Top 5 Ways Rich People Make Money With Inflation
When the Fed dropped interest rates last year, everyone expected inflation, but the Fed claimed that we shouldn't be concerned because inflation is only a touch above 2.4 percent. However, if we look at the current situation, we can see that prices have grown considerably since then. I'm not only talking about asset values like houses, stocks, and so on, but also the consumer pricing. Inflation in the United States has risen to its highest level since 2008, as the economy recovers from the epidemic and people return to work, spending more than ever before.
In May, the consumer price index increased by 5% on an annual basis, up from 4.2 percent in April and the highest level since August 2008. While the majority of people suffer as a result of inflation, certain people profit from it since every difficulty gives an opportunity. Is there a method to profit from the current inflation? The answer is a resounding YES! So let's take a look at some of the numerous ways that the wealthy are profiting from this inflation.
1. Hold Real Assets
What most people don't realize is that money is just another commodity on the market, and its price is influenced by a variety of variables including demand and supply. Consider a hypothetical scenario in which you have ten houses on one side and ten bucks throughout the entire economy on the other. A single residence will cost one dollar in this hypothetical scenario. However, if we invest an additional ten dollars in this market, there will be a total of twenty dollars, but there will still be ten houses, raising housing values to the point where a single property will cost two dollars. That is a straightforward explanation of inflation. When the economy was on the verge of collapsing last year, the Federal Reserve decided to inject billions of dollars into the system to stave off depression by issuing stimulus checks and purchasing corporate bonds. In the year 2020, 22 percent of all US dollars in circulation were printed. Anyone with a rudimentary understanding of economics knows that inflation is coming.
That's why, at a time when interest rates were at their lowest, everybody could afford a homemade instant investment in real estate rather than storing cash. It makes no difference whether the real rate of inflation is 2.4 or 3.4 percent. Because property prices increased by 15% to 20%, according to some estimates. This indicates that real estate investors not only beat inflation but also made a lot of money. However, the most astute investors didn't simply buy residences; they took out mortgages, since leverage transforms excellent buys into fantastic ones, especially when interest rates were at historic lows.
2. Debt
Many of you may hold a negative view of debt, however, debt may be beneficial, especially when inflation is present. If today's dollar is worth more than tomorrow's dollar. That means I made a profit if I borrowed a dollar today and returned it tomorrow. Today's median property price is roughly 350K dollars, but it was less than half that 20 years ago, at around 150K dollars. Because the real value of the dollar decreases every year, a 150K dollar worth 350K now is equivalent to a 150K dollar 20 years ago. That's why, when the Fed started purchasing corporate bonds and lowering interest rates, guess who started borrowing all that money? The world's top corporations, such as Amazon, Facebook, Microsoft, Apple, and others, even though they do not require the funds.
Apple is sitting on a cash hoard worth more than $200 billion. But it still borrowed money because why spend your own money when you can put it in the SP500 and receive at least a 10% return while borrowing money at only 1%? Even if you earn a 5% return on that borrowed money by investing it in your business, you are still profiting by 4%. Furthermore, when you borrow money, you receive all of these tax advantages. As a result, you will save money on taxes. Any money you borrow is potentially a profit if interest rates are lower than inflation.
3. Gold
What distinguishes gold from other assets is that it has always been an asset that has preserved wealth, particularly during times of crisis.
It works in this case. Gold prices soar when the future appears unpredictably uncertain. Because of the 2008 financial crisis, gold prices soared from roughly 600 dollars to over a thousand dollars in 2007. Investors panicked and began purchasing gold right away. The US dollar may lose value and possibly become worthless in the future, but gold will never be worthless. The value of gold has remained constant since the dawn of civilization, although the US dollar has lost nearly 90% of its value in the previous 100 years. In 2010, speculators panicked once more and began purchasing gold in large quantities, pushing gold prices to a new high of $1,900 per ounce. The economy has subsequently steadied, and the gold bubble has burst. When the economy appears to be improving, investors are more likely to invest in assets such as stocks rather than gold. As a result, gold prices tend to decline during predictable, steady periods.
When the United States launched a trade war with China in 2019, gold prices began to rise again, and the pandemic exacerbated the situation. For the first time, gold prices surpassed $2,000 per ounce. Looking back through history, gold has always been a terrific method to profit from inflation. A single US dollar was a lot of money in 1973, but today it can barely buy you, sweets, while gold prices have soared from roughly 100 dollars in 1973 to 1800 dollars today. However, because gold is a passive asset, I am not a great supporter of it. It merely sits there gleaming, whereas equities or real estate provide rental money. It's a working asset that delivers a service or a product. Why do stocks continue to rise? Because the businesses that support them continue to expand. Today, Apple sells a lot more iPhones than it did ten years ago. That is why it is now worth a lot more than it was ten years ago.
4. Crypto
I was hesitant to include it on this list. However, because many individuals have gained from inflation by purchasing crypto, I felt compelled to discuss it, though it is extremely dangerous. If you've been a long-time reader, you already know what I think about cryptocurrency. The technology underlying it is undeniably impressive, and it has enormous promise, but it is still exceedingly dangerous and unpredictable in the short term because it is still in its infancy. As we previously stated, one of the reasons bitcoin has risen so drastically in the last 12 months is because the Federal Reserve began creating trillions of dollars.
After purchasing stocks and homes, investors realized that bitcoin is similar to digital gold, so they decided to purchase bitcoin as well. Many individuals who were uninterested in bitcoin before the epidemic has forgotten that the price of bitcoin was around $8,000. The price of bitcoin was only 3600 dollars before the trade war. You might have made a fortune if you were interested in bitcoin when most people weren't, but people normally get enthused about anything when it's all over the news. The brightest individuals, on the other hand, got in early and have increased their fortune by 10 to 20 times since then.
5. Stocks
Stock prices may not have grown by tens of thousands of percent like crypto, but they are far more stable and less dangerous. The sp500 increased by 40% from July 2020 to July 2021. That's an incredible return, especially considering you're putting your money into the whole US economy. When you buy a stock, you are purchasing a piece of a company. That's why they're sometimes referred to as shares. When there is an excess of cash in the economy, the value of a firm rises, and you rise with inflation. Furthermore, that money is often spent on necessities and wants, resulting in quicker business growth, so you are not just battling inflation, but also gaining from it. Consider how much of those stimulus cheques were spent on Amazon or Apple items for a second. If you include the fact that these businesses have taken out billions of dollars in loans for essentially little money and grown at an exponential rate, the picture becomes even bleaker. People are returning to work, the economy is reopening, people are spending more, and these firms are poised to expand even more rapidly.
The trick is to keep your money invested in inflation-protected assets. The majority of wealthy people do not have a large amount of cash on hand. They usually keep a little portion of their net worth liquid in case of an emergency. Consider the world's wealthiest individuals. They are extremely wealthy because they own a significant portion of the companies they founded. Their wealth rises in tandem with their enterprises. Even if you only have a few thousand dollars, you may benefit from inflation by using one of the strategies we've covered.
© 2022 Akash Panda
