Tags: Hyman | inflation | real | wealth

Why Inflation Is in Our Future

By    |   Tuesday, 04 September 2012 08:34 AM

This past week, I had a couple of people call me on a conference call to pick my brain. They asked me whether I saw inflation or deflation in the future.

I told them that it would definitely be an inflationary period overall. Here’s why.

For starters, inflation has been the mode that we’ve been in ever since we came off of the gold standard, which allowed the Federal Reserve to start printing money.

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Don’t plan on that “habit” of printing money to stop. It’s been consistent no matter who we’ve had at the helm of the Fed, and it’s been consistent no matter who we’ve had in the White House, as well.

Why? Inflation is political. What?!? Yep, you heard right.

Here’s what it boils down to.

You can’t tax deflation. Yet you can tax inflation. You see, if we get into a deflationary environment where the costs of goods become cheaper and cheaper, there wouldn’t be a pressing need for wage growth.

If gasoline, food, etc. keep getting cheaper and you make the same amount of money, you’d actually still be gaining in your overall purchasing power and there wouldn’t be any huge pressure on employers to raise your wages.

However, if we’re in an inflationary environment where it keeps getting more expensive to live due to higher food, energy costs, etc., then there would be “wage pressure” out there. Employers would eventually have to continue to pay you more and more. As that happens, the government can tax that increase. But it’s hard to justify the government raising taxes on wages that aren’t increasing overall through the years.

So an inflationary environment is really a political issue. And that’s why we’ll continue to have inflation overall and why it won’t come to an end.

Now, with that said, what they don’t want is hyperinflation because that would risk them being voted out of office, as their voter base would get frustrated with the situation at hand and shake things up at the top. So, hyperinflation jeopardizes their positions and threatens them. That’s why they want to avoid hyperinflation at all costs.

However, you’ll notice that they equally fight deflation at all costs too. You see, had the markets and economy been left to themselves over the past four years, we truly would have had a deflationary environment. But they couldn’t have that. So what did they do? They had the Fed print a ton of money and lower interest rates to an insanely low level and even buy up positions in companies.

Deflation was prevented. Why? It’s hard to “tax” in a deflationary type of environment.

So, when you look at all of this through the eyes of politics, you can see why we’ll always have an inflationary environment … and why we’ll likely never have an extended period of deflation and why hyperinflation will try to be avoided at all costs.

Therefore, with those thoughts as a backdrop, it’s why I’m so convinced that everyone needs to hold “real wealth” assets like we hold in the Ultimate Wealth Report portfolio.

Real wealth assets are those that benefit from the rise of inflation, such as commodity exchange-traded funds (ETFs) and stocks that are commodity related. They are also assets that benefit from a falling dollar and rising foreign currencies, like foreign currency ETFs and stocks that benefit from the rise of foreign currencies and the fall of the dollar. That’s what we hold in our portfolio, and it’s doing quite well.

You see, many companies don’t benefit from inflation’s rise. Why? The price that they have to pay for materials to make their products rises, yet the price they can charge for them is somewhat limited by the price that customers are willing to pay for the products.

This puts a squeeze on their profit margins, as their costs rise faster than do the increases that they can effectively pass onto consumers. This leads to lower earnings, which eventually leads to a lower stock price or a slower growing stock price. Either one of these scenarios is not desirable.

Editor's Note: Join the 3.5% of Americans who are truly wealthy and financially secure.

However, let’s say you’re a gold miner and it costs you a fixed cost to bring gold out of the ground, but the price you can get for it in the market keeps going up. Then your profit margins are widening.

What if you’re an oil producer and you pump it out of the ground for a fixed cost, but the price of oil keeps going higher? Your profit margins as an oil producer are widening.

So, there are companies that actually benefit from inflation’s rise. It’s the job of the astute investor to learn to “side with inflation” and use it as an edge that works “for” you over time rather than “against” you, like it does against many investors.

Holding real wealth assets gives you an edge over time that the typical investor simply doesn’t have.

So, when you’re thinking of what to invest in, in the future, consider inflation and what will benefit best as it rises. Invest in inflationary assets like we’re doing in the Ultimate Wealth Report.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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