Monetary Inflation: How Increased Paper Wealth Can Translate into a Lower Standard of Living

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Monetary Inflation: How Increased Paper Wealth Can Translate into a Lower Standard of Living

April 17th, 2008

April 17, 2008

Consider this. If you owned a prime piece of real estate in 2001 that was valued at $1.8 million that cost 7,200 ounces of gold to buy it back then (at a price of about $250 an ounce), and if you could now sell that same property and receive $2.6 million for it, even at this inflated price, it would now require less than 2,800 ounces of gold (at about $930 an ounce). So while you may have become richer in the paper currency of U.S. dollars, this increase in paper dollars does not mean much if this increase in paper will enable you to buy less “stuff” today. Certainly, despite the inflated price of this property in paper dollars, you have become much poorer in ounces of gold (real currency). Thus, Central Banks, by inflating money, create the illusion of growing wealth when in fact they are stealing wealth from right underneath our very noses. This is EXACTLY what Alan Greenspan meant when he said “deficit spending is simply a scheme for the confiscation of wealth”. By the way, Mr. Greenspan was only bold enough to make such a statement in 1966, decades BEFORE he knew that he would eventually became the Chairman of the U.S. Federal Reserve.

Perhaps, an even easier way to understand the above illustration is as follows. If you had liquidated that $1.8 million of real estate in 2001 and bought a basket of goods that contained a couple of luxury cars, a small condominium, food for a couple of years, a two week vacation somewhere, all your entertainment expenses and other assorted goods, and now liquidated that $2.6 million property today and bought the EXACT same basket of goods as you did back in 2001, you probably would discover that due to monetary inflation, that same basket of goods would now cost you in excess of $3 million, if not in excess of $3.5 million.This is the exercise that would truly tell you what inflation is, NOT the ridiculous CPI figures that the government releases.

That is why, even with the current unsustainable “solutions” being implemented by the Feds today, even should a miraculous upward surge in U.S. and other global stock markets occur, it can only incur because the U.S. dollar is being purposefully and greatly inflated. Thus, those that truly understand the game of monetary policy that is imposed upon financial markets by Central Banks today would have no problem understanding that a game of financial Russian roulette has been thrust into our laps as the preferred solution to the financial crisis we face today.

Even in a so-called “best case” scenario for U.S. stock markets and major global markets with strong ties to the U.S., you may very well still end up losing substantial wealth if you truly understand the inflationary tactics that are being implemented in an attempt to manufacture another up leg in U.S. markets. Still, despite the intervention (or some would say meddling) of the U.S. Federal Reserve in free markets, I hold strong reservations as to whether another strong leg upward in U.S. markets is possible. Despite the excessive monetary inflation tools that Central Banks have at their disposal ever since the U.S. Federal Reserve decided to take the world off the gold standard, decades of manipulation have led us to the verge of a tipping point that even excessive inflationary policy may not be able to prevent. If you understand this, it’s quite easy to understand why certain elements of the investment and financial industry desperately want you to view gold, silver and other precious metals as “speculative” and “risky” and paper driven assets such as traditional stocks and paper currency as “safe”. A simple understanding of global monetary policy dictates that the exact opposite is true.

Technorati Tags: monetary inflation, hyperinflation, U.S. Federal Reserve, financial crisis, U.S. dollar crisis, gold bull, commodities

5 Comments Add your own

1. The Underground Investor &hellip | April 30th, 2008 at 10:46 am

[...] The reality still remains, however, that if the Feds cut interest rates again later this afternoon as expected and feed a continuing rally in U.S. markets, the rally is largely irrelevant because of the great lengths of monetary inflation that have already been imposed upon the economy to provide the current levels of market stability. To fully understand this concept, merely read my article here of How Increased Paper Wealth Can Translate into Lower Standards of Living.Technorati Tags: monetary inflation, dollar debasement, increasing prices [...]
2. The Underground Investor &hellip | May 13th, 2008 at 9:22 am

