Market Beat: Inflation or deflation?
November 27, 2013
Should investors today be more concerned about inflation or deflation? That’s a great question and long-term investors should carefully consider the effects of both.
Robert Orben was quoted as saying, “Inflation is the crabgrass in your savings.” What he means by that is that if you’re a saver, the effects of inflation will reduce your purchasing power over time.
Today, you are likely to see well qualified opinions from both camps. I recently interviewed Dr. Robert Barone on my radio show and he thinks that we are very likely to see a period of stagflation like we had in the 1970s. The show can be heard on Sunday night at 9 p.m. on 99.1 FM talk.
Dr. Barone says that the Fed is on the deflation side; the way they are proceeding with their highly accommodative monetary policy, with the low interest rates and the quantitative easing, means that they want to use easy monetary policy to stimulate the economy and are more concerned about deflation than inflation.
There are other pundits who are more concerned about inflation. There are several economists who contend that inflation is actually understated in the government statistics.
The main measure of consumer inflation used by the government is known as the CPI, or consumer price index. Some economists have developed their own methods of calculating inflation and say that inflation is a worse problem than the government statistics show and that this rise in prices is especially harmful to the middle class.
The renowned economist John Maynard Keynes once said, “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
I’m not a conspiracy theorist saying that this is part of an evil government plot, but it is certainly something that all investors need to be aware of. Inflation can have devastating effects on your long-term purchasing power, and long-term growth investors need to get a rate of return at least equal to the inflation rate just to stay even.
Dr. Barone recently wrote an opinion piece for Jim Cramer’s, “TheStreet.com” where he discussed stagflation. Stagflation can be described as a slow growing stagnant economy accompanied by rising prices.
He thinks that investors should stay with stocks, consider gold for the long term and be very cautious with bonds at this time, especially bond mutual funds. Bonds with a long time to maturity can be subject to large price swings with changes in interest rates.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information on his money management service can be found at his blog at http://www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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