Protecting an endowment’s buying power from the impacts of inflation by growing balances at a rate equal to or greater than the current rate of inflation is critical to the survival of any institution.  Inflation diminishes the buying power of the dollar without changing balances which creates an illusion of safety.  A basic example involves someone with $100 in the bank that needs to buy 100 loaf s of bread at $1 each.  If the price of bread increases to $2, the individual’s $100 will only buy half as many loaves.  Normally inflation doesn’t increase at rates over 2%-4%, but according to Fortune Magazine the US markets are experiencing the highest inflationary rates (+7.9) in 40 years.  Experts anticipate the rate of inflation going even higher.  Savvy institutions and investors avoid the inflationary trap and protect their buying power by keeping up with the rate of inflation, actively managing assets, and investing to ensure their portfolio maintains or gains buying power.

Individual and institutional investments will require equal or greater amount in annual gains to maintain their current level of buying power.  A report published by the Consumer Price Index, stated the current rate of inflation is 8.5 percent as of April 2022. It is important to note that the cost of transportation items (fuel/energy) and food items are not included in normal CPI data.  These two items are normally much more volatile and listed separately.  For example, in 2021 the cost of fuel in the United States increased by as much as 49% and fuel in general increased by 32%.

In recent years, digital asset’s ability to create more efficient solutions in the financial sector have earned them a reputation as premium hedges against inflation.  The traditional investment portfolio asset mix of 60% equities and 40% bonds is being challenged as investors move in favor of a mix that includes crypto currencies.  According to the International Monetary Fund (IMF) and Bloomberg Finance, 90% of government bonds trade at yields lower than 1% in today’s economic environment versus 15% yields when the 60/40 rule was developed for portfolios.  In stark contrast, Bitcoin and other digital assets with various use cases have outperformed bonds, gold, and the very best equities on the market thousands of percentage points.  The +100% average performance of Bitcoin year over year, and mathematically locked supply of the asset caused institutions to shift to a 60-20-20 mix that includes digital assets.

 The mix has changed due to a change in the bond market, the rate of inflation, and the growth of a new sector of digital assets.  The Rule of 72 may be used to predict a numerical doubling in cash value or a loss of half the buying power of a set number of dollars over a period of time.  At the current rate of 8.5% a fund can lose half of its buying power in roughly 8.5 years (72/8.5= 8.47 years).   Seeking out nontraditional assets that out-pace the current rate of inflation is crucial to any institution that has long-term growth plans with the funding to execute.

  These items impact the ability to complete projects or operate facilities at the individual and institutional level that were planned years in advance.  As the US government continues to manage debt and money creation, it is critical to understand that there are two general ways to service debt by governments.  The can raise taxes or create more currency.  When governments choose to create more currency, scarce assets like Bitcoin become more valuable against the dollar.  In layman’s terms, it will take more dollars to buy everything.  In theory Bitcoin and other digital assets that prove to be more efficient and scarcer will outpace inflation as displayed in the chart above.

  At 8.5% inflation, a portfolio of $15 Million will need to increase by $1,275,000 (or a total of $16,275,000) to maintain its buying power from the previous year. Savings accounts (0.06%) or a traditional investment vehicle such as a Certificate of Deposit (CD, 5%) does not yield an output greater than 8.5% after expenses and fees.  Current inflation requires active investments that balance risk and yields to prevent diminishing the buying power of the investor.  In layman’s terms, the investor will be poorer in every sense of the word if he or she does not account for inflation.  Simply saving is not a long-term option.