The Upside of Inflation

Posted by Ken Kurson via Richard Russell

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“Until someone explains how a government can quadruple its deficit in a year and come close to doubling its spending in four, I will believe that our currency is slated for a serious – and possibly shocking — devaluation. Inflation is devastating to anyone who owns lots of stuff denominated in U.S. dollars (like, say, cash in the bank or a Chinese Fort Knox full of T-bills). It erodes the value of every dollar you have – which is why the goal of investing is to build dollars faster than inflation undoes them. An employee who makes $15 an hour and finds that he can suddenly buy only three gallons of gas with an hour’s wages instead of six has been made substantially poorer.

“At the same time, inflation has all kinds of winners. Some are obvious – the guy with a bunch of gold bars is already cashing in via those “send us you gold in an envelope” commercials that should be interpreted as a precursor to the apocalypse. But other winners include those who have anything to sell that can be priced in U.S. dollars. Grocery stores, for example, will have pricing power they haven’t experienced in years. And our $15-an-hour worker will likely command meaningful wage increases for the first time since the early ’80s (shame that his groceries will cost more, but still…), and commodities from land to sugar to copper will command higher prices. Producers of American goods and the American hospitality industry should see demand grow.

“As for what you should do if you accept the premise that inflation is afoot, it’s pretty simple: Trade your dollars, which are declining in value, for stuff that appreciates in value. Gold, baby.”