Inflation, Its Effects, And How To Preserve Value

Inflation, Its Effects, And Inflation, Its Effects, And How To Preserve ValueHow To Preserve Value

How is Value Determined?How is Value Determined?

What is a dollar?What is a dollar?

• Began as a Joachimthaler which was one troy ounce of silver

• Eventually the name was shortened to thaler.

• Thaler was changed to daler and in time became dollar.

• Thus a dollar is an ounce of silver.

What is the Value of Money?What is the Value of Money?

• Remember the Laws of Supply and Demand?

• If there is very little money, then money is valuable.

• If there is a lot of money, then money is worth very little.

InflationInflation

• Inflation is an increase in the total amount of money.

• When there are more dollars, each dollar is worth less.

• Since other goods didn’t change in value, it takes more dollars to buy the same good. Thus prices have went up.

Why do we get inflation?Why do we get inflation?

• At its root, it is a moral problem.

• Government has 2 ways to raise money:– tax

• duty• income• sales• etc.

– inflation

TANSTAAFLTANSTAAFL

• There Ain’t No Such Thing As A Free Lunch

• Nothing of Value comes for free

• Someone had to pay for it– with money– by work– by taxes– by inflation

• “I want, I want” = “Tax Me, Tax Me”

VelocityVelocity

• Velocity is the speed at which money changes hands

• If a 10 dollar bill goes to 50 parties in a year, then the velocity is 50.

• 10 people in circle all want to sell goods– with 10 five dollar bills– with 1 five dollar bill

Demand for MoneyDemand for Money

• Money can be thought of as just another product on the market which has its own supply and demand curves.

• When demand for the dollar falls, people want to get rid of the dollar, so they spend it. This has the effect of increasing the supply

• When demand for the dollar rises, people want to hold the dollar, so they keep it. This has the effect of decreasing the money supply.

Demand Velocity RelationshipDemand Velocity Relationship

• If demand for money falls, the velocity rises.

• If the demand for money rises, then velocity falls.

Stages of InflationStages of Inflation• Prices rise, but people hold their money

waiting for prices to fall.Because the money is held, prices don’t rise fast.

• Prices rise still further, and now you spend your money because you see that prices won’t fall. You also speed up buying since you know money is declining in value.Velocity is increasing as demand for money falls. Prices go up faster than the money supply.

Stages of InflationStages of Inflation

• Prices keep going up so you now try to get rid of your money as quick as possible. You will buy anything that has value because the money is becoming worthless.Money changes hands very fast. Demand for money is falling fast and Velocity is skyrocketing.The money is becoming worthless and even if no more money is printed, the money is doomed.

Federal DebtFederal Debt

• The Government knows that if to much currency is injected into the economy, we will get stage 3 inflation.

• Thus, the Gov has decided to inflate something else – Treasury Notes.

• The Gov is papering the world in these notes – inflating them instead of dollars, so it can keep up its spending.

• For now this seems to be working.

Why is Gov Debt Bad?Why is Gov Debt Bad?

• Think of supply and demand of investment money.

• Businesses and Gov compete on market for investment dollars.

• When the Gov gets the money, then Businesses can’t get it to expand operations and grow.

What is Impact of Inflation on What is Impact of Inflation on Investment?Investment?

Principle $1,000.00Interest Rate 10.00 0.1Inflation Rate 3.00 0.03Tax Rate 30.00 0.3Number of periods per year 12Number of years 50

Compount Interest $145,369.92Value of Ending value in starting value 0.223548224Relative Value of ending in starting $32,497.19taxable gain $144,369.92Tax $43,310.98Post tax ending dollars $102,058.95Post tax ending dollars in starting value $22,815.10Net Performance $21,815.10

The French LessonThe French Lesson

• Introduce Paper Money

• Inflate that money– Stage 1 inflation– Stage 2 inflation– Stage 3 inflation

• The Black Market• The “Legal Tender” Laws

• Government collapse

The Panic of 1980The Panic of 1980

• The Carter inflation – over 18% in two years

• Iranian hostage situation

• Freeze of Iranian Assets

• Global run on the dollar

• USSR invades Afghanistan

• Carter levies grain embargo on USSR

The Panic of 1980The Panic of 1980

• Gold prices skyrocket, and dollar is about in stage 3.

• Paul Volker triggered deflation and raised interest rates by 3 points in a month

• The panic subsided

Lessons from 1980 PanicLessons from 1980 Panic

• Most foreign investors now keep liquid investments instead of long-term investments

• Banks realized that gold was necessary in light of government policies

• Few learned about demand for money

Increasing VelocityIncreasing Velocity

Shares traded on NYSE in millions

1980 1985 1990 1995 2000

11,56211,562 27,77427,774 39,94639,946 87,87387,873 262,477262,477

Value of shares traced on NYSE in billions of $

1980 1985 1990 1995 2000

382382 981981 1,3361,336 3,1103,110 11,06011,060

The Hair TriggerThe Hair Trigger

• Because of the 1980 Panic, the rich hold very liquid assets. This means that at the sniff of something going wrong with the economy they will pull their cash out of the banks.

• With each shot of inflation, the economy becomes more and more unstable because of all the malinvestment.

The Injection EffectThe Injection Effect

• When the Gov issues money, to whom does that money go?

• Is it spread evenly across the people in the economy?

• Or is it poured into the economy in certain places or to certain groups of people?

To Whom Does the Money FlowTo Whom Does the Money Flow

• Where are these cones?

• Is a cone a deliberate cone (DC) or an accidental code (AC)?

• Is the cone filled (F) or hollow (H)?

Cone ClassificationsCone Classifications

• DCF1 – Deliberate Cone Federal 1st in line

• These are people or companies who have extremely stable incomes from the gov and backed by the printing press

• Ex: Social Security, Gov Pensioners, military pensioners, civil service pensioners

• If this is the customer base, you can plan 5 to 10 years out. Extremely stable


• DCS1 – Deliberate Cone State 1st in line

• State pensioners

• Not backed by printing press, but very stable


• DCL1 – Deliberate Cone Local 1st in line

• County and city pensioners from police, fire, social services and education.

• Not backed by printing press, but very stable


• DCF2 – Federal 2nd in line

• Ex: Federal Agencies, employees

• Can experience budget cuts, layoff, career changes.

• Stable, but not as good as DC1s.


• DCS2 – State 2nd in line– State Agencies and employees

• DCL2 – Local 2nd in line– Local Agencies and employees


• DCF3 – Federal 3rd in line

• This is a firm or person which sells directly to DCF1s and DCF2s.

• Military contractors, retailer just out of military bases, insurance to federal employees, etc.

• Much more stable than regular businesses, but effected by budget cuts and changes.


• DCS3 – State 3rd in line– People or companies which sell to DCS1s and

DCS2s.

• DCL3 – Local 3rd in line– People or companies which sell to DCL1s and

DCL2s.


• ACF – Accidental Cone Filled– This is a company, location or industry which

is booming due to money sloshing around. – This can be a good source of profit but it

could crash in a week.

• ACH – Accidental Cone Hollow– This is a area which is spending to prepare for

a boom that never comes. Can make money selling while they prepare, but business will never take off.


• S – Sinkhole

• Slums, poverty stricken areas.

• They have no money so you cannot sell to them, but you can buy from them for cheap.

• Buy in the S and sell in the other areas.

Dangers of Arbitrary LawDangers of Arbitrary Law

• When the Gov can make money and move it around whimsically, then it is dangerous to hold to many fixed assets.

• You don’t want to be stuck holding the factory with no production in a S or ACH.

• So be a connector instead of a manufacturer.

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Inflation, Its Effects, And How To Preserve Value