As you probably already know, I recently launched a new website where I’m teaching basic economics, financial security, and systematic investing philosophy. You can check it out at Stand Strong Research.
For the second year in a row, the government has decided to withold any increases in the monthly checks received by Social Security recipients. According to the government’s calculations, there was no inflation in the preceding period and inflation appears to be well in check. Somehow, that conclusion seems a bit hollow.
While not everyone feels the effects of rising prices, certain areas of the economy have definitely gone up over the past year. Your wallet is lighter this year if you use gasoline to fuel your car, buy fresh fruit and vegetables at the grocery store or incur medical expenses. Inflation is there, but recognizing it through government statistical analysis, indicates otherwise.
Inflation is coming back and in a big way. With runaway government spending in the name of support for the fragile economy at record levels, the chance of inflation returning increases. The more the government spends, the greater the budget deficit grows. Someone has to pay the interest and service the massive deficit. When the government needs money to meet its obligations, it either has to raise taxes or print more money. Printing more money will devalue the dollar. In some countries, the devaluation of the currency has caused inflation of 50%, 100% or even more. The United States may be headed that way if they don’t get their house in order.
As government revenues have moved down, the deficit has moved up. The $13 trillion + (and rising) National Debt shows no signs of easing. The Federal reserve is actually undertaking a policy to try to sprinkle in just enough inflation to keep the economy from sputtering out. Interest rates may be going up soon and inflation will go up right along side.
Those who doubt that inflation is ready to strike in a big way need only look back in history to see a similar and very predictable scenario. The government will have no choice except to raise taxes to try to collect more revenue. Whether that works is a discussion for another time. One thing is clear, the greater our debt grows, the more likely taxes and inflation will go up.
To protect yourself from the destructive effects of high inflation, owning gold or silver might be a good investment. A traditional hedge against inflation, an ounce of gold will always have value. Paper currency fluctuates greatly around the world, but precious metals act to stabilize the economy. A prudent investor would do well to have 10%-20% of their portfolio in gold and silver.