How To Protect Your Savings From High Inflation

Inflation is an ever-present danger in a monetary economy, especially one that runs on fiat money. Inflation makes your economic eyesight worse: It becomes harder to plan, harder to forecast and harder to determine whether or not you’re making ends meet. And of course, any cash or bank balances you happen to hold buys you less stuff tomorrow. 

Consumers in a monetary economy have no choice but to hold cash from time to time. To prepare for retirement, a rainy day or even next month’s bills, you must dabble in money and set aside your monetary assets in some fashion. 

When the money becomes unstable and prices run away, this task moves from difficult to hopeless. Inflation comes for us all — of the hyperinflation kind, the unexpected kind, or the regular 2-4% a year kind. And we must find a way to deal with it; in inflationary environments, therefore, we need better glasses. 

Defining the problem

A general increase in all (or most) prices is what marks inflation. While the term at one point was reserved for increases in the money supply, economists nowadays use “money expansion” or “money contraction” for that, instead treating inflation as a synonym for the general increase in the price level. 

A change in the general price level reshuffles the purchasing power of assets. It impacts the real meaning of wealth, it causes headaches for consumers trying to make use of prices to do monetary calculation and it erodes the value of money held as cash or cash balances.

Browsing the table makes it shockingly obvious what Michael Saylor means by the dollar as a melting ice cube. If you wish to preserve purchasing power — instead of making a real donation to Uncle Sam, the currency issuer — you cannot hold cash. 

Be proactive about inflation

The best time to prepare for high inflation and potentially even higher inflation to come, is before it happens and before anybody else expects it. The burden of (high) inflation depends on to what extent it was anticipated, and who correctly anticipated it. Financial markets, where most of our assets reside, are forward-looking and fears of inflation get priced into stocks, bonds, yields and mortgage rates at the speed of light. 

The most basic inflationary defense available to most households 2020 and 2021 was to lock in mortgage rates at less than 3%. At 6% CPI, a real interest of -3%, you’re effectively getting paid for having a mortgage. Hurl the burden of inflation onto your banker! 

If you were late to the inflation party, banks have now severely restricted the credit available: The same mortgage that would have cost you less than 3% a few years ago now routinely fetches above 6%.

Most asset prices have already adjusted. Bitcoin, stocks and real estate moved up rapidly in 2020 and 2021 as a result of money printing. You can’t buy insurance on the house after it’s already on fire. 

The question on everybody’s mind is whether inflation will slow to its historic 3-4%, stay elevated at 6-8% or runaway to the double-digits that many other countries are seeing. 

What Does Inflation Mean For You?

Everyone is affected differently by inflation. No matter the Fed’s single-minded focus on broad inflation rates, or the financial press’ obsession with the CPI number, all prices move up at different rates. Some even fall. The bundle of goods and services that you consume are unique to you, a postmodern rate of inflation suitable just for you.

Measures of inflation capture general averages. Some people will face prices going up much faster, others seeing a rate of inflation in their consumption baskets rising much slower.

If you just had a baby or have kids in school, you’re exposed to different price rises than a student, different yet from a retiree. One’s financial circumstances are as much an outcome of decisions we make in life as they are about where and when we are. Those aspects also determine what sorts of evasive maneuvers we can take to protect ourselves against inflation and try to avoid as much of the pain as possible. Factors that matter:: 

• Age determines where we are in the life cycle, how much of our lifetime earnings are ahead of us or behind us, and consequently how much risk we can take with our savings and in our professional lives. 
• Incomes and occupation: some industries are more sensitive to inflation and accompanying changes in interest rates. A high-income earner has a different set of possibilities and risks than a low-income earner; a gig worker is different yet from a tenured professor or government employee. Inflation presents different kinds of risks and opportunities for all.
• Savings and assets: what you already own impacts what decisions you must take to counter inflation or how much attention you must pay to protecting the assets you already have vs. acquiring more, or searching for different income streams. 
• Dependencies: if you have kids or elderly family members that depend on you, safeguarding income streams or assets from inflation becomes even more important. Holding non-yielding assets that don’t pay off for years, for instance, becomes infeasible since you have expenses today. 
• Geography: inflation affects different countries, and regions within countries, differently. Moving within a country or relocating (fleeing?) to another country can be one of the most impactful decisions available. 

How to Protect Against Inflation

The exact anti-inflationary measures depend on your circumstances. Fortunately, a lot of the risks with inflation — in the high but stable kind or the disastrous hyperinflation kind — are different only in degree. Similar actions can be taken in more or more extreme ways. 

Most high-inflation regimes don’t devolve into hyperinflation. But some stay elevated for long, their societies and economies in turmoil for decades; others return to low single-digits. 

1/ Take a Close Look At Your Budget and Expenses

Pay more attention to expenses. Inflation worsens our ability to economically see, so we need more safeguards: like a driver in foggy conditions should keep a greater distance, households in inflationary environments should keep higher margins. That means more savings.  

Paradoxically, more uncertain economic conditions should push us to hold more of our wealth in liquid assets or cash — but non-yielding and fixed-rate assets are precisely the ones that lose purchasing power the most under inflation. 

