Inflation might be sneaking past you
How strange it is that after and during so many disruptions to "normal" economic activity...we are still being told by official "experts" that whatever flashes of inflation we are noticing will mostly just be temporary. Not to worry. Right?
Well, it's happened before — that the political establishment bought its re-election with borrowed money — over and over again. Debtor governments are the primary beneficiaries of inflation because they get to pay off their creditors with devalued money. Most everybody else gets screwed.
At the risk of stating the obvious, there are basically two kinds of inflation. The first is known as demand inflation, where either a shortage of or a sudden increase in demand for a commodity pushes up the price. Demand inflation does tend to be temporary as production is increased to, again, meet demand. The other kind of inflation is caused by the devaluation of money. Not only do the prices of all commodities go up, but all consumers are harmed in the process.
In her recent book Great Society, Amity Shlaes describes how Johnson and then Nixon converted the dollar to a pure fiat currency...unsupported by any reserve of actual wealth other than the historic reputation of the United States government. After Nixon's forced resignation, Gerald Ford wore a button on his lapel that said "WIN" for Whip Inflation Now. Needless to say, that was a waste of both time and effort. By the way, Bitcoin and its ilk are also fiat currencies...but they're divorced from political influence, which has at least some sort of value. Ultimately, Reagan's Fed chair, Paul Volker, cranked up interest rates, intentionally causing a recession that ultimately stabilized the value of the dollar.
Meanwhile, many of the producers of commodities have clever ways of camouflaging inflation. It used to be that a package of corn tortillas contained an even dozen; now there are only ten. I recently bought a box of kitchen trash bags — the old box that was almost empty had 60 bags when it was new, and the new box has only 50. That's almost a 17% price increase. However, a gallon of gasoline remains a gallon of gasoline.
It was once explained to me that gold really doesn't change in value — money does. It was a professor of finance at U.C. Berkeley (not Robert B. Reich) who said that, at that time, the records for gold and wholesale commodities (pork bellies, to be specific) went back 150 years. During that entire period, an ounce of gold consistently bought the same number of pork bellies. Currently, gold is selling for about $1,800/ounce.
Ten years ago, it was at about $1,900, and five years ago, it was at about $1,450. To me, the price of gold is the best inflation barometer.
Interest rates are different. The ten-year Treasury is the primary index for establishing mortgage rates because it's a true auction rate rather than a fiat rate (such as the federal funds rate) set by political appointees. Rates for the more secure instruments, such as U.S. government bonds, tend to go down during times of financial uncertainty — reflecting a flight to quality.
Harry Truman famously said that he wished he had a one-armed economist so he could never say, "Well, on the other hand." I'll say it anyhow: on the other hand, the stock market is being propped up because interest rates are so low. Some, but not all, investors are willing to assume a bit more risk in order to increase the yield on their pile of cash. Also, the stock market can be a better hedge against inflation than low-interest government paper.
Like gold, real estate is a hard asset that tends to hold its value through periods of inflation. But nobody ever wants to rent gold. So, unlike gold, real estate can also provide cash flow in addition to serving as an inflation hedge. But it's at least a bit more complicated to buy and sell, and collecting rent imposes an administrative burden on the owner. And there's always location, location, location. As such, we must continue to wait and watch, to see demand inflation sort itself out, and realize the true consequences of the continuing devaluation of money.
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