How to Survive Inflation
Purchasing Power - Money Printing - Earning Power - Cost Compression
Hello, I am Nicolas Bustamante. I’m an entrepreneur and I write about building successful startups.
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Inflation is the decline of purchasing power of a currency over time. Consequently, of the falling value of the currency, the general level of prices rises. Inflation will always exist as long as governments have a monopoly on money printing. Bureaucrats can't resist the urge to fund their expenditures by printing too much money. Increasing the money supply is the worth tax ever because it distorts the price system necessary for capitalism to work, and it steals people, mostly the poor. How to resist inflation?
One solution is to buy so-called hard assets that have a limited or at least predictable supply. Among them, you find gold, collectibles, art, or bitcoin. In theory, thanks to the non-inflatable supply, these assets might preserve their value over time. Gold price, for instance, is supposedly correlated to the inflation rate offering a hedge against money printing. Note that maintaining value is far different from creating value. This type of asset doesn't produce value over time and thus yields nothing. Worse, because the fundamental is the demand side, you have to hope that buyers will pay more in the future for the same asset to make a profit. I like Warren Buffet's take on gold: "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what it's worth at current gold prices, you could buy — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils (XOM), plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"
The crucial element to surviving inflation is to have assets that preserve and produce value over time. The only way to do that is a combination of earning power and cost compression. Possessing earning power means an ability to increase prices faster than inflation. It requires benefiting from strong competitive moats and uniqueness. On the other hand, compressing cost means that expenses rise slower than inflation. The combination of these two factors is the best way to thrive in an inflationary period. I believe that this reasoning works for people and companies alike.
A company with solid moats and goodwill will have no trouble raising prices faster than inflation. It's also an excellent way to identify the quality of a business. Quoting Buffet: "If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you've got a terrible business." Regarding expenses, the goal should be to benefit from strong bargaining power to refuse or delay the price increase. It also helps to have an asset-light business that requires not much capital to maintain its competitive position - think of a tech company, for instance.
People with unique skills should be able to increase their compensation faster than the inflation rate. That's why inflation is a disgusting tax; it steals the poorer who cannot raise their wage while promoting the rich. With regards to expense, one might want to consume less and avoid buying any inflated assets. For individuals, it always seems easier to reduce costs rather than increasing compensation because the latter takes time to adjust. Again, a combination of the two makes the most sense when inflation is on the rise.
For all these reasons, I believe that the best way to resist inflation and even benefit from it is a combination of earning power and cost compression. For businesses and people alike, this strategy is better than simply owning hard assets because first, there is a real intrinsic value, and second, it creates value over the long run!
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So you are saying you should be value-investing EVEN during inflation?! ;)
"That's why inflation is a disgusting tax; it steals the poorer who cannot raise their wage while promoting the rich." => I am skeptical about this argument. If you can't get a raise of 2% in a 2% inflation country, it probably means that the market value of your work is actually falling by 2% (or more) in real terms. A 2% inflation is actually just "helping" your company lower your salary by 2% if the market value of your work has fallen by 2% or more.
I imagine that in a 0%-inflation world, companies would find another way to adjust salaries down, perhaps by laying off all the "overpaid" people once in a while and replacing them with new people who would be forced to accept the lower market salary. Or it would just hire less people, leading to higher unemployment.
In the end, if my reasoning is right, the only people who really loose from inflation are those hoarding cash. Of course I'm assuming here an inflation rate with small variations and lower than 5%. If inflation has very strong variations indeed it leads to a whole set of problems linked to uncertainty for the market agents.