Categories
Economy

Four Stages of the Business Cycle

There are four stages of the business cycle: expansion, peak, contraction and trough. We’ll look at these and other cycles and draw some conclusions about the economy and how you can plan for the future.

Experts Have Discovered That Economic Events Happen in Cycles. The Seasons, the Planets and Human Life Itself Are Cyclical

Before we get to the details of the four stages of the business cycle, let’s discuss more about economic catastrophe. Unfortunately, the American Great Depression and the COVID-19 shutdown of 2020 were catastrophic events. Yet, some very intelligent researchers have determined that much of what we experience in our lives revolves around cycles.

The sun and the moon follow a cyclical pattern that is predictable. In addition, the earth’s movement through the universe and its relationship to other stars is part of a greater cycle. But here on earth, there are many more cycles.

The life of a human being is part of a cycle. You are born, you become a youth, then middle aged, followed by elderly life and death. Our season are cyclical: Fall, Winter, Spring and Summer. Researchers have discovered that our economy is cyclical as well. Oddly enough, the four stages of the business cycle are closely related.

According to Investopedia, the four stages of the business cycle are as follows:

“The four stages of the economic cycle are also referred to as the business cycle. These four stages are expansion, peak, contraction, and trough.” -Investopedia

The Four Stages of the Business Cycle: Expansion, Peak, Contraction and Trough

Expansion occurs when the economy is growing. Prices begin increasing, more people are working. Businesses grow and make more money, hire more workers and pay better salaries. The workers tend to spend more money, buying cars and houses, passing money along through the economy. Most participants in the economy benefit and see more money in their bank account.

The peak of the business cycle is the highest point. It occurs when expansion reaches its maximum. For example, employment in the economy is considered full, prices increases are beginning to look like inflation. Many people will have borrowed great deals of money for bigger houses or more things. The stock market is usually at an all-time high.

During a contraction economic growth begins to slow down. Inflation (price increases) begin to slow down as well. In addition, unemployment may begin to increase and more people find themselves out of the workforce. The stock market may level off or even begin a correction or retracement. New housing starts may decrease during this time period.

The trough is the low point and may also be called a “recession” or a “depression.” People begin to worry about personal finances. Unemployment is higher, borrowing money is more difficult and people struggle to make ends meet. The stock market may be in a bear market trend either going down or flat. Jobs are scarcer and the real estate market is tight.

Economist Ray Dalio and the Economic Machine

Ray Dalio, an economics expert from Bridgewater Associates, has created some really intelligent free videos on understanding the 4 stages of the business cycle. He also is the author of the book, “Principles.” Dalio is really good at simplifying economic ideas and helping you understand why things happen as the do.

How the Economic Machine Works by Ray Dalio

Why You Need to Know About the Four Stages of the Business Cycle

During the up Cycle the Economy Flourishes; During the Down Cycle the Economy Suffers

It’s important to understand the basic concept of economic cycles because cycles go up and down. The economy bounces back and forth between growth and recession. In down cycles, money is tight, banks are reluctant to lend money, economic growth slows down and people don’t spend as much because they have less money. However, in up cycles, people spend more, banks lend more money, the economy grows and unemployment is low.

There are many investments in the economy that are affected by the economic cycles, such as the stock market, real estate prices and even commodities prices like gold and silver. As a result, financial planners and investors must be proactive in planning for changes during the four stages of the business cycle.

The American Economy is in a Down Cycle in 2020

In 2020, the economy is passing through a down cycle. We are probably somewhere between contraction and trough in the four stages of the business cycle. As a result, unemployment is high, it is becoming more difficult to borrow money and yet the stock market is at an all-time high. Money managers have to make tough decisions about re-balancing portfolios with stocks, bonds, precious metals and even cryptocurrencies.

stages of the business cycle

What You Can Do to Thrive and Protect Yourself

The Secret to Winning in the Four Stages of the Business Cycle: Budget, Save Money & Invest

When life is cyclical, it simply means things go up and then they go back down. The pattern repeats itself in a cycle that goes on forever. Moreover, in the natural world, animals are aware of the cycle of the seasons. For example, squirrels have the natural instinct to bury acorns during the summer and build their nests to prepare for the bitter cold of winter.

