Watch Out! Inflation is Heading Higher Again...

What Happened?

Earlier this week we mentioned the sorry state of federal government debt.

It sits around $36 trillion.

To put that in some kind of perspective. It means that the U.S. government has borrowed $105,000 on behalf of each citizen.

A sum that continues to grow each year.

Of course, there’s no way the government will ever repay the debt.

Its only option is to ‘make it disappear’. How? Inflation…

Why it Matters

On Wednesday, the Commerce Department released the latest inflation data. It showed that through October, prices increased by 2.8% compared to a year earlier.

Admittedly, the annual rate is much lower than it was two years ago, when it hit 9%.

But prices are still rising. Even a lower rate of increase is still an increase.

And when you compare prices today to where they were three years ago… you can see it’s a big difference.

Unfortunately, as much as we’d like to think the government and Federal Reserve are interested in getting inflation lower, we just don’t believe that’s their aim.

The real aim is to keep inflation as high as they reasonably can. Until recently, that meant setting a target of a 2% inflation rate.

But that level was designed in the days when government debt was much lower — one-tenth or one-twentieth of what it is today.

The fact is, the only way the government can keep to its spending commitments is if it allows inflation to eat away at the value of the debt already issued.

By that we mean, when investors buy government bonds and treasurys, they expect to receive an income (called a coupon) on a regular basis. Then when the bond reaches maturity, say, after one, three, or five years (for example), the investor gets back the amount they invested in the bond.

Simple. Except if inflation is running high, the money the investor gets back from the bond at maturity, is worth less in terms of purchasing power than it was when they made the investment.

You see the problem?

How it Affects You

This is why so many investors have turned away from holding cash or cash-like investments and instead have bought assets they believe will protect them against inflation.

That includes owning stocks, real estate, and gold. Some folks even say that Bitcoin is a protection against inflation. In our view, the jury is still out on that.

But whatever your choice. However you plan to beat inflation, the reality is that you need to set a plan to do so. Even at 2.8% inflation is a problem.

Don’t be lured into thinking it’s not that bad and not as bad as it used to be.

We like gold as our inflation beater. It has a proven track record of beating inflation over the long term. We don’t see that track record ending anytime soon.