By Steven Lo
Inflation moves some of the cheeses away from hardworking producers every year, but what really causes inflation? Doesn’t it sound strange to have something that steals away an average 3% of your wealth, but no one says anything about it? If someone has to lose, then who receives the gain?
Popular perception is that inflation is inevitable and it just happens. Well, nothing just happens. There are always causes and effects. Inflation is human-induced and the perpetrators know what they are doing.
Inflation makes money worth less. How can money bills worth less? A 5 dollar bill is a 5 dollar bill right? The market doesn’t care if the face value tells you it is worth X dollars. What the merchants and workers are willing to offer at a set price tells us how much money is really worth.
There is a set amount of dollars in the system at any time. If there is an influx of freshly printed money into the system, while the amount of real assets and services stay the same, then the money bills will be worth less. The same goods and services will need more money to purchase. In other words, the market determines the value of money based on the rule of supply and demand.
Whoever gets the increased money supply earlier in the game will get more benefits, because at that time the market just starts to respond to the new supply of money, so the prices of real goods and services haven’t increased yet. The group of people who get the new supply of money enjoy the same purchasing power before inflation kicks in, but the last group of people who receive the batch of new money before price adjustments will suffer the worst of inflation. They have offered their goods and services, but the money’s no longer worth the same in the market.
This is why investing in the market is so important. Your purchasing power will be protected if you exchange money bills for real assets. It is also very crucial to see where inflation starts. Does the government give away free money again? To whom? Are there new government regulations or protection for certain corporations in certain sectors? Paying attention to these things can pay huge dividends to investors down the road.
If you simply want to park your money in a safe place, but are concerned with the low rate of returns on bonds and Certificates of deposit, then precious metals such as gold are probably the best place to protect your wealth safely, and it offers very handsome returns too. Gold is precious because it is hard to find. It is not something that can suddenly increase. In fact, the more money supply increases, the more gold prices will increase. If you want to know more about the reasons and the strategy of buying gold, you can visit the link below.
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MLA Style Citation:
Lo, Steven "The Best Inflation Strategy." The Best Inflation Strategy. 22 Jun. 2010. uberarticles.com. 12 Aug 2015 <http://uberarticles.com/finance/investing/the-best-inflation-strategy/>.
APA Style Citation:
Lo, S (2010, June 22). The Best Inflation Strategy. Retrieved August 12, 2015, from http://uberarticles.com/finance/investing/the-best-inflation-strategy/
Chicago Style Citation:
Lo, Steven "The Best Inflation Strategy" uberarticles.com. http://uberarticles.com/finance/investing/the-best-inflation-strategy/
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