Rich dad has identified 4 methods that the rich employed to take money away from the poor and middle class and inflation is one of them. Inflation is simply a devaluation of the currency due to a larger supply of that currency in the market. This will translate to you paying more for products because there are now more money chasing after the same number of goods. Printing money is a direct way to increase inflation and those who first get to use the new money to purchase things will gain the most value. After the new money is introduced, it dilutes the pool of money and shrinks the purchasing power of every dollar of the currency you possess. For example, if the inflation rate is 3%, and your money in the bank is only earning 1% (is less than 1% in Singapore banks), your real value of wealth instead of increasing, is decreased by 2%.
Previously, currency was pegged to the amount of gold the government holds and you can actually change your dollars for gold at the treasury. US government used to do that and other governments of the world pegged to US dollar. But after President Wilson took away the requirement for gold to back the US dollar, money supply began to expand guickly and resulted in inflation. However, if inflation is kept at an acceptable level, say 3-6%, people will rarely feel the effect and that is why it is a silent killer, slowly eroding your wealth. The most shocking discovery that I have made was that, we were not actually in a stock market bull run from 2004 to 2007! How can it be? You probably made a lot of money from the market. But you may be surprised that you may have profited thousands of dollars, but your real wealth had decreased.
The prices of stocks rised due to inflation, not real growth! Take a look at the chart below where Dow Jones Index was denominated in Gold rather than US$. (chart courtesy of The Big Picture who took it from Natexis Bleichroeder)
Can you see that the Dow Jones is actually worth less from the peak of 2000? Year 2000 is the dotcom bust and stocks have been falling from then on. The worst is we are misled that the “real value” of stock market actually rallied in 2004-2007.
Why use gold as a reference? Because gold is considered the most traditional form of money and value. By eliminating the dollar from the equation, it can said this is the true value of the stock market. Alternatively, you can denominate Dow Jones in terms of commodities, agriculture, crude oil etc, things that you pay for consumption. In fact, Michael Maloney has already plotted the charts in his book “Guide to Investing in Gold & Silver“, and he has shown that Dow Jones has been performing worse than each of them.
I began to understand why Jim Rogers was so bullish about commodities in early 2000 onwards. He must have saw something that most of us missed, while we thought the stock market was good. In fact, the commodities was where we could have protected our wealth. But will commodities continue to rise for the next few years? I am not sure but many gurus strongly believed so. They are very very pessimistic on the dollar and expect a great devaluation to happen. The underpinnings of the economy are better elaborated by Jim Rogers in Hot Commodities, Robert Kiyosaki in Conspiracy of the Rich, Michael Maloney in Guide to Investing in Gold & Silver, Peter Schiff in Crash Proof 2.0, Dr Stephen Leeb in The Coming Economic Collapse and Charles Goyette in The Dollar Meltdown.
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