Buy Now, Pay Later Strategy

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).