October 16, 2009

Money-Guy 10-16-2009

If you watch any piece of news, read any bit of financial commentary (which you probably do since you listen to this show), or have any sense of how financial markets work, then inflation has no doubt been a thought on your mind. If you go a little deeper, then you’ve probably come across many conflicting view points of inflation. Is inflation good? Is it bad? Are we going to see 70s like inflation? Aren’t we in a current state of deflation? Is this really a concern?

Well, there are no cut and dry, pure, clear answers to these questions. HOWEVER, when I think about this issue, I try to apply the Brian Preston School of Common-Sensical Thinking. The government is printing money. A lot of money. And fast. To understand why this is bad, let me give you a very elementary example.

Assume there are $1,000,000 US Dollars in circulation. Now assume that you have $100,000 of them. You can safely say you own 10% of the total amount of US Dollars. When thinking in terms of consumption, 10% can probably do some damage. Now let’s assume the government steps in and says, “We need to print more money”, so they now print another $1,000,000 US Dollars. Now there are $2,000,000 US Dollars in circulation. Your 10% has now immediately dropped to 5%. In terms of consumption, you can do a lot less with 5% than 10%. That is the danger of inflation.

But I’m probably not telling you anything that you don’t already know. This very simple example above is what we call Monetary Policy (controlling the money supply). Monetary policy determines 3 things:

  1. The Supply of Money
  2. The Availability of Money
  3. Cost of Money

Be careful, however, to not confuse Monetary Policy with Fiscal Policy. Fiscal Policy has to do with government borrowing, spending, and taxation. Fiscal Policy is monitored by the President and Congress, whereas Monetary Policy is regulated by the Fed (The Federal Reserve). As you listen to the show, I’ll explain more deeply the concepts of both these policies.

I also share in the show an article written by my business partner, Bill Cleveland. Bill is a super bright guy, and I think he did a phenomenal job on this article for a medical magazine he supplies content for. In the article he explains how the Fed uses Monetary Policy to attempt to regulate and steer the economy. He goes on to share a speech by Fed Chairman Ben Bernanke titled “Outstanding Issues in the Analysis of Inflation”.

As I close out the show, I share some thoughts on possible ways you can prepare for what most people are calling “inevitable inflation”. There are certain assets classes and types of investments you can purchase now (when the protection is cheap) that you will be so thankful for if we enter into an inflationary period. I go on to explain that inflation is necessarily always a bad thing, and sometimes it is actually beneficial for certain individuals. I also share some thoughts on the strength of the US Dollar and what this not only means for you as an American, but also what it may mean for your investment portfolio.



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