Watching the news can be like watching poorly scripted theatre. You can tell from everyone’s reactions that something important is meant to be happening, but you’re not really sure what it is. Even for people with supposedly ‘good’ jobs where you get pay rises now and then and a promotion if you promise to work hard and do the right thing, asset prices are rising faster than wages, and you never seem to be able to get ahead.
The use of money printing and low-interest rates by central banks around the world has been happening for as long as fiat currencies have existed. The excess capital that has been created has a sneaky way of finding its way into the prices of goods. In effect, it’s a hidden form of taxation that punishes savers and rewards borrowers.
Let’s have a look at a real-world example of a Big Mac to try and understand what is really happening to your money.
This is what a Big Mac looked like in 1967.
This is what a Big Mac looks like today.
Despite the urban myth, they have not changed in weight, height, or diameter. Other than the fact that the modern Big Mac is in high definition, they’re exactly the same. Yet when the Big Mac was first sold in America in 1967, it only cost 45c. Now they cost $5.81 USD. They have experienced an inflation rate of 4.7% per annum.
What caused it to be 13 times more expensive over 55 years? They certainly don’t provide 13 times more size, value, or nutrition than in the past.
The simple answer is that the USD has lost 13x its purchasing power when priced in Big Macs. The endless printing of currencies by the central banks has caused the USD to erode in value over time. Recently the USD (as measured against a basket of other currencies) has strengthened, but this is all relative. All currencies are losing value, it’s just that the USD has been losing value at a slower pace relative to other currencies – including the AUD. If we look at the M2 money supply of the US, it’s been increasing at around 7.1% per annum since 1967. Incredibly 40% of all USD ever in history were printed in 2021.
Another way to look at it would be if you kept cash under your mattress, you would be losing the equivalent of 4.7% per year if all you consumed were Big Macs.
If the purchasing power of your money eroded at 4.7% per annum, it means that if you kept $100,000 in your mattress for 50 years and gave it to your children at the end, it would be the equivalent of giving them $10,000 today in terms of what they would be able to buy.
The implication in this example is that to protect against the loss in purchasing power of your money, you would have to deploy it in an asset that increases by at least 4.7% per annum…. After-tax.
This gets even worse if you were to price the purchasing power of your dollars in assets rather than Big Mac considering that the returns for property and shares are in the vicinity of 7-9% per annum.
The use of leverage with an appropriate asset is probably the easiest way to get around this problem because leverage can magnify your returns. With the typical property using a 90% LVR, at an average interest rate of 5%, a yield of 4.3%, and an annual growth rate of 5%, your return on your cash invested would be 13.53%. Property has been one of the best assets not only to protect your wealth from the effects of monetary debasement but to grow it over time. Probably the reason why the vast majority of the wealth of the royal family of England has been stored in land over the last 1000-odd years.