The Magic of Inflation

Photo by keynesiandream

Welcome back loyal reader.  Did you know that your money is actively losing value even as you are reading this?  Every single liquid note you possess is losing a tiny smidgen of its purchasing power through the magic of inflation.  Yes even those sweaty singles hoarded under the mattress are leaking potency as we speak.


Simply put inflation is the steady increase of prices that occurs over time.  You know how granny is always going on about bread costing a nickle back in her day?  Why doesn't that nickel go quite as far in the current millennium?*  Bread prices, along with the prices of everything else fluctuate over time, on a long enough time line the trend is for prices to increase.  The rule of thumb most economists use is 3% inflation per year.  This means that the prices of goods and services increases by 3%, and thus each non-invested dollar you own is losing a corresponding amount of value.

What about my invested dollars?  I have a savings account you know.  Glad you asked, unless your savings account is paying 3% interest you are still losing money.  If your savings account has such an astronomical rate, post it in the comments because we all want to know about it.  Most major bank savings account offerings are paying less than one percent at the time I am writing this article.  Savings accounts are not long term investment vehicles.  Many people perceive them to be safe because of the FDIC insurance and all.  When you factor in inflation most savings accounts are actually losing you money.  Don't get me wrong, savings accounts have their purpose just not that purpose.

When people tell me that they won't use non FDIC insured investments because of the risk I tell them that they are idiots.  Then I tell them that most FDIC insured investments are practically guaranteed to lose money through the mystical arts of inflation.  If you are saving for an extremely long term goal, such as retirement, you need an investment vehicle that outpaces inflation.

A common saying in the world of finance is more risk more reward.  This refers to the greater potential upside of investments that involve risk.  While you might lose money put at risk you are guaranteed to lose spending power if your "safe" investment is losing ground to the black sorcery of inflation.

"But I don't like risk.  I don't want there to be the possibility of me losing money."  Tough noodles butterball there is no way to completely shield yourself from all risk.  At a certain point your attempts to shield yourself from risk will guaranty failure.  Like the bubble boy of legend.  Perfectly protected from all pathogens the bubble boy never grows an immune system.  Perfectly protected from your dollars decreasing in numerical value you may be denying yourself the opportunity to outpace the blood necromancy that is our dark master - inflation.

So buckle up bubble boy.  Get your unproductive assets out of bed and put that mattress money to work.  Dollars are excellent employees.  They will work for you as long as you let them.  They never take breaks or call in sick.  They can't sue you or file insurance claims.  They actively recruit their friends to come work for you.  Dollars don't sexually harass your other dollars resulting in costly sensitivity training.  Once you employ enough of them you will never have to work another day in your life.  If that doesn't sound like the perfect employee to you than you have never had an employee.

"But what can I do?  Where should I invest my money?"  Well for starters you can start doing some independent research on the subject.  If you are too lazy to learn about money you open yourself up to the risk of being taken advantage of by someone who gives you bad advice.  Plenty of people give advice that turns out better for them than it does for you.  Such as: Please donate to my blog through the following link.

I will give you until my next post to read up on the subject.  Until next time dear reader.  I appreciate you sticking with me through all the basic material.  I'm looking forward to speaking as adults.  Well almost like adults, but with less swearing.

*Kiloyear in the metric system.