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MAKING CENTS OUT OF THE NEWS
Blog #21
(May 28th, 2009)
ARE WE "PRINTING" RUNAWAY INFLATION?
By Tom McAllister, CFP™
Ever since last September, the Federal Reserve Board's printing presses have been running overtime in a frenzied effort to slow the economy's descent. Ironically, the signs of recovery we're seeing now are mostly the result of the October Bush stimulus package; the real impact of the Obama February stimulus package has yet to be felt.
As I've stated several times in earlier blog posts and newsletters; while both stimulus packages were important for psychological and public relations reasons, attempts to cure a sick economy with massive spending have never worked long-term, either in the U.S. or in any other country.
During coming months, we will face the results of all this frantic stimulation in the form of rampant inflation. Contrary to the impression the Fed tries to convey, the government has no real exit strategy. First of all, the government's plan to purchase $1 trillion in mortgage securities will be years in the unwinding; the Fed will most likely need to hold these mortgages to maturity.
The second element of the looming problem is the increase in money supply. While it's popular to refer to the process as "printing money", there is no actual incremental printing involved. The money supply is increased when the government electronically manipulates its inventory of U.S. government bonds, either increasing or decreasing the amount of money in circulation.
Add to these two elements the soaring U.S. government deficit spending. You might recall that I was highly critical of the Bush administration's runaway spending during the past eight years. The new administration has budgeted a deficit this year that is greater than the first seven years of deficit spending by the Bush congress combined!
It's frightening to consider the insidious impact of inflation during my own lifetime. The purchasing power of one dollar today is 70% of what is was in the year 2000, 61% of what it was in 1990, 42% of what it was in 1981, 25% of what it was in 1975, 14% of what it was in 1962, and 7% of what it was in the year of my birth, 1937!
Put another way, it takes $14.77 in today's money to purchase what could be bought for $1 in 1937. When I got my driver's license in 1953, one dollar bought as much as $7.97 buys today. When I entered the investment field in 1962, $1 was sufficient to purchase what now requires $7.04.
These numbers are mind-boggling to me and, I trust, to you. Still, they represent a "mere" annualized compound inflation rate of 4% since 1970. I would cheerfully accept a guaranteed ceiling of 4% annual inflation going forward - my fear is that 10%+ inflation is what awaits us when this recession ends.
Where can one hide? Traditional inflation hedges include real estate (yes, it will come back!), common stocks, inflation-adjusted U.S. government bonds (TIPS), gold and other commodities, diamonds and jewelry, art and other collectibles, and private businesses.
Where should one not seek shelter? Vulnerable are bonds, mortgages, insurance policies (fixed rate dependent such as whole life and annuities), and cash.
I pray I am mistaken in my fears. Sadly, the new administration and our Congress inspire very little confidence in me when it comes to their ability to head off runaway inflation.
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