It wasn’t too long ago that all the talk was about bailouts on Wall Street. Now the news is about bailouts in Europe. There’s a pattern here that investors must begin to address.
A major tool available to central banks is the ability to create money in order to execute their monetary policy. With so much country debt and so many bailouts, central banks in most Western countries have been printing money like mad in order to keep their economies afloat. This, instead of letting them correct on their own.
It’s seems like there is a conspiracy out there, and what it comes down to is excess—excess on the part of citizens and excess on the part of governments. Whether we like it or not, we live with a gigantic mountain of debt on our backs and the only way to deal with this debt is for central banks to print more money so they can pay for it. This conspiracy of poor financial management will only leave us with one enormous problem: inflation.
It almost seems natural now for central banks to fix everybody’s financial problems. GM’s gone bankrupt; no problem, we’ll bail you out. The economy’s not growing fast enough; no problem, we’ll buy a bunch of bonds to help keep interest rates low. But, someone has to pay for all these bailouts and you guessed it—taxpayers and the consumers are left holding the bag.
If we are in an age of austerity, it doesn’t seem like governments or central banks get the point. The fact is that we are spending way too much money at these levels. Economies are allowed to create excesses (due to a lack of even the most basic of regulations) and then, instead of being able to correct themselves, they are “managed” by institutions that have the power to create money. The marketplace is being skewed and there’s nothing we can do about it.
Well, that isn’t true. As investors, we can plan for the consequences. By creating all kinds of new money to bail out economies in America and Europe, the probability of a sustained period of price inflation is increasing. We’re already seeing some of that price inflation in the price of oil and some agricultural commodities.
In order to beat this likely scenario, individuals need to pay down debt and invest in the right assets that benefit from inflation. Resources and commodities should be the big winners here.
If there ever was an argument for owning gold, I can’t think of a better one. Eventually, we all have to pay the piper. Despite what central banks think, money doesn’t grow on trees.