One set of strategies that work differently in countries with merely high inflation and countries under accelerating, double-digit or hyperinflation, is how to think about purchases. With high inflation, you can lock in current prices by signing up for yearly subscriptions instead of monthly. Buying in bulk is time-tested advice for both lowering your costs and tying up deteriorating money in real goods and services. Under high enough/hyperinflation, the main consumption strategies become a struggle to push as many purchases as far into the future as possible. 

When inflation gets high enough and there is no end in sight, offloading the burden of a melting currency to others becomes the order of the day: have your bosses pay you daily, or several times a day; buy goods in installments, down to clothes and kitchen appliances. You beat inflation by buying as much as you possibly can, as soon as you possibly can, while trying to delay nominal payments. 

Mind your income side too, making sure that your wage adjusts to inflation — the sooner, the better. If you work day jobs or are employed in the gig economy or black-market economy, you might not have the benefit of automatic inflation adjustments to your salaries. If you’re a retiree your income is at the mercy of compensatory calculations like the U.S. COLA, the cost-of-living-adjustment that increased Social Security by 8.7% in January 2023.

There might be important time lags where expenses rise sooner (or faster!) than your wage can adjust. Similarly, you might be lucky to have a nominal wage increase now but you’re still in a fixed-contract for some portion of your expenses (mortgage, rent, insurance); don’t get too comfortable with the windfall, as inflationary pressures will come around to those contracts too (and then some!). Be careful not to confuse Cantillon effects rolling through the economy with increases in your standard of living.

Inflation record-holders like Argentina and Turkey routinely see the ranks of the poor grow, with fewer and fewer people having access to the life-saving escape vehicles of foreign currencies, gold, bitcoin or land.

In Turkey bigger firms, the rich and more financially savvy individuals have avoided much of the inflating lira by holding property and hard currency (physically or with foreign banks). The bagholders are those holding the literal bag of paper money — forced to, because they need to transact or receive salaries, yet unable to protect the value of their earnings by ditching the currency. The Lebanese in the 2020s use black market dollars; Venezuela is filled with dollars and Colombian pesos; Argentina is said to have one of the largest stashes of physical dollars outside the U.S.

2/ Don’t get too comfortable in cash

Cash provides flexibility, leaving you able to tackle unexpected costs. But cash under higher inflation rates is “expensive”; they lose value fast. Unnecessary cash balances are the first thing to economize on. They are the melting ice cubes. 

While simple stories about inflation tell that it benefits the rich who can protect their assets, or it expropriates the poor who hold cash, the reality is often much muddier. The wealthy are often the ones expropriated by a raving government hiking taxes or confiscating assets; the poor might not have that many assets to lose or even hold cash for very long before spending it. 

On a societal level, the problem with a currency collapsing is that economic affairs get harder to navigate. It’s trickier to find out what’s going on; consumers and savers find themselves jumping from one slippery rock to another, never finding solid balance. 

If your wages or incomes rise before general prices do, you benefit. If your wages or income lag the rise in prices, you lose out. That’s the unfortunate and unfair outcome of inflation.

Consider Adding Some Inflation-Resistant Hedges

Avoiding inflation is a game to get out of the currency and into hard assets. In hyperinflating countries that means foreign currencies with less inflation — like the U.S. dollar, euro, or Swiss franc. It also means getting your hands on hard assets, resistant to the eroding effects of inflation: bitcoin, gold, land and real estate.

Bitcoin

In the history of fiat money and asset classes, bitcoin is a new entrant. Even if it hasn’t been around that long, it has shown its value as a hedge against money printing and a seamless way to flee warzones with your wealth intact. Since it hasn’t been around for decades or centuries, we have only limited data on how bitcoin’s financial returns have been under high inflation or hyperinflation. 

The limited data is promising, for instance during the banking crises of 2023 — a high inflationary period — bitcoin performed impressively as a safe haven. This can be attributed to its properties of scarcity and durability, plus its lack of counterparty risk, which are known to be strong store of value attributes. 

Leaving banking fragility aside, bitcoin has been the best-performing asset class in all but three of the previous 13 years. In 2014, U.S. REITs outperformed bitcoin; in 2018 it was U.S. cash; commodities were the best performing asset of 2022. The three years of underperformance coincide with bitcoin’s inherent cycles and U.S. monetary expansion. Monetary expansion is the primary driver of inflation and “bitcoin is a hedge against credit inflation” as per Greg Foss.

Should bitcoin continue on its current monetization path and the bitcoin standard becomes the de facto monetary standard, then there will no longer be a requirement to have an inflation hedge at all, as bitcoin will reprice all other assets to their marginal cost of utility. 

However, it is still early days for bitcoin, and other investment classes will continue to provide value for the foreseeable future, although they come with their own inherent risks, especially during times of uncertainty when their counterparty risk becomes most apparent. 

Gold & Other Commodities

Under inflation you want to own the things that get more expensive, ditch (or short) the worthless paper that gets cheaper. With economic growth, commodities usually get cheaper (relatively speaking) as productivity leads us to economize on their use and find ways to extract more of them from the Earth’s core. 

