The Great Debasement

Hedgeye research put out some startling statistics today on just how much lost purchasing power we’ve seen in the USD since 1999. Take a look at this: The money supply (M2) in 1999 was 4.7 Trillion. M2 today stands at 21.2 Trillion. This is a 4.5X increase in the money supply. 1/x = .222: 1-.222 = 77.8% debasement since 1999. This my friends, is NOT SOUND MONEY.

One of the first things a student of economics MUST do is recognize this. No strategy makes sense until you understand this. This is the basis for why real estate investing has been so lucrative over the decades. Fixed-rate, long-term debt against cash-flowing assets, where the cash flow is growing at 3-4% per year has been a hedge against this corrosive debasement. But here is the most interesting point the team pointed out in their latest report: 77.8% debasement since 1999 works out to be a 6.26% compounded annual growth rate (CAGR), or debasement of 6.26% annually. Gold has appreciated 10.4% per year (CAGR) since 1999. US equities have grown, in US dollar terms +5.6% since 1999 with much higher volatility. Thats remarkable. Inflation is not going away for awhile, despite what the Fed says, or chooses to believe.

The nearly $2 Trillion budget deficit and out of control debt levels will continue to amplify the debasement until they are brought under control. Until then, Gold, real estate, and other hard assets will be a haven for savvy investors.