In many ways, the four stages of the business cycle operate much like that in the animal kingdom. Although humans no longer depend on instinct to survive, we can still use our higher brain function to make decisions. If we know that the economic cycle goes up and down, then sometimes we will have more money and other times we may have less money. Following this logic, it makes sense for us to save money during the times that we have more money. When we learn ways to save money on a tight budget, we are better prepared to weather the storm of bitter economic times.

Write Down Your Goals

If you want to be retired, living on a beach in Costa Rica in 20 years, then you need to write that down as part of your goals. We recommend creating a notebook, journal or even a spreadsheet where you list exactly what you have planned for the future. This serves two purposes. Writing down your goals makes what you want explicitly clear. It gives you a starting point and also provides you with the details that you will need to determine how you will reach your goals.

The second purpose of planning out your financial goals on paper (or electronically) is that you are signaling to the universe what you want. History has proven that the psychology of desire and intention is a powerful tool in accomplishing goals. Understanding the four stages of the business cycle can help you achieve your financial goals as well.

Review Your Goals Regularly

Once you’ve written down what you plan to accomplish through your goals, you should return to the goals frequently to review them. Some people even find it helpful to place a copy of the written goals in a location near them where they see the goals daily, like on your bathroom mirror or near your workspace. It can also be helpful to visualize your goals through imagery. Is one of your goals to own a beach house? Place a picture of the beach house that you want on your wall. Again, the power of intention is great and tends to help you focus your energy on exactly what you want.

Create a Budget

Now that you have established your goals, it’s time to create a budget. Budgeting requires a great deal of self-discipline, so if you don’t follow your budget, then it can wreck your plans! When you create a budget, start by writing down in detail what your expenses are each month.

Spreadsheets are great for budgeting, but not required. There are also budgeting apps to choose from that can be helpful. For now, you need to know where you spend your money. Provide as much detail as possible when listing your expenses. You may find it helpful to review past bank statements and receipts.

Once you have an idea of where you spend your money each month, it’s time to take a hard look at your budget and cut some expenses. Many people find making cuts to spending a difficult task. But making cuts now will help you reach your financial goals quicker.

Living Below Your Means

After cutting your expenses down to the bear minimum, you should be living below your means (hopefully). Unfortunately, living below your means is a philosophy that most people don’t follow these days. Living below your means requires that you spend less than what you make. For example, if your take home pay is $1,500 per month, then living below your means is only spending $1,000 per month.

The extra money that you have from living below your means will serve two purposes. At first the extra money will be used to pay down debts quickly. Getting ahead requires that all debt be paid off first. Secondly, after the debt has been paid off, you will then use the positive cash flow to fund your emergency fund, savings and investments. Each of these is part of your net worth and the buffer between you and poverty. The more you can grow your savings and investment, the simpler and easier life gets.

Pay Off All Debts

Before you can start saving money, you must pay off all debts. Now that you’ve established your budget, cut personal spending to the bare minimum. You will take extra money that you have leftover in your budget and use it to pay down debts. Create a list or accounting of your debts, the corresponding balances and interest rates that you maintain. Use this information to help you keep track of your progress as you pay down debts.

If you are young and just starting out, hopefully your debts are minimal. Having minimal or no debt when you begin your journey toward wealth creation is a huge advantage. Paying off debt can take years and a great deal of sacrifice. So, if you have little or no debt, congratulations! For the rest of us, it’s time to get to work paying off debt.  

The Shocking Truth About Saving Money

According to a December 2019 article by GoBankingRates, approximately 70% of Americans have less than $1,000 in savings!

