By Bruce Frohman
One often reads about the negative aspects of monetary inflation. The worst complaints may be the ones predicting the collapse of the dollar and an ensuing economic meltdown. Inflation can be very beneficial to those who are able to prosper from it.
How one invests his money will determine how much he benefits or suffers from inflation. The large variety of available investments generates an equally large number of different outcomes.
Coin collectors often believe that inflation is bad and that the acquisition of gold and silver is the best protection against the negative consequences of a declining value of paper money.
Nearly every coin collector relishes the thought of his coins increasing in value. In essence, he is hoping for inflation. If the value of his asset increases, the dollar must be worth less. A given coin isn’t going to be any more rare, so why should the value increase, except because of inflation? The collector base is not growing in large numbers, so increasing demand is not always the driver of higher value.
People who owe money at fixed interest rates benefit when inflation is greater than the interest rate being paid on a loan. Inflation enables borrowers to repay a loan in cheaper dollars.
Real estate investors like inflation because as properly values increase, their equity ownership in the property grows. Stock investors like inflation if the company’s assets increase in value and causes stock prices to rise.
Greater economic prosperity usually occurs during periods of inflation. Stagnation and recession occur when inflation is in check because dollar wealth is not built when assets don’t appreciate.
So, when is inflation going to cause the big collapse that the doomsday-sayers are predicting? Looking at world economic history of the past couple-hundred years, “never” might be a good answer.
Mexico has enjoyed and/or suffered from substantial inflation for decades. Every so often, the country revalues old currency into new currency and starts a fresh round of inflationary economic policy.
If the United States has a big enough inflation, the dollar could be reissued with a new name like “Super Dollar” or “Patriot Dollar,” where old money would be traded in for new money. For example, maybe the Super Dollar would be valued at 100 of the old dollars.
Thus, the government could continue its inflationary policy in an endless cycle of currency renewal. The investments with intrinsic value would retain their purchasing power relative to other goods. Only the amount of currency needed to make a purchase would change.
Those who know how to benefit from inflation will usually do better than those who always keep assets in cash. Even coin collectors need to be wise about which coins they buy in order to avoid loss due to inflation.
Inflation exists because wealthy investors profit from it. Inflation is used by government as an alternative form of taxation. Money is printed and spent by government without a corresponding increase in goods production.
The groups fearing inflation are the most vulnerable to it: wage-earners and those on fixed incomes. Their suffering greatly offsets the benefits of inflation. Cost of living increases are not used enough to reduce the harm inflation can cause.
Bruce Frohman is a collector from Modesto, Calif.
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