Five Myths About Inflation By William Cate
A classic definition of inflation is any increase in money supply. Understanding inflation is vital to anyone seeking investment profits or attempting to build a successful company. As with most basic issues of global economy, inflation is surrounded by myths and misinformation.
Myth #1 Inflation is bad for everyone.
Inflation is bad for lenders. It's good for borrowers. To break even on a loan, a lender must charge sufficient interest to offset inflation and taxes on resulting interest income. For past decade, inflation has hovered around 6%/year in USA. If you assume that State and Federal taxes on interest income are 40%, lender needs a 10% interest rate to breakeven. There haven't been any relatively safe U.S. Investments paying anything near 10%/year, for over two decades. If you have a 30-year fixed mortgage at less than 6%, you are benefiting from inflation. Assuming inflation rate remains at 6%, (which is very optimistic) you are making more money on borrowed mortgage money than you would earn having deposited same amount of money into a bank savings account. America's biggest borrower is U.S. Government. The Government's plan has always been to ensure that inflation rate offsets Government's interest payments. Follow Washington's lead and be a borrower in United States. However, borrow to create income and assets, not to live good life. When people no longer accept their currency, lenders usually go bankrupt and borrowers will pay their debts with worthless paper. There are two examples in American history of loss of confidence in U.S. Dollar. After Revolutionary War, Continental Dollar was no longer accepted as currency. After Civil War, Greenback Dollar was no longer accepted as currency. Both were printed by Government to pay for a war. In both cases, dollars where bought by speculators and Government eventually redeemed them at face value. The reason that U.S. Constitution has a provision limiting currency to gold and silver is directly related to failure of Continental Dollar. The strategy that benefits from this inflation paradox is to be an American borrower of dollars to buy hard assets and a foreign investor (lender) of your investment funds.
Myth #2 A gold standard would end inflation and result in a better life for all.
You can't eat gold. You can't wear gold. It takes too much gold to build a house. As Art Hoppe suggested twenty years ago, chicken eggs would make a better hard currency than gold. At least you could eat your nestegg when Government scrambled economy. Western Europe had eight centuries of gold standard. From roughly 4th Century to 12th Century, everyone was on gold standard. Usury was outlawed everywhere, It was against teachings of Catholic Church. It's still against teachings of Islam. Money was limited to gold, silver and land. This period in Western History is called "the Dark Ages" for good reason. After WWI, Winston Churchill tried to move Great Britain back onto a modified gold standard. Not only did his effort fail; it was among secondary causes of Great Depression in England. Fiat money is intrinsically worthless. Gold is intrinsically worthless. The advantage to paper currency and credit is that it can be expanded at any rate and thus create perceived wealth. This perceived wealth could be used to create products that create more jobs and more perceived wealth. The goal is to ensure that those hurt by expanding money supply aren't aware of their lending mistakes. As long as everyone agrees that paper money has value, system works better than people agreeing that gold has value.