Thursday, March 31, 2011

Money divided by Goods and Services = Price

Inflation and wealth preservation

Inflation is a much misunderstood word. Does it mean a general increase in the CPI, or money supply, or both?

To illustrate what inflation actually is, here's some examples:

3 dollars in coins + 3 loaves of bread = 1 coin will buy 1 loaf of bread

6 dollars in coins + 3 loaves of bread = 2 coins to buy 1 loaf of bread

In this example, what has changed is the money supply. It now takes more of your coins to but one loaf of bread because someone (read: Central Bank) purposefully created more dollars out of thin air (fiat money).

How does this steal your wealth? Well, the 3 coins you still have in your bank account will have to increase by a factor of 2 just to buy the same loaf of bread! Ouch. And what should make us even more 'upset' is the fact that whoever gets first use of those new coins from the Bank will get to use them at top value and not your watered down value.

Now can you see why the large Investment Banks get to profit from higher commodity prices?

In Roman times 2000 years ago, 1 oz of gold would have bought you a nice toga, a good quality coat and a pair of fine leather sandals. Today that same 1 oz will buy you a good quality suit. Same amount of gold, same amount of wealth and purchasing power.

(for more on this see : "Stories from the Desk of a Bullion Banker" by Philip Judge)

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