This is a shocking statistic that shows how access to credit cards and lending have dominated our society. Unfortunately, Americans have adopted the idea that borrowing money for most things is normal. Yet, just a few generations ago in the early 20th century, people learned the hard way during the Great Depression that borrowing can lead to financial ruin. Having no savings puts you in a dangerous financial place.

Make Saving a Habit

Saving is a habit that can be learned over time and simply requires discipline. Become determined to reach your financial goals. Your personal determination to win at the money game will help you develop the discipline to save.

In addition, develop good habits of saving money. In the classic personal finance book, “The Richest Man in Babylon” by George Clason, the author implores the reader to set aside at least 10% of your earnings. This is a great rule of thumb for saving and investing because removing only a fraction of your income each month will likely not even be noticed or missed. Yet, this small amount of money is the seed needed to grow wealth.

Create an Emergency Fund

The first thing to do when you have paid off debt is to start saving for an emergency. Many people think that saving for an emergency is not necessary, until life proves them wrong and an unexpected event happens. Unfortunately, we all have emergencies during life: job loss, medical issues, natural disasters, home repairs, car problems, etc. Life is expensive and it pays to be prepared.

At a minimum, you want to have at least $1,000 in your emergency fund. In reality, your emergency fund should cover 3-6 months of expenses. For most people this number should probably be between $5,000 – $20,000. Keep in mind that in the worst case scenario you want to be able to pay all your bills and eat for 3-6 months, in the event that you lose your job.

Invest 10-15% of Income

Once you’ve fully funded your emergency fund, you can start investing. And if you have made it this far, then congratulations! You are ahead of the pack and well on your way to wealth building.

As stated previously, we recommend that you invest 10-15% of your income monthly. The earlier that you get started saving and investing, the better off you will be in the long run. In fact, the most powerful tool that will be working for you during investing is compounding interest, and it works like magic. How do you turn $1,000 into $62,000? The answer may be simpler than you think.

Wrap Up: the Four Stages of the Business Cycle

As you can see, understanding the four stages of the business cycle is critical in understanding how investing works. Knowing the parts of the business cycle makes investing and managing money clearer and reduces the chances that you lose money over time.

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Disclaimer:

It is important to note that Piggy Bank Coins does not provide financial advice. We don’t endorse or recommend any financial investments. Instead, we provide information for educational purposes to those seeking knowledge regarding personal finance. However, in the spirit of transparency, note that the author is an investor in cryptocurrencies, precious metals and some equities.

In addition, The Federal Trade Commission (FTC) requires that Piggy Bank Coins disclose to readers that we may receive commissions when you click our links and make purchases. However, this does not impact our reviews and comparisons. Moreover, we try our best to keep things fair and balanced, to help you make the best choice for you.

Categories
Economy

Dollar Loses Reserve Currency Status

In this article we discuss the future of how the dollar loses reserve currency status among world currencies. In addition, we touch on how the dollar became the world reserve currency, the history of the US Dollar. We also provide information about the difference between real money and fiat currency.

In a recent Market Insider article, Stanley Druckenmiller, CEO of Duquesne Family Office, was quoted as saying that the US Dollar would be removed as the world reserve currency in the next 15 years (by 2036).

Clearly, the US Dollar has grown weaker in the past 20 years. The US debt has continued to grow out of control and the American economy has become weaker. The United States has become a gross importer and has continued to produce and export very little.

Social Program Budget and War Spending Overload

Over the 20th and 21st Century, America continued to borrow greater sums of money to fund wars throughout the world. The US occupies dozens of nations and has fought wars recently in Afganistan, Iraq and the like. At home, the Baby Boomer generation (born roughly 1946-1964) are now beginning to retire from the labor force.

Dollar Loses Reserve Currency Status

Yet, it is unclear how American social programs such as the Social Security Program and Medicare will pay for all the retirees’ benefits. Furthermore, the labor pool (those who pay taxes) has continued to shrink. With fewer people contributing to these Federal programs, and more requests for benefits coming in daily, something has to give.

