It seems that “everyone” knows that hyper-inflation is coming. “Common sense”–and the radio–say so. The Government bail outs, etc. are going to sink us all! The printing presses are running!! (Truth: The Government printed $974 million last year, but 95% is just to replace worn out dollars. So, be careful with partial information. To put it in perspective, $30 billion in Monopoly money is printed every year!)
In theory, inflation could soar, but the evidence suggests that the risks are overstated according to this CBS News article by Larry Swedroe, director of research at BAM Advisor Services we work with. He points out that we are not seeing the same factors that stoked the fires of inflation in the ’70s and early ’80s. His main points are:
- Americans’ disposable income and bank credit was growing by double digits back then. Those are now in low single digits or negative.
- With official unemployment in excess of 8%, and unofficial rate much higher, there is no pressure coming from wage increases. Wages and housing prices are a much larger component of inflation than are commodities, like oil, that are attracting all the media attention.
- Although the Fed has been injecting a lot of money into the economy, it isn’t being felt in the system because people are not spending and banks aren’t lending.
- If the investors, economists and financial markets were concerned about runaway inflation, the yield (interest) on 30-year Treasury bonds would be a lot higher than their current 3.3%. The consensus for 2.2% inflation over the next 10 years is reflected by the fact that 10-year Treasuries are yielding 2.2%
- Finally, the Fed is keenly aware of the risks if consumer spending increases dramatically and if the banks begin to lend freely again. The central bank is constantly trying to strike a balance between tightening too quickly (the mistake made during the Great Depression) and not tightening fast enough (increasing interest rates, etc.).
The bottom line is that your investment portfolio should be properly diversified to have some protection against unexpected inflation. That is why our clients all have a small portion of their investments in commodity funds and inflation-protected Treasuries (TIPs).