Inflation reduced by investments in intangible assets

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Future inflation will be contained in certain sectors of the economy. The level of inflation we see is still up in the air. From a Main Street perspective, people and businesses say inflation is here to stay and is not a short-lived or transitory problem. Yet it’s also important to remember that, as supply and demand have taught us, what goes up can and often goes down. I argue and envision that most of the inflation that occurs will be in hard assets, and it will be the result of people losing faith in fiat currencies.

When money is created or printed, it has to go somewhere, and it has fueled the “everything bubble”. While fueling the “wealth effect” and inequalities, a bubble is not necessarily inflationary. All of this can be a difficult concept to grasp. The important point to remember is that everything is relevant, and values ​​and prices change. Much of the newly created money so far has not resulted in massive inflation. Indeed, it has been diverted from the goods that everyone needs to live and towards intangible assets not included in the consumer price index.

The way people view fiat currencies is about to change dramatically – they are generally a bad place to store wealth. To be clear, I consider the dollar the best of the four fiat currencies; however, I expect they will all come under more pressure in the near future, with the Yen and Euro being the biggest losers. The amount of interest in cryptocurrencies and other inflation hedges is an indication that many investors are losing faith in central banks and fiat currencies. The result can be a currency crisis and chaos that moves people into tangible assets and a self-sustaining inflation loop.

None of this means that cryptocurrencies are the answer. This article is written to point out that our normal inflation model completely misses an important point. Most economists and analysts are oblivious to the point that with so many people ready to invest in intangible assets, they have curbed inflation. By not buying tangible, real items, people are helping to minimize inflation. This is a very important part of the inflation puzzle.

For many investors, the difference between these two very different asset classes has blurred over time. An intangible asset is a useful resource that lacks physical substance. Examples are patents, copyrights, trademarks and goodwill. These assets produce economic benefits, but you cannot touch them and their value can be very difficult to determine. These intangible assets often contrast sharply with physical assets such as machinery, vehicles and buildings.

Tangible and intangible fixed assets

Tangible and intangible assets (Author)

That doesn’t tell the whole story

Most tangible assets can be easily converted into cash – which is why most people include as “tangible” the amount of money in a bank account. Even though money held by a bank is a promise on paper, it falls into a “grey area” in that it has the characteristic of being quickly converted into something real, such as goods such as cars , houses or boats. Some of these accounts can also be used as collateral in case you want a loan.

Over the years, investors have shown little resistance to turning away from tangible assets. It is easier to own intangibles than to deal with the “real things”. This could partly explain the growth mismatch between these two types of assets. In our modern economy, aAnother example of intangible assets, or at best quasi-intangibles, are the shares of a company. When you buy what are called stocks, what do you really get? You don’t get a certificate like you used to – that should send fear of God to those worried about hackers.

Owning stocks is very similar to owning fiat currency in that much of its value is based on faith. What you get is a Glorified Note in a computer base somewhere – good luck proving what you’ve got if things go wrong. Chances are that even getting a government official to listen will be a daunting task. If you take action, it will probably be years before you get your money back. Thisis significant considering the huge importance that equities play in the global economy.

At the same time, it is also important to consider the massive importance of other quasi-intangible “financial instruments”, such as bonds, pension funds, retirement programs, and more, in our modern economy. Enough said. All papers and promises sold as assets eliminate inflationary pressure on the price of tangible goods. They also give us the warm, fuzzy feeling that we are protected from an uncertain future. Unfortunately, they are more an illusion of security than substantial things. We often accept these surrogates to own real estate because society makes it so easy and even encourages us to do so. A major problem with assets that are not tangible is that they are easily subject to manipulation and are even capable of disappearing before our eyes.

Growth in tangible and intangible assets

Growth in tangible and intangible assets (Author)

The growth of intangible assets has greatly exceeded that of real and tangible assets

The chart above shows how, over the decades, the growth of intangible assets and the money supply has far exceeded the growth of real and tangible assets. That is problematic. Currently, the gap is so large that even if you allow much of the wealth stored in intangibles to be washed away, there will still be enough cash and credit available to create inflation. Ironically, a huge washout in the value of this type of asset could become a driver of inflation by triggering a shift towards durable assets.

Time and again, history has revealed how Ponzi schemes work in plain sight and are often touted as a great investment – ​​until they aren’t. In addition to the problem of intangible investments and buying a promise, many of these transactions are now done online and placed in the cloud. This means that many investors could one day pay a very high price for their trust in a financial and political system that has a history of not delivering on its promises. For those who have been robbed of their money, our broken, slow and expensive legal system rarely dispenses justice.

Let’s go back to the idea stated in the title of this article, where people put their money. The Fed, the government, and many institutions appreciate that so many of us accept paper and pledges in exchange for our wealth. The problem is that these groups may not be in a rush to return this wealth. To prove how ingrained this is in our system, just look at the growth of the financial sector over the past few decades. On the other hand, hurdle after hurdle has been thrown and placed in front of those buying tangible assets. Remember that not investing in “hard goods” helps minimize inflation, but it also takes your wealth away from your control, which can prove detrimental to your financial health.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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