Capital preservation often doesn’t end up yielding the results folks want because of that silent killer—inflation. But inflation can also get folks who plan for some growth—just not enough.
First, a few words about inflation, because folks often confuse what inflation is and what it isn’t.
Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.” What he meant was inflation is about money supply—nothing else. Not gold. Not debt. Not trade deficits. Not oil prices. Not any of the other things headlines scream cause inflation. Money supply. If money supply increases faster than economic activity can mop up the excess, prices rise—and prices rising on average is inflation. This is often described as “too much money chasing too few goods.”
Folks often don’t think about money supply, but they should. Irving Fisher’s (no relation) famous equation (which Milton Friedman ascribed to) described the relationship between money supply and prices as:
M is money supply—how much money is out there. Central banks globally control money supply (in part) by raising and lowering key central banking rates (in America, the fed funds target rate). Effectively, when a central bank raises rates, it’s reducing money supply. When it lowers rates, it increases money supply. Then, too, when a commercial bank makes a loan to you—for ...