While the mainstream media gives us conflicting opinions about whether we are experiencing inflation, common sense tells us our dollar is losing value at a rapid pace. Long time newsletter readers know I write about inflation a lot because it is the most important yet misunderstood economic concept in our society.
Since the dawn of government-issued currency, Federal governments have paid their bills by printing money rather than spending less than their revenues. Inflation is a popular form of taxation because most people are financially illiterate and don’t understand the shell game that is going on. Inflation gives the government virtually unlimited spending power. Virtually unlimited spending power gives the government virtually unlimited power. Once a government has virtually unlimited power, they are highly unlikely to reverse course.
The first people to receive new dollars printed by the US government are foreign governments who received dollars in exchange for service on the US debt and the US trade imbalance. The United States imports things with real intrinsic value, such as clothing and oil, and we export worthless paper backed by a good faith promise to pay from the American people. When foreign governments get a new shipment of US dollars, they have very few places to put them where they will retain value. Foreign governments know the US is sending them the ethical equivalent of counterfeit money and so foreign governments want to trade in their worthless scraps of US currency for something of intrinsic value as quickly as possible. Foreign governments cash in their fragile US Dollars primarily for two things – precious metals and oil. Precious metals have intrinsic value, but oil has much more utility. The world uses the US Dollar to denominate the price of oil. Because of the size of the oil market, its utility, and intrinsic value, oil is the natural commodity to soak up the surplus of bogus currency the US government is floating.
Technological breakthroughs such as hydraulic fracturing have increased the supply of extractable oil while the worldwide recession has reduced the demand for oil. Normally when you have reduced demand and increased supply, the price of something goes DOWN. What’s really going on is the price of gas is rising dramatically because of an excess of dollars, not an excess of demand. The rising price of gas should be a major leading indicator that the price of everything else (including wages and rents and real estate) will go up. Inflation does not affect the price of all things at the same time. Inflation has a trickle-down effect based on who gets the cash first, second, third, etc. The price of gas is leading the inflation charge because the US money supply has flooded foreign governments who get first choice of what resources they want to exchange their US dollars for and they’ve chosen oil.
Ironically, while the US government is printing money as a “hidden tax” to drive up the price of gas, the government is simultaneously lowering the tax rate on gasoline as a way of masking the impact of rising gas prices for consumers. Inflation is driving the price of international crude oil up while reduced gasoline taxes inside the US are influencing the price to go down. An important thing to remember is the reduction of gasoline taxes will have a limited impact on the price of gas while international market and inflationary forces will still be able to drive the price of gas to infinity and beyond (deference to Buzz Lightyear).
Don’t get depressed by this warning of inflation. If you are financially literate, you can use this information to take action and make a profit for your family. There is no way you could have prevented the terrible tsunami in Japan. However, if you had a year’s notice that the tsunami was coming, you would have done a great service to humanity by selling tsunami preparedness kits in the areas you knew would be affected. This is the same as inflation. Inflation is a powerfully devastating force that will wipe out tens of millions of families. Unfortunately we can’t stop it. If you know inflation is coming, you will do humanity a great service by preparing yourself and your family for it.
Here are a few ways to use the phenomenon of rising price of gas to safeguard your family from the coming inflation:
ACTION ITEM #1: Acquire rental property as close as possible to major job centers.
As the price of gas rises, people will pay a higher premium to live closer to their jobs. As the price of gas rises, your rents should follow suit.
ACTION ITEM #2: Own rental property in communities near centers of oil extraction.
The rising price of gas will stimulate economic growth in oil rich areas such as Dallas, Texas while depressing economic growth in other areas which must pay a higher cost to import their oil. As the price of gasoline rises, job creation and economic prosperity will contribute to rising rents and housing prices in oil rich areas.
ACTION ITEM #3: Own rental property in areas where job growth is fueling a massive demand of housing while increased construction costs are constraining the supply of new housing. Gasoline / oil is a major component of construction costs.
As the price of gas rises, the cost of construction will increase dramatically thus limiting the ability to add new supplies of affordable housing. Reduced supply combined with increased demand will drive up prices and rental rates of existing housing inventory. Again, Dallas, Texas is a great example.
ACTION ITEM #4: You could invest in oil related stocks or into the extraction of oil.
I am generally against owning publicly traded stocks because of the lack of control over your investment, the lack of intrinsic value associated with owning a minuscule share of a publicly traded company, and the lack of cash flow from non-dividend paying stocks. However, if you’ve already decided to have stocks in your portfolio, talk with a qualified stock investment adviser (not me) on the potential for including oil / energy stocks into your portfolio.