Why Major Inflation Is Inevitable – At Some Point (What To Do About It)
I discovered copper in my backyard!
It was an enormous find, so I dug a hole and started to sell it a few days later – making copper prices plunge (said nobody, ever).
When there is an actual resource discovery, billions need to be raised, permits need to be obtained, politicians need to be paid off, and extracting operations (mining, drilling, boring, etc.) need to be constructed – and all of this takes at least 10 years (assuming a company is willing to take on the expense and challenge).
And that is the point that both Lyn Alden and Adam Rozencwajg make in recent podcasts, here and here (that I highly recommend).
The world is facing massive energy and commodity shortages due to a lack of investment over the last several decades, and it will take decades more to replenish supplies and/or to find alternatives.
And – this will inevitably lead to massive supply shocks and cost-push inflation (like we are seeing now with energy prices).
I might add that mining and energy companies have under-invested so much because of the enormous capital commitments, the risk of pushback from environmentalists, the fear of a declining economy/lack of demand, and the fear of political risk, e.g. when politicians declare a particular fossil fuel verboten.
So yes, I think much less inflation and even deflation is a possibility in the near term (over the next six to 24 months) like I have discussed in recent blogs, including this one: Is Inflation Over?
But after the next one to two years, all bets are off, as prices are likely to surge everywhere for several reasons.
- Commodity Prices Will Surge. As I discuss above, many pundits like Ms. Alden and Mr. Rozencwajg, are firmly convinced that we will see massive resource shortages.
- Labor Shortages. This is something author Peter Zeihan addresses often, as the largest generation of workers in American history is now retiring en masse, and that will foster a labor shortage that will drive up labor costs and prices overall.
- Monetizing Debt. Lyn Alden also frequently reminds us that America’s overall debt load is 3.7x GDP right now, and that there is no way we can pay it off. Our Federal debt alone ($30 trillion) exceeds GDP ($25 trillion), and when you couple that with all our state and local debts and, worse, our unfunded pension, social security, and Medicare liabilities (over $100 trillion) – we are screwed. The only way we will pay off all that debt is by effectively printing money or conjuring it out of thin air somehow – and that will result in massive inflation. Ms. Alden reminds us often that there is a precedent for this too, as the government did this in the 1940s to pay off WWII debt.
WHAT SHOULD WE DO?
The best inflation hedges include gold, some forms of cryptocurrency (depending on whom you’re listening to), commodities, and … REAL ESTATE.
And – given the inevitability of significant inflation, we all should be loading up on inflation hedges in one form or another.
I of course like real estate the best for numerous reasons: (1) it can generate income while appreciating in ways the other assets cannot; (2) it has performed better than any of the other assets historically, particularly as an inflation hedge; (3) it is local, tangible and something we can all see, feel and understand; (4) we can live in it and/or actually use it because it has utility (unlike the other assets); (5) it can be bought with leverage/borrowing – allowing for much higher cash on cash returns; and (6) it can’t be stolen by thieves or taken by a government (or at least not very easily).
HAVE FUN BEING POOR!
Whenever someone questions Bitcoin in any way on Twitter, Bitcoin advocates come out of their corners to attack – and then scream, “Have Fun Being Poor!”
I am going to start screaming that at any client who gets cold feet about buying real estate right now… or not 😊
But – I might share this blog and remind them that they absolutely need real estate to protect themselves and their family when the “big inflation” hits, and, rest assured, it will hit!
Founder/Broker | JVM Lending
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