Back to the 70's?

Some of us remember the inflationary depression of the 1970’s when real incomes, the general standard of living, and the value of savings held as stocks, bonds or deposits declined drastically. Official rates of inflation reached into the teens, rates for mortgages were in the mid-teens and interest rates for business loans sometimes exceeded twenty percent. People were frightened. Fear helped drive the prices of gold and silver to record highs. Ordinary people were stockpiling freeze dried food and ammunition in anticipation of worse times ahead. It was not pleasant.

For about a quarter of a century after that, the government of the United States generally sought to avoid a repetition of those days. Monetary inflation was usually mild and, once under control, so was price inflation. Now though we seem to be seeing a change. The present government seems to be committed to monetary inflation as a matter of policy. It certainly has an incentive for it since inflation allows for a both a partial repudiation of debt by lowering the value of each dollar owed, the monetizing of debt through schemes such as “quantitative easing”, and higher tax collections on phantom capital gains and interest earnings as nominal returns rise but real ones do not. Additionally the obvious victims of such policies are people with savings, bond investments, and money in bank accounts, i.e. people more likely to not be political supporters of the administration.

Investors can look back to the 1970’s for ideas on ways to protect themselves, but of course should not expect everything that worked then to work now. Gold, silver, real estate, and the Swiss franc were fine investments in that period. Now, though, gold and silver already seem expensive, while a lot of real estate looks risky, and the franc is perhaps not as sound a bet as it was then. Commodities might do well in inflationary times, along with the stocks of companies, particularly overseas companies, that produce them. Some real estate is cheap, and there are collectibles, other foreign currencies, and inflation indexed bonds. There is also the chance that the inflation may not be as bad as we fear, and the country may avoid serious trouble with it. If so, a person would not want to be 100% in gold and commodity futures. I’d follow the generally sound advice to diversify across many investments, while getting really light on fixed-rate bonds with maturities over three or four years, just in case. And it might not hurt to go ahead and buy some of the durable items you will need in the next few years sooner rather than later, again just in case.