Inflation Busters

Inflation got very little coverage in last week’s political conventions.  It occurs to me that most Americans have never experienced inflation and probably don't even know what it is.

In a nutshell, inflation occurs when the dollar loses value—buys less. Usually this is demonstrated by the cost of the stuff we buy every week, going up. When inflation hits a currency people all-of-a-sudden realize that their money is losing value.  When that happens they begin to buy things, and save less—because if money will only get cheaper over time, it makes sense to spend it quickly.

That’s why I view the auto sales numbers—up 20% in August over 2011, as maybe good for the auto industry, but an indication that inflation is upon us.

It's hard to come to grips with the value of our dollar changing.   I mean a dollar is a dollar.  After all, our dollar has been so steady that other countries even use it as a constant currency.  But when our administration simply prints money and puts it into circulation, our dollar is losing value and is in fact getting cheaper, and prices will continue to grow due to the administration’s acts.

Just watch, you’ll see costs of goods go up and up and up. Take for example, gasoline which is going up every day.  Ditto with food—bread and eggs and orange juice have doubled, while other foods like cereal and beef and cheese have just gotten more expensive.

If you could hold a currency value steady, (no inflation and no deflation) the costs of the market basket of items you buy would never change. Think for a moment that a gallon of gasoline in 1962 could be bought for a quarter. Back then a quarter was made of silver. A 1960 silver quarter today is worth about $4, and would still buy a gallon of gas. That's because the silver held its value, but the dollar has inflated.

I recall a gas station in Rindge New Hampshire that had the price they charged for gas painted in huge numerals of their roof.  It said 29.9 cents.  And for all the years I lived there, (1964-1968) that’s how much they charged for a gallon of regular.  Nobody would even consider painting a price on their roof today as the prices are so flexible.

Quantitative Easing, which is something the Fed likes, is the process where the government drizzles money into the economy by purchasing Federal Bonds—basically “on the cuff”.  They buy the bonds with essentially counterfeit bills.  And so as more fake money—with nothing to back it—is fed into the economy, the dollar is being inflated.

What can you do to protect yourself from this erosion of your savings and buying power?  The best way to fight inflation is to exchange your dollars for something real that you need or will grow in value.  Obviously I like real estate, and when dollars get cheap, houses get expensive. 

In severe inflation a house you may have bought for $100,000 will soon have a value of $125,000 or $150,000.  The problem with houses is they are not liquid.  Meaning you cannot exchange them for the higher dollar amount at your will, you will need to find a buyer who may need a mortgage and sometimes there are other costs, taxes and so forth. This can take a year or more as we've recently seen.

But not everyone can buy a house to fight inflation.  If a house is not in your future, you can buy things before the costs go sky high.  That’s why cars are selling so well.  Buying items you might have been putting off-- like home improvements--makes sense. If you need a new air conditioner, now is a great time.

Being invested in something other than dollars is another good way to shield your savings. This is why gold, silver and other metals are thought to be an excellent means of protecting the value of an estate.  Investments in Swiss Francs might be a bit risky, but conform to these thoughts

If you look back 70 years at the “portable assets” that Europeans coveted, these metals and other assets like diamonds were good inflation fighters and offer the advantage of portability, meaning that $100,000 in diamonds might weigh only an ounce, while $100,000 in silver would weigh 3,000 ounces—so to carry your savings with you, diamonds seem to make the most sense.

Nonetheless, if you can buy a house right now; all the variables are in your favor.  Rates are low, asking prices are low, inflation is about to kick in. Jump now if you can.

Dane Hahn is a real estate professional practicing in Florida. You can reach him at dane.hahn@gmail.com, call him at 941-681-0312, or see him on the web at www.DaneSellsFlorida.com