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"Austrian" Investment Themes, Economics

Inflation: Getting Your Hands on the Money First

Is wealth disparity the cause of economic problems, or are economic problems the cause of wealth disparity?

The default government response to economic and financial troubles is to inflate. Just because there is not a rise in consumer prices does not mean that inflation is not present.

Financial asset inflation is every bit as destructive as late comers to the party are forced to pay inflated real estate prices or invest in a stock market that may be propped up with inflationary policy.

 

This phenomenon is described by Austrian School of Economist Murray Rothbard in his book What Has the Government Done To Our Money? Courtesy of the Ludwig von Mises Institute:

“To gauge the economic effects of inflation, let us see what happens when a group of counterfeiters set about their work. Suppose the economy has a supply of 10,000 gold ounces, and counterfeiters, so cunning that they cannot be detected, pump in 2000 “ounces” more. What will be the consequences? First, there will be a clear gain to the counterfeiters. They take the newly-created money and use it to buy goods and services. In the words of the famous New Yorker cartoon, showing a group of counterfeiters in sober contemplation of their handiwork: “Retail spending is about to get a needed shot in the arm.” Precisely. Local spending, indeed, does get a shot in the arm. The new money works its way, step by step, throughout the economic system. As the new money spreads, it bids prices up–as we have seen, new money can only dilute the effectiveness of each dollar. But this dilution takes time and is therefore uneven; in the meantime, some people gain and other people lose. In short, the counterfeiters and their local retailers have found their incomes increased before any rise in the prices of the things they buy. But, on the other hand, people in remote areas of the economy, who have not yet received the new money, find their buying prices rising before their incomes. Retailers at the other end of the country, for example, will suffer losses. The first receivers of the new money gain most, and at the expense of the latest receivers.

Inflation, then, confers no general social benefit; instead, it redistributes the wealth in favor of the first-comers and at the expense of the laggards in the race. And inflation is, in effect, a race–to see who can get the new money earliest.

As an investor the key is to remember that the government will almost surely default to inflationary policy in times of crisis, and to try and position yourself so as to near the front of the line.

 

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DISCLAIMER: Nothing in this article should be construed as a personal recommendation or advice. Nor should anything in this article be construed as an offer, or a solicitation of an offer, to sell or buy any investment security. Barnhart Investment Advisory clients and principals may hold positions in any securities mentioned in this article. Investors should conduct their own due diligence and seek the advice of a financial and/or investment professional before making any investment decisions.

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