Gold Prices History Inflation Adjusted
Inflation – The Negatives
While my comments last month ( see 7 Reasons Investors should take inflation) focused on the positive aspects of inflation, at least from the perspective of government, its mandate and in general the long-are always negative. The only reason that capital gains traction in government is because it has several positive aspects in the short term for bureaucrats and politicians, which last month detailed. Apart from the fact that last month's positive inflation are negative for the government and non-debtors let's review some more negative aspects:
- It discourages investment and erodes savings so planning and budgeting of individuals and industry hesitant and uncertain.
- Causes a further allocation of capital in productive assets such as gold, collectibles, land, etc.
- Causes hoarding and speculation leading to price distortions, ie, self-perpetuating.
- It erodes people's pensions and savings retirement is that you can not afford to retire. Retirees face and reduced quality of life and to become host of Wal-Mart.
- Tax level leads to influence people by increasing their tax rates, plus the total amount of tax.
- Increases labor disputes and disruptions in wage bargaining that unions more important to workers.
- Causes a misallocation of resources resulting from the constant need to increase prices, which is also expensive, for example, restaurant menus.
- It leads to speculative lending which increases the risk of investors and global systemic risk to the financial system.
- Take an economic contraction of government when it decides the negatives outweigh the positive. They do this by increasing interest rates and reduced the money supply.
- As inflation drives interest rates, the cost to the federal government to fund a debt of $ 14000000000000 say 6% becomes 840 billion U.S. dollars a year – the amount of the total budget does long. This alone would be a $ 350 million increase in federal spending on actual costs, which shows how marginal is the current debate on receiving $ 100 billion in annual budget cuts.
The consequences of inflation for the federal government are a series of new problems, usually involving spending more money to combat the economic downturn caused in the first place. But then, this is the story of the government's actions, a high percentage of them can address the political mistakes of the past.
retail investors, who must be proactive if they want to avoid the consequences of inflation.
My recommendations for the allocation of assets are:
- 25% in debt securities with adjustable interest rate
- 30% market issues sensitive securities, that is, convertible shares and pay high dividends chip stocks
- 20% in energy values and master limited partnerships
- 15% higher dividend payments special closed end equity funds, commodities, namely energy, adjustable-rate debt and stocks
- 10% in gold, silver and platinum ETFs
We follow this strategy to our management accounts and try to achieve this diversity in the portfolio of Multi-conductor.
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We leave this story last month with the happy hope that Fed Chairman Bernanke is going to deflate the bubble bond carry trade, carry interest rates in line with long-term inflation expectations, stimulate bank lending and thereby create economic growth.
In this play monetary velocity, ie, money becomes more frequently, moderate increase in inflation give Ben is hoping to induce. The problem with this optimistic scenario is that the inflation rate is likely to be much higher than desired.
The Fed's plan would be that once the desired level of inflation, which will begin selling the $ 600 billion in Treasury bonds purchased under the QE2. These sales will reduce the money supply, the first shoe to the inflation equation. This will also have the effect of driving interest long-term rates even higher in the search for buyers. It also has little effect on the velocity of money, which actually should further increase as increased interest rates further fuels inflation anxiety.
The Fed has little or no influence on the velocity of money under interest rates in the short term at a level that makes an economic slowdown or recession. Even then, if not played right, can get their slowdown Economic and still have inflation (known as 'stagflation' of the term.)
Even those who try to protect themselves against inflation by buying TIPS and other adjustable rate securities find their shelter is limited by the fact that the government decides how much to inflation report. By excluding such essentials as food and fuel from the CPI (called core CPI) to miss much of the cost of real life. This is especially true since the housing is 42% of the overall CPI index, but it becomes 51% of the underlying index when food and energy are removed. Given this percentage distorted housing, which continues to decline, do not expect core CPI to give a realistic reading anytime soon. It is reported that if inflation today is measured as it was in the 1980 we reported a rate of 9% instead of 1.4%. Track, you may want to avoid cash TIPS, which are linked the core CPI.
To make matters worse, through what is called hedonic adjustment, the government makes subjective judgments about the product equivalent ( say, a computer today can cost more, but is 4 times better than that sold five years ago! ergo in calculating the price drops that do not use or the need for new striking features is irrelevant.) is the manipulation of the data that allows politicians to inflation while ignoring mandate cost budget increases tied to CPI.
About the Author
Mr. Lehman founded the Bond Investors Association (BIA) in 1983 as an information organization for individual bondholders. ISA is the successor to BIA.
He has authored numerous articles on bonds and fixed income investing both in financial column and book form. He is currently a regular columnist on fixed income investing with Forbes Magazine. He has taught finance and accounting in the MBA program at Barry University in Miami and has spoken at numerous investment seminars.
Mr. Lehmann holds an MBA from Columbia University, is a CPA and a registered investment advisor.
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