There are a multitude of reasons to store and grow your wealth inside a properly-designed whole life insurance policy with a mutual insurer. A question many people are asking right now is how to fight inflation. As it turns out, using the life insurance strategy means your household will no longer contribute to the inflation of the US dollar.
If your response to the last statement was, “Huh?” this post is for you!
Let’s break this down.
What is Inflation?
In everyday conversation, when people talk about inflation, they refer to rising prices. Things just “aren’t as cheap as they used to be.”
However, prices are rising not because that is some inherent feature of existence, or because human beings are greedier this year than they were last year. No, it is my contention (and the contention of the Austrian school of economics, who I thank for the insight) that this general increase in prices is because the total supply of dollars is rising. Indeed, new dollars are entering the money supply today at a staggering rate!
Please understand that this is a blog post, not a book. I will not offer a full treatment on exactly why this causes prices to rise. I will direct you to the reading list at the end of this post for a few of those.
But, if you can for a moment work with the premise that more dollars to buy the same amount of real stuff (groceries, cars, etc.) means prices will tend to increase, then consider what happens when you deposit money in the bank…
Fractional Reserve Banking
We’ll use round numbers for simplicity.
Let’s say you get a bonus check from your employer for $10,000. You deposit it into your bank account.
The bank has a $10,000 asset because they accepted the money, but they also have a $10,000 liability because you can spend the money or take it back out of the account. This all looks fine at first glance. It’s net zero so far.
The bank also knows that not everyone will spend or withdraw all their funds on the same day. They are legally allowed to keep only around 10% of their funds “on reserve.” That $10,000 you deposited now allows the bank to make another $90,000 in loans.
Does your checking account balance go down? No. Does anyone call to ask you if you would like to ”put your money to work” in these loans? No.
So what happened?
How Banks Create Inflation
Well, it may shock you to learn this, but the $90,000 they loaned out to someone else is brand new money.
Did the bank print dollar bills in the back room? Again, no. The bank just took the balance of this person’s account and typed in $90,000 more than it used to have.
To be clear: You deposited $10,000, and now there is $100,000 available to be spent. This is called fractional reserve banking. (Your money is only a fraction of what can be loaned.) In this example, 1/10th or 10%. A portion of readers may have heard of this phenomenon before but dismissed it as a “conspiracy theory.” If that applies to you, please see this document published by the Federal Reserve Bank of Chicago in 1994.)
It’s actually much worse than this, but I hope that serves to alert you enough to pick up some books and learn what’s really going on! And certainly, if you came here to learn how to fight inflation, you must see that trusting the money supply to the banking system is not the answer.
Now then:
If, other things being equal, more money in circulation leads to higher prices… (it does!)
And, if banks create money in the manner described, every day… (they do!)
Aren’t you curious about the way to opt out of this system?
The Federal Reserve
You see, banks in the United States are all part of the Federal Reserve System, one of the enduring evils from 1913. This behavior is all enabled and encouraged by the laws on the books!
Life insurance companies—which you can leverage to build what is essentially your own bank—take in premiums to cover the cost of paying death benefit claims. These premiums must be invested conservatively, stewarded with the utmost care, to meet their obligations.
But when I say they are investing the premiums, in this case that is literally true. They are investing the money you put in, not “making up” money where none existed before. Life insurance company are not part of the Federal Reserve System. They are not banks!
Reassuringly, this means the “cash value” in your policy is actually there.
Therefore, conducting your affairs in this manner is non-inflationary. A bank run is a non-issue if your money isn’t stored in a bank! I am here to help.
Additional Reading on How to Fight Inflation
Inflation is a critical topic to understand. Before you can learn how to fight inflation, you must become fully familiar with what it is you are fighting. This post is a starting point, but it’s hardly comprehensive. Here are some suggestions on books to help you grapple with the topic:
The Creature from Jekyll Island: A Second Look at the Federal Reserve, by G. Edward Griffin
How Privatized Banking Really Works, by L. Carlos Lara and Robert P. Murphy, Ph.D.
A History of Money and Banking in the United States: The Colonial Era to World War II, by Murray Rothbard (Free PDF available here.)
End the Fed, by Ron Paul
The Case Against the Fed, by Murray Rothbard (Free web-based format here.)
In addition, you can also find my complete recommended reading list, which is frequently updated, here.