US Dollar History

The Continental Congress issued the first United States paper money in 1775, one year prior to the Declaration of Independence. The purpose of the money issuance was to assist with military expenses. The currency lost value. As a result, citizens of the US stopped using the currency.

On July 6, 1785 the Continental Congress officially adopted the dollar as official legal tender, beginning the official US Dollar history. The Continental Congress was a confederation of delegates who acted as representatives of citizens of the American Thirteen Colonies.

Coinage Act of 1792

On April 2, 1792, the US Congress passed the Coinage Act . The official name of the Act is, “An act establishing a mint, and regulating the Coins of the United States.”

The Coinage Act of 1792 established the US Mint and the US Dollar. The US Silver Dollar became the official unit of money for transactions in the United States. The Silver Dollar was subdivided into several denominations: one cent (penny), five cents (nickel), ten cents (dime), quarter-dollar (quarter), etc.

Silver or gold made up each coin, except for the penny. Additionally, it is significant to note that the US One-Dollar bill note did not appear until 1876. This was approximately 100 years after the US Continental Congress approved the first US currency.

During the Civil War, Dollars were called “Greenbacks.” The term was coined because the notes were colored green. In 1869, the US government established a centralized money printing system. As a result, money printed was known as United States Notes. The Greenback played an important and well-known part in US Dollar history.

Intrinsic Value

During early US Dollar History, money was backed by silver and gold. It’s interesting to note that silver and gold are commodity metals that have an intrinsic value, whether in the form of a coin, a bar, jewelry, etc. More than one hundred years later in 1876, the US Government started printing currency on paper. Yet, paper money has no intrinsic or real value.

Federal Reserve Note

In the United States, currency is called “Federal Reserve Notes.” The term is equivalent to “cash” or “money.” It can also be called “banknotes.”

In fact, if you look at a Dollar Bill, it reads, “Federal Reserve Note” at the top. Next, the Federal Reserve Act of 1913, which established the Federal Reserve Bank, also authorized the issuance of the US Dollar Federal Reserve Notes. Obviously, the Federal Reserve Bank plays a critical role in the US Dollar history. Finally, banknotes are legal tender. These notes are the official currency used in the United States. In 1914, the first Federal Reserve Note was issued.

In 1913, the Federal Reserve Bank was established. At the time, existing law required the exchange of currency for gold. However, in 1933, it was illegal to own gold coins. In addition, Federal Reserve Notes were not supported by gold. Later, Americans had to use Federal Reserve Notes. There was no other option to pay debts, except to use the official currency.

Bretton Woods System

In July 1944, a gathering of over 700 delegates from around the world took place in Bretton Woods, New Hampshire. United Nations Monetary and Financial Conference was its official name. The purpose of the meeting was to improve the economy. In addition, the conference established a world banking system, including the International Monetary Fund.

World Reserve Currency

Subsequent to World War II, the United States Dollar became the official world reserve currency. As a result, a critical chapter was written on US Dollar history. This forever shaped the future of the country. The impact of this change to global finance was significant and had long-lasting impacts on both US influence and power, as well as purchasing power outside the United States. A reserve currency is one where the central banks maintain a fixed exchange rate with a particular currency and their own currencies. In this case, the US Dollar became the reserve currency. As a result, this change played a vital role in the financial stability and prosperity that Americans enjoyed in the latter 20th century.

As world reserve currency holder, the United States was required to redeem US Dollars for gold. Additionally, after World War II, the United States was one of the largest holders of gold bullion in the world. As a result, world reserve currency status for the US Dollar seemed like a natural fit. Unfortunately, in 1971, deficit spending by the US and an excess of paper money caused countries to increase the demand for gold. In response, the US Dollar history changed forever and the Dollar was no longer on the gold standard. This meant that gold would no longer back the Dollar. Many believe that ending the gold standard was the beginning of how the dollar loses reserve currency status worldwide.

