If my brother-in-law was lined up with 10 people and you were asked to pick out the economist, he would be easily identified. In the 35 years I’ve known Mitch, he has never cared a lick about the clothes he wears or the car he drives. There is no pretense or image thing going on whatsoever. He’s just a solid, albeit quirky guy who happens to be intellectually brilliant. And doing things his own way, he retired early, owns a free and clear home in beautiful La Jolla, CA (my sister’s influence) and accumulated a fair amount of wealth, while never wavering from his extreme aversion to risk.
Since I’m in the financial education business, you can imagine that our conversations have touched on current economic events from time to time. He generally replies like the university professor he once was, exploring all the possible outcomes and remaining specifically non-committal. However, I was a little surprised by his very direct response to my most recent question…”What will be the most pronounced effect of the government’s stimulus package?” “Inflation”, he replied.
While we don’t always agree, I totally concur that the recent government bailout actions will have inflation as their unintended consequence. And if we think that a 40% market correction is bad, couldn’t a 40% devaluation of the dollar create the same effect? The principles I learned in Econ 101 taught me that you can’t just print trillions of dollars and inject them into an economy without devaluing the underlying currency. And it even feels more intuitively uncomfortable that we are using this “monopoly money” to buy assets that nobody else wants.
As Warren Buffet stated last month when commenting about where the bailout resources will come from, “I haven’t had my taxes raised,” said Buffet, “My guess is the ultimate price will be paid by a shrinkage of the value of the dollar.”
There are recent examples of country’s running into problems in this same way. In the early 90′s, the Yugoslavian government ran a budget deficit that was financed by printing money. This led to a rate of inflation of 15 to 25 percent per year. The numbers actually got worse as they were dealing with other problems like socialism and rampant corruption… that are hopefully not part of our future.
Please hear me clearly, I don’t think the government should have stood idly by while the markets were imploding and institutions were failing at an alarming rate last year. But for main street folks like you and I, it’s a good time to be thinking about measures to combat the potentially devastating effects of inflation. Warren, Mitch and I are apparently not the only ones who are on this track. You may want to peruse this Journal article to learn more about some inflation fighting “vitamins” for your personal consumption.
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