Should we worry about inflation?

Friday, September 8th, 2006
Categorized as: Series I US Savings BondsTIPS

Investors can use inflation-protected securities – Series I Savings Bonds and TIPS – as a hedge against the risk of runaway inflation. But is that a real risk?

Bill Gross, head of the largest bond fund in the world, the PIMCO Total Return Fund, thinks so. In his September 2006 Investment Outlook, No Cuts, No Butts, No Coconuts, he warns about the upcoming effects of the baby boom generation and its incompetent politicians.

That link goes to Gross’s article on, a web site which archives and allows you to subscribe (free) to the weekly investment newsletter of John Mauldin, who advises the wealthy about hedge fund managers. I recommend Mauldin’s newsletter to all serious investors. It’s one of the best things I read each week.

The critical paragraph in Gross’s Investment Outlook is the last one.

Too late to have babies, too politically sensitive to import more workers, too daft to recognize that the boomer winter is rapidly approaching and that our assets will not fund our liabilities. Too, too. Too, too. Too, too. What does a government do that is too absorbed in the moment and fails to alert its citizens to the perils ahead? Cut in line, I suppose. It devalues its currency, it reflates/inflates its economy, and because that doesn’t create real wealth, it recites the mythology of a bygone era, of a “shining city on a hill,” so that its citizens believe they’ve never had it so good. Well, as I acknowledged at the start of this Outlook, some of us never have had it so good, but the demographic season is changing and a rebalancing, more equitable distribution of our rather meager stockpile of nuts lies ahead. Corporate profits, nearing a record percentage of GDP will ultimately be taxed at higher levels in order to assuage a populist ballot-box revolt. And U.S. stocks, the present value of which represents the future value of private sector wealth creation, will stutter, perhaps stagger, as investors understand that much future wealth has been spoken for, if not already digested, by a boomer generation acting as consumers of first and last resort.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:


On September 11th, 2006 Tom Adams said:

In Mauldin’s September 8 newsletter, The Fat Lady Hasn’t Sung, he reports on a speech by the President of the Federal Reserve Bank of Dallas, Richard Fisher. Fisher directly addresses the issue of whether the Federal Reserve would allow inflation to help with a government debt crisis:

A Warning for Politicians

Finally, Fisher referred to the national debt and growing social security and Medicare obligations. [He said it’s] not the Fed’s problem, and he flatly asserted they will not monetize the debt in the future. This is a political problem. Congress is going to have to get its own house in order. The Fed will not bring back inflation to accommodate a profligate Congress. He did not have kind words for the lack of spending control in Washington.

All well and good, but the Federal Reserve’s ability to control inflation isn’t like driving a Cadillac – it’s more like riding a bucking bronco.

On November 22nd, 2006 Steve the K said:

Based on what Ron Muhlenkamp has said, as long as people and Congress and the Fed would rather have a recession than 1970s-era inflation, inflation will not get too high. If it looks like inflation will get too high, the Fed will react to nip it in the bud. However, if Congress decides that they will do ANYTHING to prevent another recession (like they did in the 1960s and 1970s), we may get sky-high inflation again. What will happen when this philosophy meets the desire for controlled inflation of the 1980s and 1990s, I don’t know. If taxes are hiked dramatically and people have less income to spend and invest, that will hurt the economy and the stock market. The only people who will have money will be the wealthy people working in the Imperial Federal government.

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June 1, 2010

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