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Countries Using the US Dollar

“Five US Territories and seven sovereign nations use the US Dollar as their official currency.” –Investopedia

The territories include Puerto Rico, Guam, the US Virgin Islands, Northern Mariana Islands and American Samoa.

In addition, the following countries utilize the US Dollar:

  • British Virgin Islands and the British Turks and Caicos Islands.

Countries throughout the world that use the US Dollar as a surrogate or a proxy for their own currency include:

  • Panama, Zimbabwe, Cambodia, Ecuador, the Bahamas, El Salvador, Nicaragua, Timor-Leste, Micronesia, Palau, Marshall Islands, Bahamas, Barbados, St. Kitts and Nevis, Costa Rica, Belize, Myanmar, Caribbean Territories and Liberia.

Note: if the dollar loses reserve currency status, the aforementioned countries will no longer have reason to use the US Dollar.

Fiat Currency

It’s important to understand what fiat currency is and the difference between real money and fiat currency. Gold and silver do not act to back fiat currencies. Fiat currency is a promissory note from a government. As a result, fiat currencies frequently fall prey to high inflation, devaluation and ultimately failure. They typically have no intrinsic value. Unfortunately, most modern currencies are fiat currencies. Some investors believe that the US Dollar being a fiat currency is how the dollar loses reserve currency status.

Why Fiat Currency is Popular?

Central Banks, such as the Federal Reserve Bank of the United States, can increase the money supply and increase fractional reserve banking by printing more fiat currency. As a result, these central banks can use the power of interest rate change and money printing to manipulate entire economies.

Although the central banks have good intentions, their meddling with the economic system can wreak havoc on the economy and cause distortions in markets. Often, altering interest rates and printing money simply delays the problem, requiring bigger solutions later. Many investors believe the weakening fiat market may be the domino that leads to how the dollar loses reserve currency status in the world.

Real Money

Merriam-Webster Dictionary defines “money” as,

Something generally accepted as a medium of exchange, a measure of value, or a means of payment: such as officially coined or stamped metal currency, money of account or paper money. -Merriam Webster Dictionary

Is the US Dollar real money or fiat currency?

A currency not backed by gold or silver is not real money. Unfortunately, government promises do not meet the criteria. Fiat currency is simply a legal tender paper note that the government requires everyone to use for payments. By definition, fiat currency is incontrovertible to gold or silver.

On the other hand, real money must have the backing of valuable or tangible assets. For example, tangible commodities such as gold and silver have supported currency. In addition, money backed by gold and silver has a value tied directly to the value of the silver or gold asset. As a result, real money is inherently stronger than fiat currency. As a result, it is not easily manipulated. Real money is also resistant to inflationary forces. Unfortunately, being a fiat currency is how the dollar loses reserve currency status.

Future of the US Dollar

It is unclear what the future holds for the US Dollar in the long-term or whether the dollar loses reserve currency status. The US Dollar remains as the world reserve currency; however, it’s role in this position may be for a limited time. Unfortunately, gold and silver do not support the Dollar. Yet, the strong US economy support its world reserve currency status. Financial analysts believe that so long as the US economy is strong, the US Dollar will remain strong. However, US debt and trade deficits continue to grow, putting pressure on the US monetary system.

Wrap Up: Dollar Loses Reserve Currency Status

Hopefully, we have explained why the dollar loses reserve currency status in this article. As the US Dollar becomes weaker over time, with nothing like gold or silver backing it, the chances that the dollar loses reserve currency status will increase. As a result, investors must take action now to keep investments safe.

Want to learn more about money and the Federal Reserve Banking System? Check out G. Edward Griffin’s “The Creature From Jekyll Island.”

If you want to learn about the history of money, check out Mike Maloney’s free “Hidden Secrets of Money” video series. It’s a goldmine of information that can help you better understand money and where the world stands today financially. Highly recommended!

