Why The Super Rich Love Inflation (And How You Can Profit Off It Too)

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May 19, 2014 by Liberty

Janet_yellen_swearing_in_2010The federal reserve had a press conference recently that shed some light on the insanity of it’s current policies. As expected, Janet Yellen (the fed chairman) left herself wide open to do whatever she wants in the future. While the media continues to announce more tapering in the future, a quick look at the federal reserves history suggests any tapering is going to be short lived. Janet Yellen even went as far as dismissing inflation as something that the average person does not care about.

Of course, that’s complete insanity. One of the number one concerns of the average person is the rising cost of living. When the average person goes to the grocery store, they can’t afford for the bread to cost twice as much to buy. Even the middle class end up suffering by having to spend less money on luxuries with more required for the essentials.

Then we come to the biggest victim of inflation, the average rich individual. The average rich individual is older and often retired. They have a few hundred thousand or maybe even a couple million sitting in cash-like instruments. The average retiree is not investing in Google or any high risk/high reward business. They’re investing for a few percentage points a year. They suffer the most from inflation. They are forced into a constant race against inflation melting away the rest of the money in their account while they become less and less able to earn a living through working because of their age.

The average rich individual is definitely not who the federal reserve aims to help. The men and women with many million usually don’t get the money from working a 9-5 job. Getting multiple million usually requires some amount of leverage and a whole lot of risk. That’s where the inflation can do good.

Say Good-Bye To Your Debt

London.bankofengland.arpInflation may be melting away the value of the dollar but that also melts away the value of any debt you incur. If you have a few million dollars worth of debt, you might just be wanting more inflation because that will just make it easier to pay off the loans in the long run. The super rich usually have plenty of debt to lose value.

Imagine you got $100,000 worth of student loan debt that let you get a job that pays $50,000 a year. If the value of the dollar drops in half on the day of your graduation, (assuming there wouldn’t be mass hysteria) Your job would have to pay it’s employees $100,000 a year to keep them happy (why do the same job for less value.) The value of your debt wouldn’t change. That makes going to school a much more attractive investment costing only half the time to pay off.

The super rich are some of the most indebted around. They’re heavily leveraged with debt. Any inflation that occurs just helps speed up their recovery.

But Don’t They Lose Money?

The average rich loses a fortune due to inflation. As I mentioned before, they’re usually involved in investments that barely keep up with inflation. The super rich are involved in higher risk instruments that actually have a fighting chance of beating inflation. Super rich don’t become super rich investing for 2-3% percent a year.

That being said, stocks, businesses, and real estate aren’t hurt dramatically from inflation. Their value just goes up with inflation. If the dollars value drops 5% then the stock prices just go up 5%. (Not technically but it’s a simple way to think about it.)

When a person is invested in treasury or corporate bonds, a person can get locked into a deflating dollar. These are, of course, the investments that people tout as “safe.” If the dollar deflates at three percent a year and the bond only pays 2 percent, that investment is sticking the investor with a 1 percent loss every year.

What Can We Do To Profit Off Inflation

Two_20kr_gold_coinsFirst of all, never trust anyone when they tell you that an investment is safe. The only safe investment is the investment that you understand. The investments that most people tout as risky can become some of the safest when you know how to use them effectively.

Any low return investment is risky when the government is willing to deflate the value of the dollar. Yes, that includes your bank account. Money that is sitting around gaining a fraction of a percent interest is not gaining value, it’s losing value. Be careful with how much money you let sit in low yielding locations.

Attractive investments are the ones that have a shot of keeping up with or benefiting from inflation. By that, I mean they’re not fixed or at the very least, not fixed for long. Gold miners stocks, in particular, have some huge potential gains from the increases in money supply. Of course, don’t take anything I say as investment advice. (I wouldn’t want the feds at my door. Anyway, if you take advice without understanding the risks then you’re insane anyway.)

That, of course, brings us to gold. I sometimes have the bad habit of referring to gold as an investment. It’s not an investment. It’s a currency. You can invest in gold but it’s definitely not the same as holding it as a currency.

Everyone should have a little gold. It’s the oldest and safest currency in history. While the dollar can disappear tomorrow, gold has thousands of years backing it up. That gold should not be considered an investment. It should be considered a less accessible emergency savings account. In case the worst of the worst happens, you’ll have some value to provide.

That gold should be treated completely differently from any investment in gold. Your investment in gold is the part you can profit off of. While the gold you have as currency may double in value, you don’t sell that. You hold it as long as possible. The gold you hold as an investment can be sold.

The average person should probably focus on non-physical gold for investment purposes. There are some unlikely catastrophes that can happen with this but if you’re planning to sell it for a profit, the benefits of not having to hold it greatly outweigh the risks. Gold stocks, ETF’s, and companies that benefit from gold are some easy ways to get started through paper gold investing.

One investments that too few people utilize is their own business. Businesses can be unbelievably attractive as an investment. Whenever inflation kicks down the value of the dollar, you just raise the prices to match. The value of your business goes up with the dropping value of the dollar. Most importantly, you learn all the skills you need to run a successful business. This is probably not for everyone but I highly recommend it.

The super rich know how to benefit from the falling value of the dollar, and you should too. While you may never be completely protected, you can prepare your portfolio to leave yourself much better off no matter what ends up happening.

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