While 2020 was miserable in many respects, from a financial perspective, it was a ball. Governments around the world printed trillions of dollars to pay people to essentially stay at home and not go out to work. At the time, they sold the idea as them paying us to put up with being stuffed inside our homes for months on end.
But, in reality, the government doesn’t actually produce anything. So they don’t have any cash to dole out. Anything that they distribute to us came from us. And eventually, we’re going to be the ones that bear the brunt of their actions in one form or another.
What’s Going to Happen Next?
This raises some interesting questions – namely, what’s going to happen next?
Well, there are two options. Either the government can raise taxes and lower spending to address its appalling accounts positions. Or it can simply create new money to pay off its debts without ever changing public policy.
It seems quite clear that it’s going to favor the latter. The last time the government tried to reduce public spending, there was discontent in the streets. People protested austerity for years and even today, it’s become a dirty word. Similarly, tax rises don’t seem likely. The tax burden on the average working person is already high. Adding yet more will likely disincentivize work, leading to lower overall collection.
So the only remaining option seems to be to pay off debts using new money.
Will Inflation Hit?
The problem with creating money from nothing is that you dilute the existing supply of currency in circulation. Over time, it becomes clear that there are more dollars than goods, and so prices rise. There are many different kinds of inflation in the short-term. But over the long-run, it’s money supply that really counts. So if you increase it – as governments have – you can expect some nasty inflation to hit between 18 and 36 months later.
We’re already seeing inflation popping up all over the place. Some economists are saying that it is around 4 percent in the US already, and there’s nothing stopping it from going higher. Asset prices, as always, are shooting up as well.
This wasn’t a problem in the past with the gold standard. What is the gold standard? It was a way of limiting the supply of money. Government could only issue new notes if they had the gold bars in reserve to back them up. Dollars were just a claim on gold.
But today, we don’t have that at all. If you give the fed five dollars, it’ll give you a five dollar bill in return.
How to Protect Yourself
Given that inflation is likely around the corner, holding cash isn’t a good idea. If you can, you’ll want to invest your money in gold or other assets that can keep up with inflation. This is the wrong time to be stuffing notes under your mattress for a rainy day because when that day comes they’ll be worth much much less.