The Illusion of Wealth

There's a curious investment phenomenon you may have never noticed.

The best performing stock markets in the world are usually nations which have very high inflation rates.

Those that have investment in these markets seem to be getting wealthier, until they change their frame of reference and realise the financial disaster that has unfolded.

Let me explain.

Local stock markets are denominated in the local currency. Nations with high inflation rates also have a currency that purchases less goods and services as it devalues.

Measuring investments in terms of a declining currency makes you feel wealthy, because the numbers are higher, even if there is no change in purchasing power.

Think about it like this. A single share of a Venezuelan oil company costs 10 Bolivars. A loaf of bread costs the same. Now if the oil stock rises to 100 Bolivars and so does the price of bread, you aren't any better off, even if you have more Bolivars to your name.

One share still buys one loaf of bread.

And it's not just in basket case economies that this plays out.

US stocks have been on a huge rise with the S&P 500 up around 29% over the past 12 months in US dollar terms. However, if you change the metric to a measurement against an alternative yardstick, things don't look quite so good.

Petrol prices in the US have risen by 49% over the same time period while bacon is up over 17%. These figures put perspective on the stellar investment returns.

It's even more sobering when you measure the returns against something like Bitcoin (BTC). As you know, BTC has a finite supply and is increasingly considered to be a digital store of value.

Here's how the 29% performance of the S&P500 looks when priced in BTC terms. It presents a very different picture.

The message is simple. If your measuring stick of wealth is constantly being devalued then your notional wealth will look to be increasing.

However, your new wealth is largely an illusion.

While you may be better off than those without investments, you're hopefully just keeping pace with the currency devaluation.

That's why debtors love inflation. It reduces the real value of their obligations. When inflation appears coupled with artificially low interest rates, the party just keeps rolling along....until suddenly the liquor is gone.

Just what will puncture the bubble is anyone's guess.

If the credit markets dry up, the heavily intoxicated will face a sobering reality.

Without cheap and readily available finance, the music will suddenly stop and what seemed like good fun for all becomes a total mess.

That's where we are thanks to government manipulation of the money supply. For now, the good times are rolling along but at some point, the music will stop playing and there won't be enough lifeboats for everyone.