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Disclaimer:

It is important to note that Piggy Bank Coins does not provide financial advice. We don’t endorse or recommend any financial investments. Instead, we provide information for educational purposes to those seeking knowledge regarding personal finance. However, in the spirit of transparency, note that the author is an investor in cryptocurrencies, precious metals and some equities.

In addition, The Federal Trade Commission (FTC) requires that Piggy Bank Coins disclose to readers that we may receive commissions when you click our links and make purchases. However, this does not impact our reviews and comparisons. Moreover, we try our best to keep things fair and balanced, to help you make the best choice for you.

Categories
Economy

Coming Crack Up Boom

In this article we discuss the concept of the coming Crack Up Boom, inflation and hyperinflation. In addition, we talk about how the coming crack up boom applies to our current economy and provide some solutions regarding things you can do to fight back against inflation.

What is a Crack Up Boom?

One of the most famous economists of the 1920s, Ludwig von Mises, came up with the term. Mises witnessed the events that occurred in Weimar Germany in the early 20th century, including hyperinflation and the destruction of the economy. Mises was a member of the Austrian School of Economics.

A crack up boom is when an economy or government begins a financial meltdown because of excessive money printing and rising prices. There are two key features of a crackup boom: excessive money printing by a government and continually rising prices that lead to inflation or hyperinflation. As prices of goods rise, people realize that the cash they hold is losing value quickly. The result is that citizens suffer the consequences of hyperinflation, being unable to buy normal items because of spiraling prices. As a result, hyperinflation in the crack up boom causes people to get rid of cash as quickly as possible. Furthermore, this feeds the hyperinflation cycle as people flee cash and seek out assets, which hold value.

Mises Institute: Coming Crack Up Boom

“If once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the ‘twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse).” – Hyperinflation, Money Demand and The Crack Up Boom, Mises Institute

What is inflation?

how much is a dollar worth

“Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage means that a unit of currency effectively buys less than it did in prior periods.” –Investopedia

Could a Coming Crack Up Boom Happen in the US?

Well, hyperinflation has famously happened in other places in the world in the recent past. For example, hyperinflation famously struck Weimar Germany in the 1920s. Hyperinflation has also occurred in Zimbabwe, Argentina and Venezuela. Furthermore, hyperinflation has occurred quite a lot throughout history. As a result, all of the aforementioned places experienced a crack up boom.

You have probably heard famous stories of citizens pushing wheelbarrows full of cash to the bakery to buy a loaf of bread.

Hyperinflation in Argentina

Argentina is frequently studied as a case history for inflation problems. Since Argentina became an independent country in 1816, it has defaulted on its debt nine times over the years. Many of these defaults lead to hyperinflation and economic destruction for Argentinians. Furthermore, the debt defaults have caused currency devaluations (money becomes worth less). In addition, inflation in the country has reached levels as high as 5,000%!

Argentina was known as the Switzerland of South America throughout the 20th century. It is a large, independent country with significant natural resources, a delightful climate and strong historical economic growth. However, beginning in the 1980s, increased debt and import issues caused the country to see excessive inflation of the currency. Later, Argentina staked the Argentine Peso to the US Dollar in hopes of economic recovery. However, a recession led to a default on debt and inflation hit again.

As the currency in a country like Argentina loses buying power, more currency is required to pay for the same things. For example, one day groceries may cost $50; however, during hyperinflation, you might return to the grocery store the following day and spend $100 to buy the same groceries that cost only $50 the day before. This behavior ultimately led to a crack up boom in the Argentine economy.

What is Hyperinflation?

“Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy. While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.” –Investopedia

Currency Inflation

One thing that significantly affects inflation and purchasing power is money printing. When the US Treasury and the Federal Reserve Bank coordinate to print large amounts of money, it causes inflation. Inflation is simply an increase in the money supply. The bigger the money supply, the less the money in your wallet is worth. Moreover, inflation is a hidden tax. As a result, money you have in your bank account loses purchasing power when money is printed by the government.

