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Prepare for Your Money to Be Worth Less
But deflation is going to end before too long, so investors shouldn't get overly comfortable. There are a few reasons, including, perhaps paradoxically, that a little bit of inflation is good for the economy.
It keeps wages going up, which makes people feel better, and it convinces people to spend money, given that hoarding just means paying (a little) more for things later. At the same time, all this money sloshing around in new programs must eventually either go somewhere or be removed. While the Fed has said it will do this (it likes to use the word "sterilize") when this crisis is over, that will be far easier said than done. There will be massive amounts of rogue money in the system looking for a new home, and thereby driving prices higher.
Avoiding inflation after so much stimulus will be like avoiding acceleration after having pressed the gas pedal flat to the floor in a truck that has now swapped going uphill for going downhill.
As hard as it might be to imagine now, it seems entirely likely that a year or more from now we will be faced with soaring gas and food and commodity prices, and worrying how to get the inflationary genie back in the bottle. I know, I know, it sounds nuts, but trust me on this: We've already loaded the system with the necessary dollars to do the deed—the trick will become avoiding hyperinflation of the kind that kills currencies, as happened in the Weimar Republic.
What should investors do? Panic is vastly underrated as a response, so feel free to start there. Next up, look at some commodity-based exchange-traded funds, of which there are now many. You should also have some holdings in inflation-indexed government bonds, which, absent a government collapse, will provide some protection. Overall, however, you just need to know that we're about to do a three-step, from inflation (earlier this year), to deflation (now), and back to inflation again (a year or so from now). It's going to be neck-snapping.
Paul Kedrosky is the editor of Infectious Greed, one of the best-known business blogs. He's currently a senior fellow at the Kauffman Foundation, where he is focused on entrepreneurship, innovation, and the future of risk capital. He is also a strategist with Ten Asset Management, a Southern California institutional money management firm.
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Paul Kedrosky is the editor of the business blog Infectious Greed. He's a senior fellow at the Kauffman Foundation, where he is focused on entrepreneurship, innovation, and the future of risk capital. He is also a strategist with Ten Asset Management, a Southern California institutional-money-management firm.
TIPS are a reasonably way to combat inflation in your portfolio. Commodities are stupid and risky. Equities are a far better hedge against inflation for long term investors.
Inflation does not lead to higher wages. During the first of the year when we had inflation, the real wages earned continued to fall. And although some are waiting until prices fall further, most are holding on to their money because they are not sure if they will have a job next year. Their purchases are for less expensive items if they buy at all. You must be talking about the wealthy. You certainly don't know what the rest of us are dealing with.
quick fix to housing market --
Emergency measures are needed to prevent more damage to the economy caused by the Fed raising interest rates 17 times in a row before drastic reductions this past year. The Government should offer mortgages direct to homeowners as follows: extended to 30,40,50 and 60 year terms. Rates should be as low as 1% (like those offered to the banks whose pipes are now clogged with taxpayer billions). For those homeowners that were able to make it thus far, this might be the safety net needed to prevent economic death and undo reversal of equity and drainage of homeowner capital caused by The Fed. The net effect is the Government will make the homeowner whole again and mitigate the damage caused by The Fed. It may even stir the real estate market out its Fed Induced coma.
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