Inflation and Monetary Decay should be Considered in Investment Decisions

Inflation Strikes Treasure Hunters’ Dream House

Long ago there was a treasure-hunting magazine with an article about a house that was being remodeled. It was an old house built at the turn of the century. Construction workers had removed all of the old appliances and then began ripping out the old plaster and lathe. As one wall was being ripped out, small bundles, wrapped in aged white linen cloth came tumbling out. Workers opened the bundles and were stunned at what they found. Inside the bundles was $20,000 in cash and 1000 ounces of gold. The owner apparently stashed the bundles in there and then died, not telling anyone where he had stashed his nest egg – a huge nest egg for the 1920’s. At that time, gold was worth about $20 per ounce, or $20,000, just like the dollar bills, so the nest egg in the 1920’s was worth $40,000. The amazing thing about the find was that the paper dollars were still worth $20,000, but the gold was now worth $630,000! The total find that day would be valued at $650,000! This means that the deceased owners’ nest egg had grown tremendously in value, right? Actually, the growth of the nest egg was only an illusion, and the magic trick will be discussed below.

Over time the amount of money in circulation increases, and it usually increases faster than the population growth rate so over time there is more money around for people to use. Time is not to blame, but it simply reveals how things work, namely that the dollar loses it’s value over time. How fast it devalues is continuously changing, but the trend is down. Everyone knows this. Usually we think in terms of prices rising, rather than the dollar losing its value. Inflation is really the wrong word for this effect. Therefore, this writer will coin, or electronically create as the case may be, a new term for this phenomenon, called decay – as in radioactive half-life. By the way, the term “rust” was also considered, and was the runner-up in this naming contest. So, as money decays, more of them are needed in order to pay for a gallon of gas, or gallon of milk, or a trip to the doctor, or to pay for books and tuition. Some indicators used to measure this decay strategically exclude energy, food, and education, but include tin, molybdenum, and hundreds of other lesser-used commodities in order to give a stable appearance. If we revisit the home remodel incident above, we could also say that the gold did not decay, and is still 1000 ounces, no change. The dollars, however, had decayed from $630,000 to $20,000. They decayed 97%. Therefore, the guy who stashed his money in the walls of that old house did not posthumously grow his nest egg, as previously thought. But, rather, his $40,000 investment could have been worth $1.26 million in today’s dollars. Therefore it actually decayed from $1.26 million down to $650,000, for a loss of $610,000, or 48%.

Some beneficial conclusions can be drawn from this incident. Aside from the benefits of ripping out old walls and telling someone you love about your hoard before you die, the point to be made here is that money decays. Money rusts. So, look elsewhere for the long-term investment or store of value.