the term ‘investing’ I don’t meant to look at it as you would your 401k or a day trade on the stock market, this isn’t a lets buy gold now so we can make a bundle later. It doesn’t work that way. And you shouldn’t think in that manner as a prepper.

It is an investment but an investment in preserving not increasing.

You preserve your wealth in precious metals, let me explain.

When you see articles and predictions of “Gold to hit 5,000 an ounce by 2014…Predictions of $200 Silver if Fiscal cliff isnt reached..” Etc and etc…

You probably think, WOW If i buy around $41k in gold right now I can buy a house when that happens….

Well technically..maybe in certain conditions, if you already holding the debt.  But its not that gold hits 5000 an ounce and everything is relatively the same price…When gold hits 5k an ounce the dollar will be extremely diminished in value, and remember….devaluing currency=higher prices.

Prices continue to go up so roughly your gold will buy the same amount of stuff then as it does today…The dollars in your bank account however will not, that is what we are talking about
Here’s something to be able to visually see what I am talking about (Click on it to bring the image into full view to read it better)

You’re getting more of the currency per ounce but your getting the same value in goods and services.

For people with existing debt like a home, etc, this can work out in their favor ONLY IF they have sufficient savings and buffers to make it through the times until wages increase to match inflation.

So having metals will help to buffer the pain felt by having your savings and retirement destroyed.

I have a whole section on precious metals investing as well as a Blog Post on Silver and Gold Coins and what to look for.

I will repeat this here though. DO NOT LIQUIDATE YOUR RETIREMENT AND BANK ACCOUNTS AND GO OUT AND BUY A BUNCH OF GOLD AND SILVER!

I am not saying that, what i am saying is look into it, and make your own decisions, if you spend all your have on Gold and Silver how are you going to pay the bills, what happens if your have an emergency expense or vacation you want to take and gold and silver are in a dip at the moment now what?

Don’t put your eggs all in one basket, be smart, be intelligent make metals a PART of your preps, not the whole kit and caboodle, I have thought 10-15% of your net worth would be a smart play, however I think now you should increase it from there, to where…I don’t know depends on your individual situation, I am at about 22% myself, but that means 78% of my assets are in other things, whether that is a home, savings as well as retirement accounts, i plan for both the worst and the best!

Its always up to you, just don’t read this or what anyone else writes, get freaked out and make a HUGE MISTAKE, always take time to research and recognize whether or not you are making a decision based on facts and not on emotions (especially fear)