What Me Worry? - About Inflation?

A New Retirement Plan:

At my Yavapai College class, I like to ask the trick question, “When was the period of highest inflation during our lifetime?” Almost everyone says the late 1970’s or early 1980’s, but the correct answer is 30 years earlier, 1947 and 1948, as the inflationary effects of the World War II spending were being worked off. The reason the question is a trick is that I was born in 1948, so I can just barely get away with it.

According to Robert Sahr of Oregon State University, the 1917-1920 period was even worse with four straight years of inflation in the high teens. This again was war related, as we paid off the costs of World War I by halving the value of everyone’s money.

Inflation, at its core, is a tax. The government can take part of your money without ever having to touch your wallet. They just print more money, making your existing money worth-less. These days they can even save the cost of ink and paper, by creating electronic lines of credit instead of actually printing dollars. Who pays the tax? Those of us holding dollars, or obligations denominated in dollars. IOU’s such as bonds, savings accounts and annuities buy less and less each year in an inflationary environment as this “tax” saps buying power.. The saddest example is pensioners who can no longer afford the price of food, because the cost of food has risen and their pension has not.

Right now some segments of the economy are inflating and some are deflating. Electronics prices are coming down and Walmart is also a huge deflator of prices. Home prices and medicine come to mind when looking for inflation. But the government is having to work to protect those prices from deflationary forces. The government prohibition regarding importing cheaper drugs from Canada into Maine is an example of price propping

Why am I telling you this? As you have just read, we have had successive cycles of high inflation approximately 30 years apart, 1917, 1947, and 1977. 30 more years would bring us to 2007. Will we have another round of high inflation by then? I don’t really know. And 30 years is certainly not a magic number. The point is that inflation clearly cycles up and down. Because we are currently in the low part of the cycle, astute investors must begin to look ahead for what is coming and prepare for it.

Obviously the government is fighting the specter of deflation with inflationary tactics. How much deflation we will see first, is unclear, but the foundation for the next round of inflation is being laid. I also remember that George Santayana said that “those who do not learn from history are doomed to repeat it.”