Power & Market

Money Inflation Is Baked In. Savers Need to Preserve Assets

This time is different. Crises aren’t just typical cycles. In Great Inflation II, savers can at least preserve savings and likely earn substantial returns by owning gold.

Government spending as a percentage of GDP has risen to a new minimum level—34 percent.

 

 

Image
anthony1

Image
Anthony 1

Government Spending
Total National, State, and Local in USA, percent of GDP

Spending was ratcheted up by congresses and presidents from both parties.

The spending is substantially paid for by creating and borrowing money. Interest is paid later, and the principal’s real value is inflated away. This money inflation is a slow-motion default on this borrowing, and is a stealth tax that’s taken from everyone who holds dollars.

Crises

Money inflation regularly produces cycles of government money error (GME, pronounced “gimme”) and occasionally produces crises.

The Great Depression was forced by 7.8 percent average annual True Money Supply increases for 8 years. Great Inflation I, by 9.9 percent increases for 18 years. The Financial Crisis, by 11.0 percent increases for 12 years. Great Inflation II, as of April 2022, had already been forced by 22.2 percent increases for 14 years.

Four Crises Summarized

Image
anthony2

Anthony, James. “Gold Is the Solution for Financial Crises, Not their Cause.”
Mises Institute Power & Market Blog, 21 Oct. 2022, licensed under CC BY-NC-ND 4.0.

1

TMS2

2

Murray Rothbard

3

Author's calculation

4

Consumer-price index for urban consumers

5

Large-capitalization USA equities

6

Gold bullion

7

Treated as illegal from 5/33 through 12/74

 

All government-money-error cycles bring wasteful malinvestment and then necessary corrections. Crises bring even-more malinvestment and correction and also long-lived shifts in saving and shopping.

Across the Great Depression, including the resulting World War II, private investment plummeted. During Great Inflation I, after a “deadtime” delay of several years, most savers sought out harder assets like real estate and gold.

Crisis deadtimes are made of many component deadtimes. Producers must decide to raise prices, knowing this will make customers look elsewhere. Customers must decide to buy assets, consumer products, producer consumables, labor, and producer durables (which can last decades). Savers must learn about crises, and must make decisions that are emotionally taxing.

Crises aren’t the usual fast government-money-error cycles, crises are irregular, slow, longer-lived increases in government spending, powered by crisis-level money inflation. In crisis booms and busts, the indicators that are of first importance aren’t the often-studied fast signatures of recessions, but instead are rarely-considered slower indicators of behavior changes—in government spending, and in individual saving, producing, and shopping.

Debt as a percentage of GDP has risen to a new minimum level—343 percent.

Image
anthony3

Debt
Total Public and Private in USA, percent of GDP

 

Employment has fallen to a new post-2000 maximum level—62.3 percent.

Image
anthony4

Employment Rate
USA

Excess deaths since the start of covid have reached 1.30 million—0.4 percent. Little has been done to limit these deprivations by government either during covid or in future operations.

So then in the current Great Inflation II crisis, government spending is high and is staying there. Money inflation has been unprecedented for the USA in peacetime, and a juggernaut of money inflation is now baked in. Debt is high and is increasing. Employment is low and is decreasing. Lives are already lost and these losses are increasing.

When hard-to-reverse trends are for the worse and are worsening, how can savers preserve or even increase their savings?

Asset Preservation

Stocks have in the long run delivered the largest total returns of any large asset class. This has been true even across crises, eventually.

Image
anthony5

Figure: Anthony, James. rConstitution Papers. Neuwoehner Press, 2020, p. 10.21.
Data: Siegel, Jeremy J. Stocks for the Long Run. 5th ed., McGraw-Hill Education, 2014, p. 6.

Total Real Returns
USA Stocks, Government Bonds, Treasury Bills, Gold, and Dollar

Stocks are ownership shares of productive capacity. This capacity is worth less in downturns, when the capacity utilization is less. But even then, whatever value will eventually spill over into nonproducing assets like real estate and gold must first have originated as value added by productive businesses. In the long run, nonproducing assets can’t outperform stocks.

