There is no other time in history where this concept matters so much. The financially uneducated get hurt.
The money you earn becomes worth a lot less when you don’t understand the concept of purchasing power.
Simply: Cash is trash. Cash is a sign of laziness, says CNBC’s Jim Cramer.
I am going to explain in really simple terms how you’re purchasing power works based on the US dollar (other currencies have the same properties, just at varying scales). Once you understand purchasing power you can become financially wealthy far quicker.
You shouldn’t have to work hard, be stressed, and have your purchasing power stolen from you — this is what happens if you ignore this concept.
Again — purchasing power is the most important concept in personal finance, especially during this time in history.
The principle of sound money
Physical cash and money in your savings account isn’t sound money. Sound money is not liable to sudden appreciation or depreciation in value.
To deal with the issue of your purchasing power being decreased you must understand that currency (dollars) isn’t sound money. It isn’t backed by anything. It can be created out of thin are which decreases your purchasing power. Simple.
Pricing the stock market in gold vs. US dollars shows the purchasing power problem
I am not a gold enthusiast. I do, however, have a portion of my portfolio in gold. Why? Gold is considered sound money. It’s a bet against inflation.
The way you see clearly that your purchasing power has been eroded is by measuring the US stock market in dollars vs gold.
If you believe the hype and don’t understand purchasing power then you’d think the stock market has done nothing but go up forever. To illustrate the point let’s look at the Dow Jones Index (a collection of popular US stocks) since 1981.
If you’d invested your hard-earned dollars in the US stock market you’d look like a gosh damn genius. In US dollars, stocks look like they have had nothing but a huge increase. Now take a similar time period and price those same stocks in gold (sound money). This is what you get:
What you can see on the graph on the left is that the stock market priced in gold is not outperforming at all. It’s going down. Why?
The Federal Reserve keeps printing more and more money out of thin air which makes the stock market look like it’s growing when it isn’t.
The central bank that is responsible for printing money isn’t your friend. Their friend is the economy and keeping it alive — they do this by decreasing your purchasing power. Your purchasing power is how central banks help dig us out of a deep recession.
You’re paying for a recession with your purchasing power.
The $3 Trillion Problem that destroys your purchasing power
In 2020 a global health crisis took us into a deep recession. This not designed to make you feel bad or fearful. It’s a fact, and we have no choice but to accept it and use it to our advantage.
Let me explain the problem in simple terms.
The Federal Reserve in the US had to print $3 Trillion of money out of thin air to stop the global economy from falling into a depression like what we saw in the 1930s. They did the right thing, but there’s more to it.
This excess money printing brought the US public debt to over $26 Trillion. It wasn’t just the US that printed lots of money; other countries all around the world did the same. What the US did is significant because the US dollar is the world’s reserve currency. That just means the bulk of the world’s trade is done in US dollars so if something affects the dollar, it affects us all in some way.
The big question you have to ask yourself is this:
How are we going to pay for the $3 Trillion of money that has been printed?
There are only two options:
- Raise taxes.
- Print money out of thin air.
It’s really that simple. You don’t have to be a finance guru to understand it. Now, again, I’m terrible at math but if you do a rough calculation you will see that raising taxes isn’t an option. The debt is too big.
What the US has done brilliantly since 2008 is print lots of money. This year they have already printed more than $3 Trillion. There is a demand for even more money printing. This is the only way the US can try and solve the ongoing problem. There isn’t any other rabbit they can pull out of their economic hat. They’ve shown all their cards.
“We’re going to get hurt,” says Jim Cramer. And he’s right: The financially uneducated get hurt. The one’s who understand purchasing power do not.
The dollar is being devalued.
The DXY (Dollar Index) is a measure of the value of the US dollar relative to the value of a basket of currencies. Since March 2020 and all the money printing madness, the DXY has been dropping like a sack of potatoes. It doesn’t take a genius or a finance expert to see what is happening. The information is in plain sight, on Google, for you to lookup.
Solution: You have to fight inflation
Now that you know how purchasing power works — and it’s clear it is going down when you store your wealth in a fiat (government) currency — you’re halfway to understanding how the financially educated become rich, and the uneducated lose their purchasing power and become poorer by accident.
So I repeat: Cash is trash for storing your wealth long-term.
The only way to fight money printing is through the understanding and acquisition of inflation hedge assets.
There are three options:
- Gold — physical gold you can touch, or gold you buy on an exchange known as paper gold.
- Certain Digital Currencies
- Real Estate — while real estate can help you fight inflation, it’s illiquid (not easy to turn into cash) and carries residential risk. (Residential risk means in simple terms that everybody tries to rush for the exits and sell at the same time, making prices go down. Or buyers can’t borrow as much money from their bank because of the economy, their credit rating, the ability to earn an income, or the desire for the bank to lend.)
These three options are inflation hedges because they are scarce assets to some degree. You can’t create these three categories of assets out of thin air like the central banks can with cash.
Now I can’t tell you which one to buy or how much. All I can tell you is that your purchasing power decreases if you don’t understand how it works, and how to beat inflation over the head with a solid metal object.
Governments bail out their citizens during a recession through an increase in the money supply. If you don’t understand this then you end up paying the bill. A basic financial education will prevent you from having everything you’ve worked hard for eroded away by money printing.
When you understand how your purchasing power works you can build wealth over time. You can use that wealth to work less, stress less, or help other people who desperately need it.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.