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Protecting Yourself
Against Inflation
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By Dan S. Defense

Inflation is a word often used and rarely fully understood. You'll hear it mentioned on the evening news, in political debates, when the Federal Reserve is mentioned, and in the context of your investment portfolio. In this article, we'll examine the nature of inflation, see how it affects people like you and me, and then discuss ways of mitigating the effects of inflation on your personal wealth.

Inflation is the result of currency debasement. Inflation simply means that you have to increasingly pay more money for the same goods that you purchase. Whether be it food, fuel or your favorite ice-cream, inflation makes it all cost more. You wages however, initially stay the same or sometimes slowly rise, but not fast enough to match the increase of your actual costs.

Inflation means that the same amount of paper money, for example $500 per week paycheck, can buy you less things in the physical world. A simple example is the cost of fuel. You have to pay more money at the pump, each time you fuel your vehicle, and therefore have less money to spend on other things. Inflation is the silent thief that steals your productivity and gives you less for more. .

We said that inflation is the result of currency debasement and we'll now look at what that means. For brevity and simplification, we'll use an imaginary village that loves cats. It's an over simplification, but it allows us the discussion of inflation in temporary vacuum, devoid of preconceived notions.

So, a long time ago, in a faraway village, a group of people lived, worked and used CAT currency for trade. In their economy every CAT dollar was backed by some fixed amount of gold. Since gold is a physical asset, that can't be manipulated by people, or governments, the paper currency represented actual value.

The only way to get more money in that village was by production. In such a system, where you have a gold standard, the currency is sound and stable and there's no inflation. People (and governments) can only spend what they have, and no more. Supply and demand dictates the price of goods, and the market regulates itself. How? By maintaining common sense and having limited funds.

Let's say that many people want to buy black kittens. Since there are only so many black kittens at any given time, the price of black kittens' rise, while the price of other kittens, which less people want drops. At one point, black kittens are so expensive, that most people simply can't afford them.

Then, a few things can happen. Vendors can breed or import more black kittens, to help address market demand, and then prices will go down; and some buyers will realize the gray and white kittens are also cute, and start buying those, at bargain prices. Eventually, because less people want black kittens, their price drops and eventually evens out with the rest of the cat market. No rules, regulations or bureaucrats required. Just good old common sense and free trade among people using solid currency.

But what if some people could cheat and get "free" money? Not by forgery, but by changing the way money was managed--removing the gold standard from the CAT currency and allowing a very respectable group of people to do as they deemed right--to "create" CAT currency "as needed".

How does it work? Well, you must have run into someone who cheated while playing Monopoly, and ended up with endless funds. They could buy hotels and any property, while you sat their wondering where all that wealth came from, until you lost the game. In our story, imagine that someone was able to print money-as much of it as he or she wanted-and hand that money to their close friends, who in turn could use that money to buy black kittens. Heck, they could buy white and gray ones too. Since they have "free" money, they could out spend every other person in the cat market, driving prices sky-high and making cats completely unaffordable.

But why stop there? people with "free" money can buy anything they want--and lots of it. So they also bought lots of cat food, human food and anything else that they wished-in each and every instance, they raised the cost of the goods they wanted, and made it unaffordable to others. Since people still needed to eat, they required that their employers pay them more money. Vendors charged more for goods.

Fixed commodities such as fuel and coal also went up in price, and a vicious cycle was created, where people earned a bit more, but kept paying a higher percentage of their pay for fewer goods. They had more paper and less buying power. They had inflation. The only people who profited from this system, were the ones with ties to the wise man who could print money at will. Everyone else just worked harder--for less...

As you can see, inflation is a very bad thing for most, but not all of us, since some appear to have a "free get out of jail card". By being the first to receive more money, they can by the goods before there price goes up. They buy more with less than the people who come later, after the price went up. They drive prices up for everyone else but they do more.

Since there is more money in circulation (think more and more water in a cup of tea with 2 spoons of sugar), the overall money supply is diluted (tea is much less sweet and eventually tasteless). And that's why inflation is also wicked because it steals from the productive and rewards the useless.

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