Investors running to the exits during the ongoing 2020 market crash sold stocks, bonds, gold, and seemingly everything they could, to get US dollars.  But what will happen now that the Federal Reserve is pumping US dollars into the markets at unprecedented rates?  Keen investors must prepare. Inflation after the 2020 market crash is a very likely possibility. How can investors protect their hard earned money from the inflation? Get ready today!

The Rush to Cash

Last week I wrote an article titled Where Should You Invest After the 2020 Market Crash?  In this article I explained that when investors sell stocks out of fear, they tend to buy safe haven investments such as bonds and gold However, as I look at the big picture, I fail to see such correlation between assets.

This current market situation is still very volatile and chaotic.  But I keep coming back to a simple illustration I shared in that article.  The animated image below attempts to illustrate the underlying point. 

This animation shows the stock market, represented by the red balloon. The red balloon is losing air as the stock market loses value.  In this animation, the same thing is happening to oil, bonds, and even gold. 

The green cash balloon, on the other hand, is getting bigger and bigger.  This is in part because people selling all other assets are increasing their cash position.  However, a bigger driver is the pump shown in blue.  This pump represents the Federal Reserve pumping cash into the US economy.     

As it should be obvious, any balloon that gets too large is at risk of bursting and causing a ripple effect through the markets.  The question is will the cash balloon get so large that it will burst?

Inflation in Simple Terms

I find most people don’t understand what inflation is.  Let’s simplify this concept and correlate it to demand and supply.  People understand that if something is too plentiful, then it generally has little value.  And if something is too scarce, it generally has high value. 

An example of something that is currently too plentiful, compared to demand, is airline tickets.  People are not flying, as a result of the coronavirus pandemic.  As such, airlines have lowered their prices in an attempt to increase demand.

Another example of something being too plentiful in this market is oil.  Currently, Saudi-Arabia and Russia are engaging in an oil price war, where both countries are flooding the markets with oil.  The end result is oil is now about ½ the price it was before this oil war began.   

Inflation works the same way.  If too many US dollars are pumped into the economy, then the US dollar will lose value.    

The country of Venezuela provides a recent example of what happens to a country’s currency under inflation (or hyperinflation, in Venezuela’s case).  If you do a google image search for ‘Venezuela money on the streets’ you’ll get something like the images below. 

Things became so bad in Venezuela that people began making baskets and other handcrafts out of their paper currency to somehow add value to otherwise worthless paper. 

Although I am not suggesting that things will get this bad in the US, I bring this up to illustrate the point that paper money can quickly lose value.

The Consequences of Unlimited Qualitative Easing (QE)

Qualitative Easing (QE) occurs when government banks infuse cash into an economy.  In the US, this takes place when the Federal Reserve purchases securities, such as government bonds from banks.

QE was first used in 2008, during the financial and mortgage crisis.  This became known as QE1.  Since then, the US has experienced QE1, QE2, QE3, and QE4.  The latter ended in October 2014.      

In the past, these QEs have targeted certain predetermined monetary amounts.  Just this morning the fed announced what is quickly becoming known as ‘Unlimited Qualitative Easing!’  Others are calling it QE Infinity. Unlimited (or infinity) really means no one knows how far the Fed will go to pump cash into the economy.

This is just the newest and latest form of cash pumping into the US economy.  In fact, there are so many new announcements on how the US government and the Federal Reserve are pumping cash into the economy that most people, including me, have lost track of the overall amounts.

Regardless, the Federal Reserve does not actually have cash to purchase those securities.  Therefore, the Fed will print unlimited money, unlimited amounts of money. 

If in fact, printing money were a reasonable solution to economic challenges, then why do people need to work?  Why can’t the Fed just print enough dollars to give everyone enough money each month?

Obviously that would not work.  I am not an economist, but these concepts are not complicated at all.  Printing money to prop up an economy may have worked to some degree in the past.  However, UNLIMITED QE on top of everything else the US Government is already doing to prop up the economy carries a ton of risk.

In short, inflation after the 2020 market crash is a very real possibility.

The Case for Gold

Earlier I mentioned that if something is too plentiful, then it generally has little value.  And if something is too scarce, it generally has high value. 

An example of something that is scarce and therefore has high value is gold.  No government or bank can create gold at will.  A government or entity can either buy gold or they can mine it. And mining gold requires significant resources and effort. 

Gold’s scarcity is part of what gives gold its value.  In fact, gold has been used as currency throughout human history because gold is known to retain value. 

Gold Vs US Dollar

We are all used to think in terms of US dollars.  We price the stock market in dollars, we price oil in dollars, and we even price gold in dollars.

But, what if instead of pricing things in terms of US Dollars we priced those things in terms of gold?  What would thing look like then? 

The two charts below shows the Dow Jones Industrial Average over the last 100 years.  The first chart shows the DJIA in US Dollars, and the second chart shows the DJIA in terms of ounces of gold. 

The first chart shows phenomenal growth, even after the 2020 market crash.  However, when you consider the DJIA in ounces of gold, the chart is definitely not as impressive. 

This is in large part because gold retains its value through the years, where as paper money loses value due to inflation.  As such, gold is known to be a hedge against inflation. 

If investors want to protect their hard earned money from inflation, one of way to do so is to own gold. 

Moving Forward

No one knows what the future will bring. But, I am convinced the extraordinary measures being taken by the US Government and the Federal Reserve will have significant consequences. And in my view, inflation after the 2020 market crash is a very likely possibility.

As such, I’ve been increasing my gold related positions and plan to soon begin to increase my silver related positions. As for what you should do, please do your own diligence and continue studying the markets. I am not qualified to give you financial advice. Simply I am sharing with you my thoughts on the likelihood for inflation after the 2020 market crash.

If you’d like to learn more about gold, please check out the article titled. Reasons Why You Should Own Gold.