During times of inflation most physical asset classes go up in value. Overall the rich most benefit from inflation as they tend to own the highest share of assets as a financial class of people. Many times the rich also use debt for leverage and inflation also depreciates the monetary value of that legacy debt.
The working class can lose purchasing power during high inflationary environments as their paychecks lose purchasing power and their rent increases.
High inflation punishes currency holders and earners and rewards asset holders.
The 5 ways rich people make money with inflation:
- real estate
- Assets increase in value
- Buying value stocks
- Debt devaluation
Rich people can profit from their large homes appreciating in value along with any other holdings of real estate and properties increasing in value at least on pace with the inflation rate. Their homes can also increase in value by tracking the replacement cost of their house if construction materials like wood increase in value and construction labor increases in cost.
Real estate is also a hedge against rent inflation for the rich, their mortgages keep their personal payments the same but they can raise the rents on any rental properties they own to keep pace with inflation.
The wealthy that own businesses have pricing power for the goods and services they provide. Producers have the ability to raise prices to keep pace with their expenses. Producers have the edge of both setting prices based on demand and profiting from any variances in expenses versus supply and demand from their competitors and sellers. Rich business owners in commodity based industries can grow profit margins during inflationary environments.
Owning a business can help to keep cash flow in line with inflation by adjusting business operations. This is something that employees can’t do with an earned paycheck.
Consumers don’t have the advantage of choosing the prices of the goods and services that they need to buy. Consumers do have more power over their decisions on when and how much discretionary products and services to purchase.
Assets increase in value
The wealthy that own large amounts of assets can increase their net worth substantially in real dollar or nominal terms depending on whether they own a commodity based or labor intensive business. Commodity based businesses will tend to increase in market cap value during inflationary periods when the commodities they sell grow in price faster than their fixed operation and labor costs.
On the other hand, businesses that have their labor and wholesale costs of goods grow at a faster pace than what they can raise prices for will have their profit margins suffer during inflation.
Buying Value Stocks
Inflation tends to cause the stock market to drop substantially in value by 20% to 50% or more. Inflation destroys the profit margins of the majority of publicly traded companies as their expenses grow faster than their ability to raise prices. Stocks for businesses with consumer discretionary products and services can be the hardest hit as consumers spend all their money on staple items like food, utilities, and rent and have to cut back on many extra items.
The rich that have gone to cash in their brokerage accounts or retirement accounts before the bear market causes inflation can have money to put to work after a large drop in the stock market.
This is Warren Buffett’s favorite way to make money. Most people don’t understand while Buffett’s primary strategy is to buy great companies for a good value his primary skill is patience and raising cash during bull markets that are overpriced. Buffett will raise cash from the money his insurance companies produce from premiums and hold it waiting for bear market opportunities. He does want to hold a stock forever once he buys the best companies at great price values versus their future cash flows.
However, he’s not dollar cost averaging into his stocks, he only buys them when he sees the best risk/reward ratio with the price versus the future earnings potential of the company. Warren will raise billions in cash waiting for the right price on 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 the normal price after the bear market is over when inflation is back under control.
Understand that the Federal Reserve can’t allow inflation in the US to stay elevated for long periods of time as it violates their mandate. The Fed has no choice but to take the necessary steps through monetary policy to tame inflation. So to bet on long-term run away inflation in the US is a bet against the Federal Reserve.
The rich can benefit more from market crashes caused by inflation as they tend to have more excess capital to put to work buying during the bear market whether from cash flow or high incomes. 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.
Whether it’s a rich person or a rich nation, debtors benefit greatly from inflation as the nominal dollars needed to payback the existing debt is reduced and the real dollar value of the debt drops. Debt shows up as an asset on the balance sheet of bond holders, businesses, and countries that have purchased debt. Debt shows up as a liability on the balance sheet of bond holders, businesses, and countries that have sold debt.
Your mortgage is your bank’s asset. If the bank holding your mortgage goes bankrupt, your mortgage isn’t wiped out, it’s sold as an asset to another bank. Debt has intrinsic value based on many variables.
The interest rate on the debt is what debt holders pay on their liability, when interest rates run higher than their original interest rates it benefits the debtors. High inflation reduces the value of debt as the currency that was originally loaned had a higher value in purchasing power than the currency does currently. When debt is paid back with currency worth less now than it was when the debt was issued it benefits the debtor. The rich love to use debt with cheap interest rates to leverage their ownership of assets. During times of inflation this benefits the rich as they can pay back old low interest rate debt with new lower valued currency.
All types of currency devaluation caused by monetary policy whether it’s gradual like 2% inflation a year or high inflation like 8% a year benefits the owners of physical assets and hurts the purchasing power of those that work for wages. The rich make money from owning the things that go up in value with inflation. The working class is hurt by inflation as it destroys the purchasing power of their only cash flowing asset, their paycheck.