On March 23, 2020, it was announced that the US Government would be giving out stimulus checks to Americans. In addition, they planned to give money and loans to businesses hurt by the COVID-19 epidemic. Almost overnight, approximately $2 Trillion in loans and grants were printed out of thin air. As a result, the internet went viral in creating money printing memes. One of those memes was the now infamous “money printer go brrrr” meme. Additionally, this could be the start of hyperinflation and the coming crack up boom in the United States.

Consumer Price Index

According to the US Bureau of Labor Statistics, the consumer price index has increased 1.3% in the past 12 months (before seasonal adjustment).

“The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.” -The US Bureau of Labor Statistics, Definition of Consumer Price Index (CPI)

A consumer price index value of 1.3% seems reasonable for 2019-2020. If inflation or the CPI were only 1% per year, that means that in 100 years one US Dollar would lose about half its purchasing power. For example, $100 in 1920 would only purchase $50 worth of goods in 2020. However, real inflation for items we buy every day is much higher. In addition, we’ll soon see what the real inflation values are, and they are not pretty. As a result, this may be the beginning of hyperinflation in the United States.

The United States Federal Reserve Bank Aims For 2% Inflation

The Federal Reserve Bank believes that we must have inflation to promote stability and predictability in the economy. Their goal is to have 2% inflation each year.

The Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability. When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy. – Federal Reserve Website

However, despite the inflation values touted by the Federal Reserve Bank, real inflation is likely much higher. Consumers are aware of the difference when buying groceries, paying for items or buying a car. Prices are clearly increasing significantly each year. But is this the start of hyperinflation and a coming crack up boom in the United States?

The Federal Reserve’s Tools of Inflation: Money Printing and Interest Rates

The Federal Reserve Bank’s most powerful tool for creating inflation is a two-pronged approach. First, they have the power to raise and lower interest rates. Increasing or decreasing interest rates has the effect of accelerating or decelerating the American economy. If they raise interest rates, people tend to borrow less and it becomes more expensive to do business. As a result, there is a chilling effect on the economy; however, if the Federal Reserve lowers interest rates, individuals (and businesses) find it easier to get capital to do business, and the economic machine is powered up, so to speak.

The other powerful tool that the Federal Reserve has is to print money. Typically, when they print more money, there is more money in the economy. The velocity of money increases and people tend to have more money. With more money in the system, the economy is stimulated. As a result, policies that involve greater and greater money printing can easily cause hyperinflation in the United States. As you can see, the scene is set for a coming crack up boom here in the United States.

Inflation Calculator

The US Dollar Has Declined in Purchasing Power Since 1913; The Stated CPI Does Not Reflect Real Price Increases

In addition, the US Bureau of Labor Statistics provides a handy Inflation Calculator. Using their calculator, you can estimate what purchasing power (based upon inflation) is today compared with years past. For example, $10 in 1960 is equal to $88.71 today. That means that in the 60 years prior to 2020, the dollar has suffered 887% inflation over time.

Since the Federal Reserve Bank was formed in 1913, the dollar has been in steady decline. The dollar’s purchasing power has decreased dramatically since 1913. Using the US Bureau of Labor Statistics CPI calculator, the US Dollar has lost approximately 96% of its purchasing power since 1913. This is an alarming statistic that may be a harbinger of hyperinflation in the United States.

How Inflation is Measured by You

Sometimes when we think about inflation, we think of what can be purchased directly with our national currency. For example, we might notice that last week fuel cost only $3/gallon, whereas, this week a gallon of fuel increased to $3.50. This is how consumers most often notice inflation. However, don’t get too caught up in measuring inflation by just using currency.

How to Survive the Coming Crack Up Boom in the United States

Seek Shelter in Deflationary Assets Such as Gold, Silver, Bitcoin and Real Estate.

There are some investments and things that you can own that hedge against inflation and the coming crack up boom in the United States. For example, for hundreds of years, owning gold and silver has been a method for surviving the coming crack up boom . Gold and silver both have a long history of maintaining their value when currencies became inflated.

