Learn Investing Secrets

'The American Age of Inflation is finished.' So says economist Robert Samuelson in his December 2nd Washington Post column.

This type of refrain is common. But, when we start hearing such defensive postures from those who don't want to hear the truth, well, its time to begin planning for it more seriously.

In Samuelson's defense, his article focuses mostly on the idea that markets have risen rapidly over the past 20 years (since Reagan reduced inflation in 1982) due to the benefit of lower inflation. Since Reagan, Volcker, and Greenspan worked to defeat the wild inflation of the Carter, Ford, and Nixon years, we haven't had to deal with this devastating bugaboo, but today we should plan for it.

In addition to damaging our savings, inflation can make our debts less bothersome.

“The American Age of Inflation is finished.” So says economist Robert Samuelson in his December 2nd Washington Post column.

This type of refrain is common. We often hear that this or that is ended – that such things only happen in the past, and that our new, more daring time is chosen such mundane things. It is reminiscent of the late ‘90’s declarations of the end of value investing, and the meaninglessness of p/e ratios, and the (can you think it?) end of bear markets. Such drivel is what houses of singleton are well-favoured on.

It is, in fact, just such declarations that should give notice us to the impending disaster that awaits. The easiest way to know when a trend or genius may be on the horizon is the ill-balanced sentences of pundits extolling its end. When the columnists and advisors in the late ‘90’s told us that it was a “new era”, and that we needn’t worry random overpriced stocks, that was precisely the time to worry.

Today, when we hear economists like Samuelson announcing the “end” of inflation, it is contrariwise time to worry. We till now sensed the comradeship of a variety of factors that could lead toward the re-emergence of inflation, but the fact that apologists for government policy (economists) see the need to talk it away only serves as confirmation that the time is at hand. Inflation is out not only on the way, it is probably at our doorstep. The massive spending spree and resulting dollar devaluation should lead us to that conclusion anyway. We’ve been expecting some level of inflation for some time. But, when we start hearing such defensive postures from those who don’t want to hear the truth, well, its time to start off planning for it more seriously.

In Samuelson’s defense, his introductory study focuses mostly on the idea that markets have risen rapidly over the past 20 years (since Reagan reduced inflation in 1982) due to the benediction of lower inflation. He argues that we will no longer worth from that improvement. But his error is in thinking that things will now be “flat”, and that inflation was a one-time event that will not be revisited.

He displays a lack of political understanding. As long as politicians can perquisites from printing and spending other people’s money, we’ll see more inflation. Of course, the fact that we stave off inflation in the financial system does not mean that this will reflect all goods equally. Certainly, our enhanced trade relations have executed prices of some imported goods to drop significantly. However, as the dollar drops in value, our skilfulness to buy imports nominally will also be reduced, and already, prices of imported goods are rising from their lows. Since these scruffy imports have been masking inflation for some time, this eventuality will speed the negative impact. Oil prices are a prime example of this phenomenon. This kind of price increase is naturally uncomfortable, but is a natural result of the free-floating currency regime we follow, and it is in very sooth part of a healthy mechanism for refocusing our efforts. It isn’t the price increases that should surprise us, and they themselves are not the problem. This is simply the result of a dollar that is plummeting in value. We need to realize that it is not the producers of goods that are doing us harm, but the governments who run our currency into the ground. Eventually, we may expect to see prices rising on most goods, including both those produced locally, as well as imports.

The result is important for investors. Rising price levels will mean your savings are worth less, and your retirement liabilities must grow just to hold their value. It has been many years since this nation has dealt with high inflation, and most of us have forgotten how to deal with it. Since Reagan, Volcker, and Greenspan worked to defeat the wild inflation of the Carter, Ford, and Nixon years, we haven’t had to deal with this devastating bugaboo, but today we should plan for it.

In proportion to damaging our savings, inflation can make our debts less bothersome. High inflation will push interest rates higher, however, so only borrowers with fixed rates will benefit. Others will probably experience rising interest rates on their credit pair and struggle to pay them off. Never ere in U.S. history have so many select so much credit card debt in a period of high inflation. One might expect higher default levels. Inflation will also leg up home prices without increasing value, and uplift profit levels without growing real assets. The outcome will be higher taxes and tougher competition. In the end, it will be a worse time for bonds, and while stocks will be a lard place to be, high-flying growth companies will often disappoint. It is a wonderful time to think like a value investor.

More Articles: