One of the assertions we commonly read about is that one of the benefits in an inflationary scenario is paying off existing debt with cheap dollars. That's true, only if you hold those dollars in an asset or investment that will benefit from inflation. If you hold those dollars as dollars, or in assets or investments that will not benefit from inflation, then you could easily be wiped out.
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Let's say you owe $100k on your mortgage and you have $100k in your savings account. Then inflation sets in with a vengeance. The cost of everything you need to survive goes up dramatically like food, energy, healthcare and most consumables. Only this time around, your wages do not rise to keep pace with inflation. Why? Because wage inflation was exported as manufacturing and high tech jobs were shipped overseas. This time, in an inflationary environment, the price of your survival goes up, but your means of survival does not. If your means of survival is to hold dollars as dollars, then at the end of the day you may still have that $100k in your savings account, but you will still have the $100k of debt, as well, and everything around you will cost many multiples of what it does today. By holding dollars as dollars, it is not possible to payoff existing debt with cheap dollars.
The only way to payoff existing debt with cheap dollars is to hold your savings in an asset class that will benefit from inflation. An asset class that will act like a "dollar magnet" when inflation sets in with a vengeance. Banks currently hold over $1 trillion in fresh reserves on their books that are not being loaned out, and that amount is growing. In a fractional reserve banking system, that $1 trillion dollars could easily become 5, 6 or 7 trillion dollars (or more) when those dollars make their way into circulation. Those dollars will chase certain assets and investments. Gold will be one of those assets. In the late 1970's, gold increased over 24 times it's value from peak to trough. This time around, gold has only increased a little over 4 times its value from a low of $250. Gold still has a long way to go.So let's say instead of holding that $100k in a savings account, you hold it in gold, and let's be conservative and say gold only goes up two fold from here. Instead of $100k you now have $200k. Your gold acted as a "dollar magnet". Now you have $200k but your debt is still only $100k. Now you really can payoff existing debt with cheap dollars. In this scenario, you would now be debt free and still have $100k left over. If gold goes up more than two fold, your reward is that much greater. But if you hold dollars, as dollars, you will lose your purchasing power, quite possibly, right along with your home.
Several weeks ago rules were quietly implemented whereby money market funds could limit your withdrawals. This week Citigroup announced that effective April 1st they can hold your cash for up to seven days. They have since back peddled and said they would never do that but have not rescinded the policy. The stage is being set to hold your dollars hostage when the next major financial "event" occurs. Unless you examine this possibility and act on it in advance, your dollars could be trapped with no way to get out. You could potentially find yourself in a scenario where gold is heading to the moon and your dollars are sinking like the titanic and you have no way out.
Knowing something and acting on it are two completely different things. Stop getting ready to get ready. Stop putting off until tomorrow what you must do today. The future is here, right now, at our doorstep. It's decision time. Are you ready?