Stocks naturally protect against inflation. Stock prices reflect all future net profits. When product prices inflate, future net profits inflate too.

Savers learn that the total returns from stocks quickly fall substantially if savers don’t stay invested in stocks. The S&P 500’s 2002–2021 annual total return would have been cut from 9.52 percent to just 5.33 percent if a saver had missed out on just the 10 best trading days in these 20 years.

But while it can be rewarding to stay invested in stocks across sub-crisis government-money-error cycles, it would be punishing to stay invested in stocks during crisis drops in stock prices. In the Great Depression, Great Inflation I, and the Financial Crisis, savers were pummeled by substantial drops in the S&P 500, respectively, of 82 percent, 64 percent, and 53 percent.

Currently, earnings forecasts can’t be trusted. Current forecasts figure in both stagnation-or-recession in 2023 and a strong recovery in 2024, but both can’t happen. If a recession is strong enough to limit price inflation, then current earnings forecasts are too high. If there isn’t a strong recession, then price inflation will be high, so there won’t be a strong recovery, so here too, current earnings forecasts are too high.

Bonds inherently lack stocks’ considerable upside potential. Also, interest rates ultimately should increase, so then the nominal value of bonds will decrease. Also, money inflation and product-price inflation will continue, so the real value of bonds will decrease.

Dollars are guaranteed to lose value. Currently the Fed openly tries to force dollars to lose value at an average annual rate of 2 percent. Already, Wall Street Journal reporter Jon Sindreu suggests that the Fed should force dollars to lose value at an average annual rate of between 4 percent and 6 percent.

And yet, even these figures wouldn’t capture how quickly the Fed forces dollars to lose value. Modern price-inflation calculations are used to claim that dollars are losing value at annual rates of 6 percent to 9 percent. But in reality, more-accurate 1980 calculation methods indicate that dollars are losing value at annual rates of 14 percent to 17 percent.

Gold has a proven track record as money. Now, computerization allows gold to efficiently be kept in vaults and have its ownership transferred without moving the gold, which eliminates a past drawback of gold as money. No other store of value can match gold’s proven track record and infrastructure.

In the usual sub-crisis government-money-error cycles, gold has a relatively constant value.

In crises, gold also gains value. In the Great Depression, Great Inflation I, and the Financial Crisis, gold gained, respectively, 69 percent, 849 percent, and 156 percent.

Image
anthony6

macrotrends.net

Gold Price
per Ounce

Back when the Great Depression started, the government had claimed that dollars were worth a fixed amount of gold. But the government had inflated the quantity of dollars, so dollars were worth less.

To avoid honoring the government’s claim and as a result losing more and more gold, President Franklin Roosevelt issued an executive order that claimed that owning gold was illegal. State governments, congresses, and justices didn’t respond by using their offsetting powers to secure people’s right to own gold. This deprivation of the right to own gold continued until 1975, by which time Great Inflation I was well underway.

Now, the national government hasn’t been claiming that dollars are worth a fixed amount of gold. So the national government no longer has an incentive to deprive people of their right to own gold.

Naturally, demand for gold has already increased. Central bankers have had to increase interest rates. Higher interest rates are costing central bankers higher interest payments. Also, higher interest rates are causing central bankers’ holdings in the moneys they create to lose value. Both kinds of losses have been forcing central bankers to buy and hold a better store of value—gold.

So then in the current Great Inflation II crisis, stocks are at unsupportable prices. Bonds and dollars are sure to lose value too. But gold is proven in crises.

Unprecedented money inflation is already baked into Great Inflation II. Savers need to preserve and increase their savings by owning gold.

image/svg+xml
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
Support Liberty

The Mises Institute exists solely on voluntary contributions from readers like you. Support our students and faculty in their work for Austrian economics, freedom, and peace.

Donate today
Group photo of Mises staff and fellows