Gold and Silver: Assets That Hedge Against Inflation

Real money assets are resistant to inflationary forces and maintain a value that is based on demand. First, silver and gold have a long history of maintaining their value against the currency of the day. No matter what the value of a dollar is, a one-ounce silver coin is always equal in value to one ounce of silver. In addition, silver and gold maintain a special balance with the value of gold, which fluctuates.

Silver and gold are real money, which is tangible and is backed by something of value. Moreover, you can hold it in your hand. Silver and gold cannot be taken from your bank account, like cash. In addition, hackers cannot steal silver from your computer, like Bitcoin. Finally, silver and gold can be kept safely and privately in a secure location. In many cases, real assets are a true defense against the coming crack up boom.

Bitcoin

Another alternative to gold and silver that many consider a hedge against the coming crack up boom is Bitcoin. In the past few years, many have begun to use bitcoin like gold – a store of value. In fact, Bitcoin has many of the positive properties that gold has. It is a store of value, it can be a medium of exchange, it can be a unit of account, there’s a limited supply, it is uniform, acceptable, divisible and portable, etc. As a result, Bitcoin may be a great way to avoid the coming crack up boom.

Both Bitcoin and gold have a finite, limited supply. As a result, this means that they cannot be subject to inflation. If there is only so much gold, silver and bitcoin, it is by definition, deflationary. Being deflationary means that as the supply of the commodity dwindles, the value and demand for each increase. This is not true of currencies like the US Dollar.

Real Estate

Even something like real estate can have a deflationary affect when compared to US Dollars. Real estate has a long history of maintaining its value over time as compared to the Dollar. However, choose wisely; many believe that there is currently a bubble in the United States real estate market. Prices for real estate in many cities today are considered to be over-priced and inflated. Owning real estate is a great way for surviving the coming crack up boom. Furthermore, it can be a source of passive income for you.

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Equities Market

This may be counterintuitive, but owning equities such as stocks can be a way on surviving the coming crack up boom . With the current trend in the United States of printing money and handing it out to individuals through stimulus checks, obviously inflation is rising. Many people are spending the stimulus money quickly. Furthermore, some people are taking their money and buying stocks or trading equities. As a result, the stock market has been trending higher. However, note that the rising stock market trend cannot last forever. In addition, when the market reverses, it may be ugly. At this point, a smart investor will move their money out of the stock market and into safer assets that can weather the storm and survive the coming crack up boom.

Other Assets

There are many other examples of assets that can be a method for surviving the coming crack up boom . For example, owning art, vintage cars, collectibles, and high demand items that serve a purpose can all be hedges against inflation. When buying assets, stick to what you know. Furthermore, if you know a lot about vintage baseball cards, then buy those with currency. In addition, try to own assets that have liquidity, meaning you can buy and sell them on the market easily. An example of an illiquid asset would be buying a Picasso painting. A Picasso may be a good store of value over time, but you may have to wait for years until you can sell it in a special auction.

Final Thoughts on Inflation and the Coming Crack Up Boom in the United States

As you can see, inflation and hyperinflation are real phenomenon that can affect your personal finances. Additionally, the seeds have been sewn for a potential coming crack up boom. Currently, inflation is quietly stealing money from your savings. In addition, if hyperinflation occurs, significant destruction of the economy can occur. As a result, it is important to have a plan to address inflation and a place to invest to fight back against the types of inflation.

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Disclaimer:

It is important to note that Piggy Bank Coins does not provide financial advice. We don’t endorse or recommend any financial investments. Instead, we provide information for educational purposes to those seeking knowledge regarding personal finance. However, in the spirit of transparency, note that the author is an investor in cryptocurrencies, precious metals and some equities.

In addition, The Federal Trade Commission (FTC) requires that Piggy Bank Coins disclose to readers that we may receive commissions when you click our links and make purchases. However, this does not impact our reviews and comparisons. Moreover, we try our best to keep things fair and balanced, to help you make the best choice for you.