by Dave Coker

Created on: June 20, 2008

Benjamin Franklin is famously quoted as having said "In this world nothing is certain but death and taxes", an opinion I'm sure we'd all agree with.

However wise old Ben left something out - the decline of currencies, the US Dollar included. The fact that currencies will decline over time is just as certain as death and taxes, just as inevitable as the sun rising in the morning.

Any middle aged adult knows this to be true - after all, a dollar doesn't purchase what it did when you were a kid decades ago. Oil prices have recently hit record highs, and anyone unlucky enough to visit a gas pump knows a a tankful costs far more that it did one year ago. The same is true of most foods and services - thing cost more than they did.

While the reasons underlying some of these price increases - oil, for example - are complex and the result of multiple factors, all price increases have one thing in common: the decline of the US Dollar.

So why can't prices stay the same? Why can't we pay the same for a gallon of gasoline as we did in 1960? Why doesn't a cup of coffee and slice of pie at the local diner cost $0.10 like it did when I was growing up?

The answer is inflation.

A four letter word to many people, inflation in the modern banking system is just as inevitable as death and taxes were to Benjamin Franklin. And the reason is simple: as The US Federal Reserve manages a growing economy, the money supply must increase as well. When the supply of money increases, prices naturally rise as a result as basic supply and demand. This is easy to see - more money means demand for goods and services increases. After all, we've got more money. We can afford more. But when more money chases a limited supply of goods or services prices increase to compensate. Its just basic supply and demand.

And because our money supply is constantly expanding inflation is inevitable, as is the decline of the US Dollar.

But that doesn't mean we can't hedge ourselves against declines in the value of the US Dollar. After all, it's only the currency that's declining in value. If we select the appropriate goods or services - what finance types call "assets" - they will maintain or perhaps even increase in value over the long term.

So what assets should we be interested in? Well to answer that very reasonable question let's first look at an asset you definitely don't want to be holding when inflation is high: cash. Inflation erodes the value of money, destroys wealth, sometimes faster than any rate of interest

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