Venezuela’s largest denomination of currency, the bolivar, is now worth only 2-cents in U.S. dollars. The socialist government has printed money to cover its deficits, which has hyper-inflated its currency down to almost nothing.
So how is the U.S. dollar doing? It has depreciated as well, and although it is over a much longer period of time, the U.S. dollar is down about the same as the Venezuelan bolivar, down by 98%.
The U.S. currency was taken over by the latest U.S. Federal Reserve, which was founded in 1913. Since then, the U.S. dollar has lost (depending on whose inflation numbers you utilize) either 95.8% or 98.8% of its value. For example, if an item had cost $100 back in 1913, then today that same item would cost $2,442. That item has not become more valuable, the escalation in price is solely because the U.S. dollar has collapsed in value.
Back in 1879, Frank Woolworth opened a “5 Cent Store.” That later became a “5 and Dime Store” retail concept that competitors also used for decades. Can you imagine buying anything at a store for 1-5 or 1-10 cents? Today we have a modern version of that industry called Dollar Stores, and when that is not enough money to buy something of value, there is another store named, “Five Below” that sells items up to $5. So the 5-cent store has turned into a $5 dollar store, reflecting the fall of the U.S. dollar: nearly 100 fold. This is the effect of long-term inflation.
How does this apply to your finances? It is most graphic to people during retirement, a several decade period where your income is modest, mostly fixed, while inflation eats away at the currency, year after year. A decent retirement income when you first retire may not be so luxurious after a decade or two of currency depreciation. A few ways to mitigate inflation eroding your investments include:
- Pay attention to your investments to be sure that they earn a return that covers the rate of inflation.
- Put some of your portfolio into inflation-protected or inflation-indexed securities.
- Invest in real estate where rental income can keep pace with inflation.
- Invest in stocks with high profit margins and the ability to raise prices with inflation.