YOU are STILL getting poorer - July 2024 (#29)

Salutations dear reader! Your dude Brent saw a few comments this week around economic news that I cannot help but correct. Understanding this is essential to being financially literate and his newsletter is all about boosting that literacy. Lets begin!

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Motivation

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

-John Maynard Keynes

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Money

The big thing I want to address in this issue is what inflation is and isn’t. Inflation is simply THE RATE of price increases over a period of time. So when the news says inflation is decreasing that does NOT mean prices are coming down, that simply means prices aren’t going up as fast as they were.

And while this is, of course, a great thing that inflation isn’t as high as it was… all this is telling you is that any wealth you have in the form of U.S. Dollars is just getting less valuable at a SLOWER rate than before… What I mean to say is YOU ARE STILL GETTING POORER.

OK, here’s why you should care. Inflation is a major contributor to wealth inequality. Inflation benefits the very wealthy the most and really screws virtually everyone else. Why? Because when the government prints money out of thin air (one major and more obvious cause of inflation), that money goes somewhere. And largely it ends up in the hands of the very wealthy who buy assets such as stocks and Real Estate with it, raising those assets prices. So guess what… it makes them richer as asset prices collectively rise.

They also benefit from inflation because they are the most likely to have loans on assets. And then they are able to pay off their loans with cheaper dollars. So really for the wealthy… inflation is amazing. For virtually everyone else, its misery.

Understanding inflation in college is one of the things that got me so excited about Real Estate. Looking at the history… inflation, at least at low levels, is virtually a guarantee. And as a result prices go up and the real value of the loan itself goes down. Win win!… If your a Real Estate investor.

However, the average person only owns 1 home. And sadly, only about half of all my fellow millenials own homes. And its getting harder and harder for anyone to own a home as prices continue to rise… due in part to all the inflation thats happened these last few years.

People usually completely ignore that inflation is a thing unless it gets painful enough to notice. When people are getting poorer slowly, virtually nobody cares. I think that’s dumb. It’s always happening, YOU should both be aware of it and always think of investment returns in the context of inflation.

Use this formula: RETURN ON INVESTMENT - INFLATION = ACTUAL RETURN

To use an example, if you invested in Coca-Cola (KO) in 2022 you made about 7% on your money, sounds great right? Well, inflation averaged about 8% that year… so in reality after subtracting out inflation your hard earned money lost about 1% of its ability to buy stuff… Your money basically went nowhere. And thats before taking out potential fees for buying and selling the stock. Many popular stocks performed even worse that year. If your not paying attention to, and factoring in inflation, your missing a big piece of the wealth puzzle. Websites like this one make it easy, and financial news talks about it nonstop.

One word of caution here. And this comes from painful experience. It’s easy to get so caught up in avoiding inflation that you take on more risk than you should to get the returns to overcome it. Always gut check yourself on the amount of risk your taking on… if you don’t, your likely to lose much more than you would have via inflation itself…

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That’s all folks!

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The information contained on this Newsletter and any resources available for download through this newsletter are not intended as, and shall not be understood or construed as, financial advice. I am not an attorney, CPA, or financial advisor, nor am I holding myself out to be, and the information contained on this newsletter is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation.

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