Milton Friedman warned 'bad effects' come 'later' when you print too much money — 3 ways to hedge against them
Imagine waking up with a pounding headache after a wild night out, only to realize that the drinks were flowing a bit too freely.
Milton Friedman, the Nobel Prize-winning economist known for his groundbreaking work on monetary policy and free-market principles, would argue that inflation has a similar effect.
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“Inflation is just like alcoholism,” he famously stated. “In both cases, when you start drinking or when you start printing too much money, the good effects come first, the bad effects only come later. That’s why, in both cases, there is a strong temptation to overdo it — to drink too [or] and to print too much money.”
Friedman’s analogy underscores a fundamental economic truth: while printing money can provide immediate relief, it also sows the seeds of future inflation.
As prices soar and purchasing power diminishes, the once-beneficial policies would reveal their hidden costs.
How investors can fight inflation
Friedman made that analogy in 1980, but his words still resonate today. To combat the economic fallout of the COVID-19 pandemic, central banks around the globe, including the U.S. Federal Reserve, cranked up the money printers.
Initially, the effects were positive: economies recovered, businesses bounced back, and employment rates improved. But then, the bill came due. Prices surged, and consumers began to feel the sting of rampant inflation.
To be sure, the Fed has since stopped its monetary expansion and taken aggressive steps to tighten policy.
Since March 2022, the U.S. central bank has raised its benchmark interest rates by 525 basis points. This decisive shift aimed to curb inflation by making borrowing more expensive and slowing down economic activity.
While headline inflation has cooled from the highs of summer 2022, the prices of many necessities remain elevated.
For instance, the food index from the CPI has increased by 26% since the beginning of 2020. Similarly, the shelter index has risen by 24% during the same period.
The good news? These days, investors have plenty of accessible ways to fight inflation.
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Real estate
Real estate is a well-known hedge against inflation. As the price of raw materials and labor goes up, new properties are more expensive to build. This drives up the price of existing real estate.
Well-chosen properties can provide more than just price appreciation. Investors also get to earn a steady stream of rental income. Since rent typically increases with inflation, this creates an effective hedge against the diminishing purchasing power, thereby preserving and potentially enhancing the investor’s real income over time.
Over the last five years, the S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index has surged 53%.
Of course, that also means properties are not cheap these days, especially with elevated mortgage rates.
But you don’t need to buy a house to start investing in real estate. There are plenty of real estate investment trusts (REITs) as well as crowdfunding platforms that offer everyday investors access to institutional-quality property portfolios, allowing them to earn rental income without the responsibilities of being a landlord.
Gold
Gold is another well-known hedge against inflation. The yellow metal has been used as a store of wealth for thousands of years.
Unlike fiat money, gold can’t be created at will by central banks. Moreover, its value isn't tied to any particular currency or economy, making it a stable asset during periods of economic instability and inflation.
Last year, economist Peter Schiff told investors that the metal was underpriced due to persistent inflationary pressures.
“I think it has to be repriced higher to reflect the reality of much higher inflation. We’re not going to go back to two percent, probably in my lifetime. It’s going to be much higher than that, and when investors come to terms with that, they’re going to bid up the price of gold much higher,” he said.
Fast-forwarding to the present, the enthusiasm of investors has indeed propelled the price of gold to record levels. The precious metal has surged past the $2,400 per ounce mark, setting a new milestone.
These days, there are many ways to gain exposure to gold. You can own bullion, buy shares of gold mining companies or ETFs, or even tap into potential tax advantages with a gold IRA.
Equities
In January 2024, the non-profit Oxfam reported that the world’s billionaires have become $3.3 trillion wealthier than they were in 2020, with their wealth increasing at a rate three times faster than that of inflation.
For some of the most famous billionaires, a substantial portion of their wealth is linked to the companies they founded or currently manage. As inflation drives up costs, businesses that can successfully pass these costs onto consumers through higher prices can maintain or even grow their profit margins. This, in turn, can lead to increased earnings and potentially higher stock prices.
The Oxfam report highlighted how large firms were making oversized profits during inflationary times, noting, “148 of the world’s biggest corporations together raked in $1.8 trillion in total net profits in the year to June 2023, a 52% jump compared to average net profits in 2018-2021.”
While stocks are also volatile, the market has performed remarkably well during the recent inflationary period. The S&P 500, for instance, has seen an 85% increase over the last five years.
Oxfam also observed that share ownership “overwhelmingly benefits the richest,” with the top 1% owning 43% of all global financial assets.
But you don’t have to be in the billionaires’ club to access the stock market. These days, many platforms enable you to buy and sell stocks with minimal initial investment requirements. Some apps can even help you invest in index funds like the S&P 500 automatically using your spare change, making it easier than ever to grow your wealth alongside the world’s financial elite.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.