"By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens"
-John Maynard Keynes
We are living in unprecedented times. It's not just all the hate re: vaccines, elections, and public policy but the actual data! I try to wrap my mind around this morning's reported 6.2 percent inflation at the same time the average 30 year mortgage is funded at less than 3 percent. Both measures have intrinsic ties to the ten year treasury bond which currently trades at around 1.5 percent. That's an extremely unusual disconnect! To me, it portends trouble ahead...
Critics of CPI point out that even the reported rate is likely underestimating inflation. CPI methodology from the 80's or 90's would indicate our current inflation is 10 percent or more! While the current rate of inflation is troubling - what gives me angst is the fact inflation seems to be getting larger as opposed to retreating. Previous generations would warn us how difficult it is to get the inflation genie back in the box once out.
There's a whole host of reasons cited for inflation currently and despite the best efforts of the Fed to suggest that inflation was going to be "transitory" they now admit that they were wrong. Drivers of inflation are numerous. Large stimulus checks and the resultant swollen bank accounts created a false sense of economic security which has reduced employees' willingness to go back to low paying pre-Covid jobs. Government spending increases continue to increase the amount of cash in the money supply. In addition, Covid-induced supply chain disruptions issues continue to persist.
Here's why I'm troubled: generally, the ten year bond trades at a premium to inflation. If inflation lasts for a while and the Fed quits buying bonds to keep rates low then interest rates will adjust to reflect inflation. In normal times if we have NO INCREASE of our current inflation the ten year would trade at seven percent or more!
Consider: The most recent data suggest that nine percent of our taxes are used to "service" (or pay interest) on the government debt. IF (and that's a big and very important "if") the interest rates on that debt quadruple or more in the future then we get an explosion of interest payments on that debt! Consider 40 percent of your taxes going to service (not pay down) debt! That would mean a 30 percent increase in taxes just to stay where we are (going deeper into debt) as opposed to apparently novel concept of paying down debt.
What can do you do to protect your family from inflation?
1) Own appreciable assets like stocks and real estate. Inexpensive "value" stocks generally do much better than growth.
2) Own some precious metals as "financial insurance" against high and problematic inflation. I'd suggest physical silver and gold.
3) While bonds don't generally do well in an inflationary environment TIPS (Treasury Inflation Protected Securities) will protect against unexpected inflation.
4) Own commodities. I'd suggest your "ownership" take the form of food storage as opposed to owning financial instruments.
5) Avoid annuities, whole life insurance, CD's, cash and long bonds - which generally have no inflation protection.
We don't get to choose the times in which we live or the unique challenges presented. We do however have the ability to protect our families financial well-being by making wise and prudent decisions which can help us stay ahead of the ravages of inflation.