Chris’ note: Two decades ago, Nomi Prins left a seven-figure salary on Wall Street to blow the whistle on unethical practices there. And she’s written two books about how central banks have distorted markets and the wider economy.
That makes her the perfect person to comment on the inflation crisis we’re experiencing now. In today’s dispatch, she explains where inflation is coming from… where it’s headed… and how to get ahead of it.
But before you dive in below… Nomi has also found an opportunity to 10x your money ahead of a historic wealth transfer worth $150 trillion. She’ll send you all the details tomorrow at 9 a.m. ET if you sign up for the VIP list here.
We’re living through an inflation crisis.
Headlines about the nearly 8% inflation rate are in every news outlet.
And we feel the effects at the grocery store and the gas pump.
The average price of gasoline in the U.S. recently hit an all-time high of $4.32 a gallon. And the price of steak rose 63% in the past two years.
But do we really know what inflation is?
Today, I’ll tackle some fundamental questions about inflation… What causes it? How do we measure it? What’s next?
And I’ll show you how you can stay one step ahead of rising living costs.
You’ve probably heard the terms “inflation” and Consumer Price Index (CPI) used interchangeably.
But they’re two different things…
Washington uses the CPI to measure inflation and determine economic policy.
So when you hear about “rising inflation” from a government official… or in the mainstream media… they’re talking about a rising CPI.
It measures changes in the price of a basket of consumer goods and services.
But there are problems with the CPI…
First, prices don’t rise in unison.
The prices of big-ticket items such as transportation, college tuition, and housing tend to rise much faster than other items in the index. That’s because they’re scarce and desirable goods and services.
Second, it’s in the government’s interest to understate inflation.
Recognizing the true rate of inflation could force some politically unpopular budget decisions.
For one, the government would have to spend more money on certain programs like Social Security.
That’s because Social Security payments keep pace with inflation.
That would force cuts elsewhere in the budget.
This alone should make you skeptical about how accurately the CPI represents the inflation rate… and how it affects your buying power.
Using the CPI to measure inflation also confuses cause and effect.
The local grocery store, the pharmacy, and housebuilders aren’t responsible for inflation.
Instead, a rise in the money supply leads to higher consumer prices.
But over the years, government and Wall Street economists have worked to redefine inflation.
Even Webster’s Dictionary has changed the definition…
Since its first publication in 1828, it defined inflation as an increase in the money supply. Then in 2003, it changed the definition to a rise in consumer prices.
This took the focus off the main culprits behind inflation – governments and their central banks, which are responsible for the money supply.
This chart sheds light on why the feds prefer to use the CPI when talking about inflation. It shows the annual change in the U.S. money supply.
What jumps out is the spike in money supply that began in March 2020.
That’s when the pandemic panic started. The stock market was crashing. Investors were panicking as they watched their portfolios plummet.
They turned to the Fed to act. So it fired up its printing press.
In 2020, the Fed’s broadest measure of the money supply, called M2, rose by $4 trillion.
That was a one-year increase of roughly 26% – the largest of its kind since 1943.
And sure enough, by late summer 2020, the stock market had recovered its losses.
But in 2021, the Fed created another $2.3 trillion.
So combined, the U.S. money supply jumped 40% over the two years.
Today, it stands at $21.8 trillion. That’s up from $15.4 trillion in January 2020.
It’s no wonder the feds would rather you look at the CPI. Compared to the 40% jump in the money supply, a below 8% rise in the CPI doesn’t look so bad.
If history is a guide, we can expect more inflation – by both measures.
With President Biden’s $6 trillion federal budget for the 2022 fiscal year, the budget deficit will reach nearly $1.9 trillion this year. You can see this in the next chart.
More important, the total projected deficit between 2022 and 2030 is close to $11.5 trillion. That’s almost half of annual U.S. GDP.
The only entity that can finance this $11.5 trillion shortfall is the Fed.
And since the money creation is unprecedented, it makes sense to expect the resulting price increase to be unprecedented, too.
Even according to the government’s official CPI numbers, inflation is hitting multiyear highs. The real inflation rate is likely much worse.
As I mentioned up top, the latest CPI inflation figure is nearly 8% (7.9% to be precise). It hasn’t been this high since 1982.
In the early 1980s, the annual CPI rise was in the double digits. I wouldn’t be surprised to see it exceed this as the situation gets further out of control.
And that’s a real problem for investors…
With each new dollar in circulation, the buying power of each dollar in your wallet decreases.
What can you do about it?
You should focus on holding assets that can shield your wealth from the effects of increasing money supply.
Gold and bitcoin (BTC) should be at the top of your list.
That’s because they’re both scarce. That means no one can create more of either on a whim. And the government doesn’t control either supply.
For exposure to gold, you can buy the physical metal through a reputable dealer.
You can also consider the SPDR Gold Shares ETF (GLD). This exchange-traded fund closely tracks the price of the metal. And you can buy it through your regular broker the same way you buy a stock.
You can buy bitcoin on a crypto exchange such as Coinbase and then store it in a crypto wallet.
You can also easily buy bitcoin using PayPal or Cash App.
Just make sure to never bet the farm on either of these inflation hedges and always keep portfolio diversification in mind.
Happy investing,
Nomi Prins
Editor, Inside Wall Street With Nomi Prins