5 Ways The Rich Make Money With Inflation
During times of inflation, most physical asset classes increase in value. In general, the rich benefit most from inflation, as they tend to own the most assets as a financial class of people. Many times the rich also use debt to leverage themselves and inflation also depreciates the monetary value of that inherited debt.
The working class can lose purchasing power during high inflation environments as their paychecks lose purchasing power and their rent increases.
High inflation punishes currency holders and money earners and rewards asset holders.
The 5 Ways The Rich Make Money With Inflation:
- Real estate
- company property
- Assets increase in value
- Purchase of value shares
- debt devaluation
Real estate
Wealthy people can benefit from the appreciation in value of their big houses along with any other real estate holdings and properties that increase in value at least at the rate of inflation. Your homes can also increase in value by tracking the replacement cost of your home if building materials like lumber increase in value and construction labor increases in cost.
Real estate is also a hedge against rent inflation for the wealthy, their mortgages keep their personal payments the same but they can raise the rents on any rental property they own to keep up with inflation.
company ownership
The wealthy who own businesses have power to set prices for the goods and services they provide. Producers have the ability to increase prices to keep up with their spending. Producers have the advantage of setting prices based on demand and benefiting from any variation in spending versus the supply and demand of their competitors and sellers. Wealthy business owners in commodity-based industries can increase profit margins during inflationary environments.
Owning a business can help keep cash flow in line with inflation by adjusting business operations. This is something employees can’t do with an earned paycheck.
Consumers do not have the advantage of choosing the prices of the goods and services they need to buy. Consumers have more power in their decisions about when and how many discretionary products and services to buy.
Assets increase in value
The wealthy who own large amounts of assets can increase their net worth substantially in real dollars or in nominal terms, depending on whether they own a commodity-based or labor-intensive business. Commodity-based companies will tend to increase their market capitalization value during inflationary periods when the commodities they sell rise in price faster than their fixed operating and labor costs.
On the other hand, companies that have their labor and wholesale costs of goods grow at a faster rate than they can increase prices will see their profit margins hit during inflation.
Purchase of value shares
Inflation tends to cause the value of the stock market to drop substantially by 20% to 50% or more. Inflation destroys the profit margins of most publicly traded companies, as their expenses grow faster than their ability to raise prices. Stocks for companies with consumer discretionary products and services may be hit the hardest, as consumers spend all their money on basic items like food, utilities and rent, and have to cut many additional items.
Rich people who have gone to cash out on their brokerage or retirement accounts before the inflation-inducing bear market may have money to put to work after a big stock market crash.
This is Warren Buffett’s favorite way to make money. Most people don’t understand that while Buffett’s primary strategy is to buy big companies for good value, his main skill is patience and raising cash during bull markets that are overvalued. Buffett will raise cash from the money his insurance companies make from premiums and keep him waiting for opportunities in the bear market. He wants to hold a stock forever once he buys up the best companies at prices that are excellent relative to his future cash flows.
However, you are not averaging the dollar cost of your shares, you only buy them when you see the best risk/reward ratio with the price versus the company’s future earnings potential. Warren will raise billions in cash waiting for the right price in the companies he wants. Warren Buffet is one of the rich people who will make money when the stocks he bought at great values return to normal after the bear market ends when inflation is brought back under control.
Understand that the Federal Reserve cannot allow inflation in the US to remain high for long periods of time, as it violates its mandate. The Fed has no choice but to take the necessary steps through monetary policy to control inflation. So betting on runaway inflation in the US in the long run is a bet against the Federal Reserve.
The rich stand to benefit more from market declines caused by inflation, as they tend to have more excess capital to work with by buying up during the bear market, either because of cash flow or high income. The working class doesn’t have any capital to put to work and the middle class just tends to buy and hold investments and buy more with fixed paycheck withdrawals for their 401ks.
debt devaluation
Whether it is a wealthy individual or a wealthy nation, debtors benefit greatly from inflation, as the nominal dollars needed to service existing debt are reduced and the real dollar value of the debt is reduced. Debt appears as an asset on the balance sheets of bondholders, companies, and countries that have bought debt. Debt appears as a liability on the balance sheets of bondholders, companies, and countries that have sold debt.
Your mortgage is your bank’s asset. If the bank that holds your mortgage goes bankrupt, your mortgage is not paid off, it is sold as an asset to another bank. Debt has intrinsic value based on many variables.
The interest rate on the debt is what the debt holders pay for their liability, when the interest rates are higher than the original interest rates, it benefits the debtors. High inflation reduces the value of the debt since the currency that was originally lent had a higher purchasing power value than the current currency. When the debt is paid with currency that is worth less now than when the debt was issued, it benefits the debtor. The rich love to use cheap interest rate debt to leverage their asset ownership. In times of inflation, this benefits the wealthy, as they can pay off old debts at low interest rates with a new, lower-value currency.
Any type of currency devaluation caused by monetary policy, whether gradual, such as inflation of 2% per year, or high inflation such as 8% per year, benefits the owners of physical assets and harms the purchasing power of those who they work for wages. The rich make money by owning things that increase in value with inflation. The working class suffers from inflation as it destroys the purchasing power of their only cash flowing asset, their paycheck.
