Danger! Inflation

Hey There Income Hunters,

Thanks to everyone who attended the Trading Legion trio session yesterday.

If you missed it, catch the replay here.

Today’s lesson on inflation history is THE most important information I can pass on right now.

So many investors, and you may be one, do not fully understand the damaging effects of inflation on their wealth

As a proud Baby Boomer myself, I feel for the retirees who could lose their life savings if not protected …

Learn From the Past … See the Future

The chart below illustrates the similarities between the Great Depression and today …

Notice how much more total debt (blue line) we have today. The orange line is the history of Fed interest rate changes…

Joe Biden might dream of being considered as a hero the way FDR was for America during the Depression.

But that will take a miracle.

Controlling interest rates is the Fed’s main monetary policy tool.

When the economy heats up, they raise rates to avoid inflation, and when it cools down, they lower them to stimulate borrowing and spending. 

The blue line above represents total debt in the economy. You see, when debt grows too quickly, governments have trouble stimulating borrowing and spending because the debt burden stifles spending activity …

And the Fed’s only mission is to reduce the debt.

Do It Like FDR

Initially after the 1929 crash, the Fed opted to enact quantitative easing (QE), which was a simple process of buying Treasury bonds from the banks and crediting their accounts at the Fed with bank reserves. 

The problem was banks were not required to lend their reserves into the economy … so most of the reserves were stuck in the banking system… 

FDR came up with two brilliant solutions…

      1. FDR knew that Gold would strengthen the dollar, so he went out and bought all the gold he could, until the US owned 2/3 of all the gold in the world…  He then pegged the dollar to gold around $20 an ounce — before revaluing gold to $35 an ounce. This efficiently devalued the dollar and debt issued in dollars. The debt burden was lessened significantly.
      2. The other thing FDR did was mandate the Fed with a task of holding down 10-year interest rates at 2.5% and letting inflation continue. The reason being, if you just ignite inflation and let rates rise when you have a massive debt burden, you risk triggering a debt crisis and defaults on debt which is deflationary. Deflation increases the value of the currency and debt issued in it.

Lessons learned: 

          1. Easy monetary policy and high inflation causes a depreciation of your currency. Tour debt is reduced because borrowers now have more dollars to pay down a fixed amount of debt.
          2. The Fed made a terrible mistake in the mid-30s. Once the economy came out of the Depression and inflation started rising, the Fed raised interests too soon, sending the economy back into depression. The Fed will not make that mistake again. They are going to be too patient, and inflation will stay higher for longer.

The Tax on Your Income

In the chart below, the blue line represents the 2.5% inflation rate cap managed by the Fed for 10 years. The orange line is free floating inflation (CPI) …

Inflation measures the increase in prices that you pay for essential goods and services… 

So, to get your inflation adjusted, or real rate of return, you must subtract inflation from the income you receive from your investments…

Think about how damaging that makes inflation is to retirees!

In the example, when we subtract 2.5% from 10%, the measure of increase every year for essential goods and services is -7.5%.

That means every year your wealth depreciates by 7.5% …

Why would you ever own a bond or any financial asset in an inflationary environment when you can own commodities, real estate, or precious metals that will rise with inflation and protect your wealth?

The graph below reflects the inflation tax in real numbers …

Let’s say you put $10,000 into the 10-year at the start. After 10 years, you will get your nominal amount of money back. The government, if needed, will just print it.

But in this case, your inflation-adjusted real rate of return would be -33% over the period.

That is the damage inflation can do.

Bring It Home

Most investors give the Fed way too much credit.

The people sitting at the New York Fed are suits who love talking about quantitative models …

They work for the politicians and that makes them politicians.

They are only telling us what they want us to believe. I guess that really is the definition of a politician.

So at least they are good at something!

Power Income is your go-to source for what YOU need to know and how to protect yourself.

And also to …

Live and Trade With Passion My Friends,



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