Take the Fight to Inflation

     In case you’ve been living under a rock or in Wyoming, the inflation rate in the U.S. has been terrible over the last two years. In 2021, it was 7%.  Later in 2022, it increased to 7.5%. The last time our inflation rate became this bad was in 1982, four decades ago. So let's go over what inflation is and primarily how to fight it.

     What is inflation? It’s the decreasing buying power of a currency over a period of time. Let’s look at an example of how it works. 

     Diamonds are Veblen goods, costing thousands of dollars. There are about 1.2 billion carats of diamonds in the world. What if that number doubled and there were more in circulation now with 2.4 billion carats of diamonds in circulation? In theory, diamonds would lose a minimum of half their value. This is quite similar to what happened over the last two years with the USD. In 2020 and 2021, we needed COVID-19 bailouts to support jobless Americans. The National Treasury decided to print more money, subsequently leading to a decrease in the dollar's buying power by 14.5% in two years due simply to how much USD was in circulation. Where have I seen this happen, which lead to the socio-economic collapse of a government? Oh, yeah. The Weimer Republic. In all seriousness, we did print more money devaluing the USD. It was comedic to see the head of the National Treasury say “It’s only transitory inflation. It’ll fix itself!” Then a month later go, "Oh, Sh*t. Yeah. This is bad. This is no longer transistor. Our number one goal is now to fight inflation!” The situation we are in is pretty terrible. Although on the bright side, we technically lowered our national debt by devaluing the USD, though you need to understand that inflation is constantly happening. The average depreciation of the USD was around 3.8% annually. Going forward, what can be done to combat inflation? Short answer: Invest.

     The ability to invest in the stock market now is more available to the average American than at any time in American history. So personal stockbrokers are now becoming obsolete. So what is the average annual return rate of a stock is? According to the 2021 American Funds ICA guide, it is 10.9% from 1971 to 2021 with inflation at 3.8% over the same period.  Meaning, if you invest your money, you would outpace inflation by almost three times the inflation rate.

     The best way to get that 10% is through ETFs. ETFs are diverse funds that reward the investor for owning shares long-term. ETFs are traded similar to regular stocks, allowing for easy management for beginning and intermediate investors. They're also cheap and have low expense ratios. For example, The S&P 500’s little ETF brother, SPY, gives over 10% in annual returns and has 507 companies in its holdings. To prevent your money from suffering from inflation, you need to exchange that money for an asset that may vary in price.

     If you are terrified by inflation, you need to get some damn Chutzpah and start on your journey to becoming an investor, not a saver. If you need more proof, open Yahoo Finance. Type in “SPY” and select the “ETF,” and then go to “full screen.” Select “range 1/1/2021 to 1/1/2022.” SPY gained 27% in one year. Even if you take the 7% for inflation, you still get 20%, if you want to take the fight against inflation and you’re gonna need an ally. That ally is the American stock market.