Campy in Nashville, Tennessee, USA wrote:
I am having a math problem with the savings part of this.
If inflation is running at 7% annually as in the USA:
Since Bretton Woods but especially since deficit spending and Reaganomics, we've had a growing credit bubble for 30-40 years. The central bank buys treasuries which increases the total return of bonds. It also sends cash/credit (think of it as 0% bonds) into the system. This lowers bank interest rates since banks are not interest in holding non-interest bearing paper. So it makes its way into the stockmarket. Until recently, the same happened with real estate. Some of this credit spills into the consumer system as well. Then it's called inflation. What matters, however, is that the financial asset inflation outpaces consumer inflation. It has done so, so far.
Since it's a way of levering up, it gets harder to navigate. If there was no credit manipulation, you'd have 0% inflation (from credit) and a 3% real return which seems to be the natural growth rate of population and nature. Instead you have 7% inflation and 10% nominal return. There's more uncertainty there. Imagine 20% nominal return and 17% inflation---in that case, only a small perturbation would kill your 3% spread.
So there's a need to stay on top of things to avoid getting creamed by exponential decays. As an investor, monetary policy makes this harder. You can't sit in cash for sure. You can sit in silver but then you'd need to save your entire life's worth of expenses instead of 33 years of it corresponding to a 3% return rate.
As a hedge against inflation, gold is more useful because it's not a commodity like silver. Silver is more like oil. It's fine to have, but in a recession (with inflation) people are not going to value it UNTIL they actually start bartering with it instead of using it to make electronic switches. Same with oil.
As a general hedge: Few things beat skills, tools, and land. I'd focus on those first which I think most here do. You may be interested in a book called The Alpha Strategy written by John Pugsley in the late 1970s. Great strategy at the time, but he didn't predict that Volcker would raise interest rates to double digits to crush inflation. It was his black swan. Bernanke is probably not going to do this but his replacement might.
Also, the world may move to a commodity based monetary system. The US will not like this. As it exports most of its commodities, that would spell the end of American dominance on the world scene. It's hard to predict how this would play out since the other major industrial countries also import their commodities.