We learned more about what inflation actually is and isn’t.
What is Inflation? It’s a general increase in prices and fall in the purchasing value of money. Peter described it as the literal ‘expansion’, like inflating a balloon.
Over the past 10 years, the average rate of inflation in the United States was 1.8%.
Inflation is when the actual number of dollars it takes in order to purchase your property has increased. The main difference is that inflation does not actually reflect a change in the asset itself. In fact, the asset or house, may actually be getting worse over time in terms of condition or location or both.
Inflation is a reflection of the decreasing purchasing power of the money you trade for that asset. It’s not that the asset is ‘worth’ more it’s that the money you had before doesn’t have as much purchasing power as it used to. You have to give more to get the same product. Inflation simply means that your money is worth less.
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We learned that the inflation rate is often measured by the change in the Consumer Price Index (CPI), a monthly measure by the Bureau of Labor Statistics (BLS) that averages the cost of a basket of goods and services from areas around the country. It reports the result as a percentage rise or drop in CPI.4
Then what is appreciation? It’s the increase in monetary value.
Realtors talk about ‘appreciation’ when house prices increase.
It’s important to note that: INFLATION can look just like appreciation, but is not ACTUALLY appreciation.
Appreciation is when the ‘intrinsic value’ of something, like a house increases. This is not the same as ‘price’ or ‘cost’, we are talking about VALUE, as in, something grows more valuable.
How does something actually gain VALUE or Appreciate?
-Increased demand, not enough supply. This is what we see today in most markets
-Additional value is discovered or created on your property; oil for example, or developed road frontage, or adding utilities where there weren’t any before, maybe adding a bedroom or bathroom.
-Amazon, Google or Tesla decide to relocate 3,000 employees to your town and there aren’t enough homes to go around. (Supply and demand).
So that’s appreciation; it reflects a change in the actual property itself.
We learned that in inflationary times, when interest rates are low, it’s can be smart to have debt on your assets. Why? Because the money you’re borrowing now has higher value to you than the money you’ll pay it back with. The dollars are not actually equal.
(Help explain this)
We learned that having a lot of ‘paper’ is not smart right now, since it’s value is depreciating, ie, every day your dollar gets you LESS.
We learned that gold and bitcoin are not equal. Gold has many uses, can’t be destroyed and has extremely predictable 1-2% growth yearly, which follows population growth for the most part. Bitcoin isn’t used for anything except buying and selling itself currently. There are nearly 13,000 types of crypto currency and more coming every day.
Normally, the Fed would raise interest rates to slow down inflation, but when asked about this:
The president of Euro Pacific Capital, Schiff said the Federal Reserve is unable to raise interest rates to tame rising inflation as the economy opens and covid-19 vaccinations help lift consumption. Hiking interest rates could “stop the party” and “pop the bubble,” leaving the economy and financial systems exposed to the risk of depression.
“The economy and financial system are more fragile than the public thinks,” Schiff said in his podcast. “Normalizing interest rates by raising them to slow down inflation comes with the risk of bursting the bubble economy that is loaded with debt and leverage.”
“How can we expect a return to a normal monetary policy when asset prices, debt levels and federal budget and international trade deficits are abnormally high? Our bubble economy can’t survive normal interest rates,” Schiff tweeted. “Abnormally high inflation is the only politically viable option.”