The costs of inflation
Seems simple: rather than cutting consumption and increasing savings, thereby touching off a nasty recession, let inflation do its magic and watch the debts melt away.
But though inflation may be an easier sell to America's voters, if not its creditors, make no mistake: It is toxic to investors, makes overall economic growth structurally lower, and ultimately is likely to boil over. "There are terrible costs associated with inflation, but all the costs are later," Malmgren said.
Here's a thought. We could use even more inflation to pay for the terrible costs! I really need to think about running for political office someday. I have all the EASY answers.
So, how bad would inflation be for investors? Pretty bad.
From the end of 1969 to the end of 1979 the average annualized total return after inflation was minus 0.9 percent for U.S. stocks, according to Barclays, and a loss of 1.6 percent yearly for bonds.
If you lose 1.6% per year on bonds and then get heavily taxed (since you are earning high interest but it still isn't keeping up with inflation), that's even worse. That's Illusion of Prosperity type thinking. That's I-Bonds at 0% (over inflation) still don't look all that bad by comparison type thinking (especially since I-Bonds are tax deferred).
Stag,
ReplyDeletePer Hutchinson: from 1995 to 3/2008, MZM grew at 8.9% annually while nominal GDP grew at 5.3% annually. During the same period, the majority forgot to save and leveraged themselves with too much debt against declining real incomes.
That's a lot of excess $$$$. If the fed won't allow either deflation or inflation, I'd say stagflation is the likely outcome.
In the future, people will probably label the start of the stagflationary period as the year 2000. The end of the stagflationary period is very much debatable.
MAB,
ReplyDeleteIt seems the sweet, sweet smell of death is beginning to infect real interest rates yet again.
My TIP fund has had a good two days. Up 1%. It may not seem like much, but it is at least six months worth of treasury bill interest. One wonders how many years of housing price appreciation 1% would represent these days. The mind boggles.
This is said somewhat tongue in cheek. Had I compared against recent gasoline hoarding, that 1% gain would be measured in hours.