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The Inflation Mystery!

Puru Saxena
15 August, 2005

Have you ever wondered why your savings keep losing value over time? Why is it that the cash you saved ten years ago, buys significantly less today?

It is a fact that most people accept inflation as a part of life. To the masses, inflation is as natural as the rising sun!

We live in an era where inflation is widely accepted yet only a few seem to understand it.

As the public remains asleep, central bankers around the world continue to destroy the purchasing power of money by steadily increasing its quantity. Inflation is not a mystical residue of an economic or business cycle. It is simply manufactured by central bankers at their own "sweet" will. You do not believe me? Then, consider the following fact-

During the entire 19th century, there was zero inflation! Zip! Nada! In fact, we witnessed mild deflation (contraction of money supply) during that entire century. To put it simply, cash saved in 1800 bought roughly the same amount of goods one hundred years later! In today's world, this is unimaginable, almost absurd! But wasn't money supposed to be a store of value? Obviously not, if Mr. Helicopter Bernanke drops dollar bills from the sky!

Things changed radically when the Federal Reserve came into power in 1913. Its official agenda was to "manage" inflation in the US. But since the Fed came into power, the US dollar has actually lost 95% of its value! Thanks to the Fed's huge success in "managing" inflation, the dollar your ancestors saved for you in 1913 is now only worth 5 cents!

This destruction of wealth occurred due to Fed-sponsored monetary inflation, especially after gold was removed from the monetary system in 1971. Take a look at Figure 1, which shows that the money supply grew from $300 billion in 1960 to roughly $10 trillion today! That is an astounding growth rate of 3,300% or a 33-fold increase! This huge rise in the supply of money has caused money to lose its value (purchasing power).

So, with such an unbelievable growth rate, you can clearly see that the supply of money has in fact been the best performing item over the past 45 years! Forget stocks, bonds, housing and commodities. Let's just "invest" in the money supply! Unfortunately, the "money supply" contract does not trade on any exchange! Otherwise, everyone would become mega wealthy, simply by "buying & holding" for the long-term! [Editor's note: Ace idea, Puru. If we can trade contracts of stuff like the Weather & Cheese, heck, we absolutely ought to be able to trade contracts of the Money Supply].

With such a consistent track-record, it would be safe to say that going forward we can expect this trend to continue. Therefore, as more money is introduced into the system by the Fed, the value of paper money will continue to evaporate in real-terms.

Make no mistake; inflation (increase in money supply) is robbery pure and simple. Inflation is the confiscation of your hard earned savings!

Figure 1: Destruction of the value of your money!

(click image to see large chart)
click to see large chart


In the 1970's, expanding liquidity caused paper money to lose its purchasing power through commodity and consumer price surges as natural resources went through the roof! Meanwhile, in the 1980's and 1990's, paper money lost its purchasing power through booms in asset-prices. Over the past 25 years, bonds, stocks and real-estate rose exponentially. In each case, whether through consumer price or asset price surges, the purchasing power of money ultimately got destroyed.

In the years to come, I anticipate that commodity prices will (once again) soar and consumer prices will rise significantly. On the other hand, I expect financial asset-prices to decline as stocks and bonds tend to perform poorly when commodities rise.

At the moment, it is really quite hard to find genuine value as all the financial assets (stocks, bonds and housing) are grossly overpriced from a historical viewpoint.

Every investor ought to take positions in gold and silver as paper money will probably lose value against tangibles over the period ahead. Gold has spent the last few months consolidating within its ongoing bull-market, which has a long way to go both in terms of price and time. A few months ago, I had stated that the US dollar was likely to rally against major foreign currencies. As expected, the US dollar did rally but gold came through as the real winner. Despite a strengthening US dollar, gold refused to decline and the yellow metal is now trading at a multi-year high when measured in Euros and the Yen.

In my opinion, gold is one of the cheapest assets paper "money" can buy these days. No, let me correct this - in fact, around $435/ounce, gold is literally being "given" away!

A lot more follows for subscribers...

15 Aug, 2005
Puru Saxena
Saxena Archives

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Copyright ©2005-2015 Puru Saxena Limited. All rights reserved.

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