During (hyper)inflationary episodes, however, prices of commodities tend to react fast and brutally, and often be involved in setting off initial price rises (oil and natural gas, both in the 2020s and 1970s). 

Storing commodities is often a problem. Most financial instruments for commodities today are paper claims, and while taking physical delivery is possible it requires some knowledge of the industry, some preparation on your part and often sizable transactions. 

Gold has a long history of outperforming many other assets during periods of high inflation, but can offer sluggish returns at other times. While gold can be held in smaller quantities like coins, and avoid the trouble of financially traded paper claims, they are still difficult to transact with — both in your immediate surroundings as well as over long distances. It’s hard to pay with gold coins online; it takes a lot of effort to cross borders with gold bars in your backpack. 

Real Estate

Properties and land are classic assets to avoid some of inflation’s effects. Since they’re real rather than nominal and since they produce variable income streams (rents that can be adjusted; commodities whose prices often rise with inflation), they can offer great protection against a collapsing currency. 

As a way to escape inflation, of the high or hyper caliber, real estate can work well, provided that 

• You can keep the house, property or land; that society doesn’t fully collapse; and that you’re not forced to flee or sell it at a loss. 
• You own it with decent leverage. A mortgage is the most basic and widespread way to short the currency and in inflationary periods that can pay off handsomely.

Like most assets that do acceptably well under high inflation regimes, the liquidity can be tough to manage, and you might have to hold the assets for years before being able to realize their “return” — or even get a price estimate for them. 

In the longest time series we have for real estate, reaching back hundreds of years, real property prices have had an upward trend for about 400 years. They can fall for as long as a generation or two, and judging from the historical record during wartime the drawdowns can be quite steep. Real estate is not bulletproof, as some instances of rapidly falling property prices occurred in inflationary periods in the double or triple digits.

Foreign (Harder) Currencies; Inflation-Indexation

Living in monetary economies we have little choice but holding some cash for transactional purposes.

People in developing countries suffering under hyperinflation often amass stacks of physical dollar bills. In countries close to the eurozone, like Eastern Europe or North Africa, euros might also do the trick. The Swiss franc has a long reputation of being a safe haven, having been the fiat currency that’s inflated the least in the last half century or so. 

The downside with holding less inflationary fiat currencies is that you’re still holding melting ice cubes; the reduction in purchasing power is smaller, but just as guaranteed. 

 In countries with a well-functioning financial system, where the inflationary period doesn’t hurl the country into failed-state territory, there are often opportunities to hold inflation-indexed assets. These are assets that provide a given return plus the official rate of inflation measured in CPI. Some examples in the U.S. involve TIPS or I-bonds, but in both cases you’re trusting the U.S. government — both as a counterparty or custodian of the asset not to renege on the promise, and as an oracle for the accurate calculation of CPI. Money market mutual funds, earning roughly the yield on (short-dated) Treasuries, minus some small management fees, can be a viable option for funds you need to spend in the next few weeks or months. 

Unless you expect the inflation to run out of control, the counterparty custodian to rug-pull you or the government to outright default, these types are short-term money stacks combats the loss of purchasing power while leaving you near-instant access to your funds.

Stocks

Numerous studies have looked at the effect of inflation on stock returns. Unfortunately, they often produce conflicting results. Most researchers have found that higher inflation has generally correlated with lower equity valuations, which means that stocks can’t really be relied upon to counteract the effects of inflation. 

Historically, you can do fairly well owning stocks during inflationary periods, provided you bought them cheap enough: If you bought stocks at attractive valuations before an inflationary period – before WWI or WWII, say – U.S. stocks proved good inflation-hedges and even gave decent real returns. If you did the same before the 1970s inflation, you would have underperformed even bonds, losing purchasing power quite spectacularly. 

Stocks as an asset class aren’t clear winners or losers during inflationary periods.

Bottom line

Inflation turns everyone into a price speculator. With inflation, consumers must spend time and effort managing their liquidity and making sure that cash in the bank or the wallet don’t lose too much purchasing power. It’s an ever-losing battle where any amount of cash not earning a return enough to compensate you for inflation is a net negative to your finances. But you have bills coming due, and holding assets exposes you to losses in market prices. 

Lose-lose: You either hold cash for a guaranteed value loss (but gain peace of mind) or you hold assets that could outperform inflation, but may abruptly fall in value (and cause you sleepless nights). 

Instead of merely balancing their incomes and expenses without thinking about the broken money, households must balance what they hold in value-losing cash against the known and unknown expenses they have coming up. 

Inflation, whether high or low, hurts everyone by making the economy harder to navigate. The higher it gets, the more it becomes a struggle for survival where offloading the burden of inflation to somebody else becomes the name of the game. 

It’s impossible to avoid inflation entirely. Some of the best escape hatches have been hard assets such as gold, land or property, but since bitcoin was invented in 2009 those looking to protect themselves against inflation — or flee a hyperinflating country with their wealth intact — bitcoin now provides the ultimate life raft.