[...] So what does this tell us? In very simple terms, when goods are priced in stable currencies, their prices remain much more stable as well. When goods are priced in unstable, highly inflated currencies, then their prices soar primarily due to the significant debasement of the currency it is priced in. Furthermore, as I explained in this previous article, the debasement of currency often creates an illusion of creating wealth while in reality, such actions destroy real wealth. [...]
3. Sunshine Kills Vampires &&hellip | May 14th, 2008 at 10:45 am

[...] When goods are priced in unstable, highly inflated currencies, then their prices soar primarily due to the significant debasement of the currency they are priced in. Furthermore, as I explained in this previous article, the debasement of currency often gives rise to an illusion of wealth creation while in reality, it actually destroys real wealth. [...]
4. The Underground Investor &hellip | July 5th, 2008 at 10:16 pm

[...] June 26, 2008 – The One Question That Will Have the Greatest Impact on Your Financial Future May 14, 2008 - What’s Driving the Price of Oil Higher? It’s the Dollar, Stupid! April 30, 2008 – How Low Will the Feds Go? April 17, 2008 - Monetary Inflation. How Increased Paper Wealth Can Translate into a Lower Standard of Living March 3, 2008 – Why Investors Will Never Make Money in this Bear Market Feb. 20, 2008 - The Secret to Building Wealth in Volatile Markets Feb. 6, 2008 – Is Recession in the U.S. Coming? We’re Already in One. Jan. 28, 2008 – The Outcome of the Fed’s Interest Rate Cuts? History is the Best Oracle. Jan. 24, 2008 - The Fed’s 0.75% Interest Rate Cut – A Recipe for Future Disaster Dec. 7, 2007 - The Dollar Panic. Is it Real? Sept. 19, 2007 – Signs of a Peak Investment Crisis Keep Coming June 18, 2007 – Alan Greenspan’s Call of Checkmate on China is Premature June 17, 2007 – PIMCO’s Bill Gross and the Economist Agree with SmartKnowledgeU 6 Months After the Fact! May 28, 2007 – The Politics of Higher Oil Prices May 26, 2007 – Asian Countries Pooling Reserves to Protect Themselves from the Incredible Shrinking Dollar, Part II May 25, 2007 – Asian Countries Pooling Reserves, Part I May 3, 2007 – The Death of the 3-Year Treasury Note Apr. 1, 2007 – The Next Cold War Will be an Economic One Jan. 25, 2007 – Dollar-Denominated Bonds Faltering Jan. 9, 2007 – Use the Longtail of Investing to Accurately Predict Dollar Behavior Jan 7, 2007 – 10 Reasons Why Dollar-Denominate Bonds Aren’t Safe Dec. 21, 2006 – Iran Presents More Trouble for the U.S. Dollar Dec. 7, 2006 – The U.S. has Perfected the Incredible Shrinking Dollar [...]
5. How a Fraudulent Global M&hellip | April 21st, 2009 at 12:25 am

[...] When I inform people of my very simple way to assess the future direction of real estate markets based upon monetary policies being implemented in their country, they sometimes counter with the question, “What about the trillions upon trillions of currencies being injected into the EU countries, the US, and Japan to stimulate the economy? Won’t that cause real estate markets to keep rising?” Again I answer their question with a question of my own. I ask, “So what if these actions succeed in inflating and distorting markets even more. Do inflated asset prices truly create real wealth and is a bigger bubble really beneficial to you as an investor?” Even if higher, inflated real estate prices and a greater bubble transpires as a result of irresponsible monetary policy, an inflated price of a real estate asset does not necessarily translate into an increase in real wealth. What matters to real wealth is simply the purchasing power of your money, not how much of it you have or how much an asset is worth. During periods of high inflation, an asset can grow quite significantly in monetary terms while simultaneously destroying one’s wea…. [...]