No, I haven’t suddenly become some sort of investing guru. This post contains no financial advice and should not be construed as support of particular assets. I do think it might help you see money in a new light, though.
Inflation Serves a Social Function
Central banks around the world usually target a steady 2% inflation rate in order to maintain steady economic growth. Whether you see this as good economic policy to avoid deflation or a debasement of the currency and a backdoor regressive tax on the currency-holders, that it is so universally held as a target leads me to believe that that rate of inflation has a function – that being to create an expectation of loss, and extract wealth on that basis.
The common refrain of needing to beat inflation in financial advice, reflected in the economic concept of the real interest rate (nominal interest net of inflation), is based on the expectation that inflation, just as much as taxes, are inevitable. Because of this expectation, everyone using the currency attempts to grow their net worth by more than the 2% that they expect. As both a stimulant and extractor of economic growth, inflation benefits everyone – except the people who work longer hours and pay more for goods and services because of it… as a first-order effect.
In order to achieve the 2% or higher year-on-year growth, the wealthy must invest more and more in productive assets and growing their businesses, bringing idle assets into production, paying workers, and expanding the economy. The very force that weakens the money in people’s pockets gives them the ability to work for more, and implicitly puts them to work. Everyone suffers from inflation, but everyone may benefit.
Many would contend that the growth created by inflation is often unnecessary, or malinvested. Whether or not that is the case, the fact is, the inflation rate attempts to pull investment forward and force people to grow the economy. In the same way that we get on the treadmill and walk to nowhere, the inflation rate forces assets to go to work.
A word about stable prices is important here. If the currency unit was stable, it is possible that a large increase in production or salable goods creates huge demand for money, meaning money appreciates against everything else. In other words, deflation. While there is theoretically nothing wrong with this, particularly now with heavily digital transactions, physical exchange of cash presents a problem. How do you pay out half a cent when your smallest unit is the penny?
Whether that represents a larger investment than normal or taking on more hours at work, however, is a massive difference, to be covered somewhere else.
Only the Wealthy Can Afford Austerity
To be clear, when I say wealthy here, I mean people with assets – ideally, you own your home or your car free and clear for this example to work. Austerity is a kind of nebulous term, but it boils down to taking a pay cut, or taking home less money over a period of time. It could be going to debt service as well, which is the core of what’s going on here.
Owning assets allows the wealthy to control the timing of their expenses, meaning they can afford to conserve cash and stay liquid rather than having to take a loan or declare bankruptcy. They often double down on this, reducing their debt and interest payments and therefore insulating themselves from the effects of a pay cut. By contrast, not owning your assets means you have to pay mortgage, rent, or lease payments, which can quickly cut into food and other expenses if they go high enough. A car, for example, if owned free and clear, no longer requires a mortgage or lease in cash on top of fuel and maintenance expenses, which can be rationed and moved around as necessary. This requires a lot of cash upfront, but you don’t have to shell out every month to borrow, which can help get you through the lean times. This in turn means you don’t have to sell things to pay down debt you don’t havem, meaning you don’t need to buy them again or rebuild home equity.
Above all, wealth helps people stay out of the debt trap, a particularly dangerous threat for businesses that work on credit. Because income does not equate to cash flow, it is possible to be simultaneously very profitable and very bankrupt, meaning the management of cash is king. Being able to sell assets or merchandise in a pinch can be a huge help.
On the flip side, people falling into debt traps thanks to constantly rising costs of living, particularly real estate, and sticky low wages, is a dangerous game. The affected people are forced to move out or suffer higher rents and cost of living, sell assets, or take on more work. While this gets extra productivity out of them and gets the assets moving again, it also strands these people on an economic treadmill where they go nowhere fast. Their potential for growth is shut off by their lack of savings and the resulting potential investment, and we all suffer for it.
That is an economic policy that sucks the lifeblood of a population, maximizing the present at the expense of the future. Debt relief, cash aid, and other social interventions to relieve debt pressure suddenly don’t seem too bad.
Timing and Sizing are Everything
Day trades make profits within the day, swing trades within the week, and seasonal trades within the year. Every investor, speculator, or trader, whatever they may call themselves, agree that timing is everything in a trade or an investment. Buying low and selling high, or buying high and selling higher, all depend on entering a trade before everyone catches on, and getting out before it goes bad. So naturally, the same should be true in infrastructure.
Sizing these trades is important too. Building a portfolio that has good upside and effectively hedges risk, balancing profits with principal preservation is key to surviving the rough waves of financial markets. After all, time in the market is often said to beat timing the market, especially for someone to whom investing is a side gig or secondary source of income, not their day job.
This isn’t just for financial investments, but for physical investments as well. Consider an infrastructure program. Let’s start simple, like a road. Deciding the route starts simple – parallel or bypassing a heavily-used thoroughfare is always a good start. The problems start when you start thinking of the details. What route allows you to keep the road straight while minimizing expense on eminent domain? Is the area already inhabited, making it more expensive to expropriate the land rights? Where is there already a road that you can easily connect to your planned road, in order to keep traffic flow smooth? How much drainage do you need for your new impermeable surface to avoid floods? How much traffic, and of what kind, can you expect, and how many lanes do you need as a result?
The questions of time are no less difficult. When can I expect the budget to be allocated for this project? When do I start soliciting bids? How do I get this done as soon as possible without causing myself more problems down the line? Most important, however, is the time horizon – how long do I expect this to last before having to add additional lanes due to additional traffic or perform routine maintenance?
Our own lives pose similar questions. Can I afford to spend a year or two not working to work on my post-graduate education at a better school, rather than taking night classes at a local university? Do I have the time to juggle the responsibilities of raising children or taking care of parents at the same time with my education? Is it actually worth it to do so, rather than working on a profitable side gig or simply taking certifications from home?
Some may think that this calculation in one’s daily life represents an invasion of the economic into the personal. I disagree – asking questions of yourself, and getting the answers to those questions, is an important method of learning what you want, even if the answer is that you don’t know what you want. That in itself is important information, telling you that you need to find out, and minimize expenses until you do.
What you invest in is, in some ways, a sign of who you truly are.
If you find yourself interested in heterodox money and investment advice, I can highly recommend
, written by the eponymous Alex Krainer. Unlike popular investment gurus like Warren Buffet and Benjamin Graham, he advocates investing via trend following in order to reap gains, and shows how these two famous investors made their money by doing exactly that, rather than by following their own advice. Rather than doing a lot of study to buy low and sell high, the trend-following approach advocates buying high and selling higher.