Why I'm Not Worried About Inflation Right Now
Is inflation coming? I mean consumer price inflation. And I mean a BIG jump up in prices across the board. That kind of overall, mean and nasty inflation. We've got inflation, but it's not like that - yet. But because we have inflation in some items (gas prices, a lot of food items, certain financial asset prices, etc.), people get confused about inflation.
For example, talking to some people lately, I hear them confuse the rise in the price of gold with the idea that inflation must be heating up. But that's not necessarily the case.
Gold goes up for a number of reasons. One reason it goes up is that the value of the dollar goes down. But it also goes up even if the dollar goes up too - at least it does sometimes. It does that when a certain percent of people out there look to gold as a "safe haven" asset.
When people talk about gold as a "safe haven," a lot of times that means a place to put your money during some crisis. Some people talk about having some gold because they think that if there's a terrorist attack, or war with Iran, or a new oil crisis, their gold will shoot up in price. And that does happen sometimes.
But some of us see gold as a safe haven from the dollar. It's not so much that the dollar might "collapse" (lose all its value in a heartbeat) as it is acknowledging that the dollar has lost most of its value over the last hundred years or so (about 95% of its value) and that it's a good bet that it will continue to lose its value now and in the future. So instead of having all your money in cash, you hold some gold to help preserve the value of that hard-earned money you saved.
So it's not necessary to think of gold as only something that protects you from a collapse of the dollar, something that might happen if we get very high inflation. You can reasonably use gold as a place to protect you from a dollar that declines over long periods of time, as our U.S. dollar has over the last hundred years.
Some people think stocks are a place to put your money in order to preserve its value. It seems like a way to preserve the value of your money. They see how stocks have increased in value over long periods of time and figure that will offset the decline in the value of the dollar.
Can stocks protect you from this long, lumbering inflation? Wall Street will typically tell you not to buy gold. They say stocks provide better protection in this case. And indeed, you might expect that stocks would keep you a step ahead of inflation over some long period of time. By long, I mean decades. But the thing is, stocks won't protect you if the dollar does, in fact, lose value quickly. If the dollar loses value quickly, stocks will suffer. So why not just buy some gold?
Then there's always the possibility that we get stagflation. And, indeed, at the moment, inflation is not the thing on my mind. In fact, I'm wondering whether we're going to lumber along for a bit before we possibly slip into a period of what became known as "stagflation" in the 1970's. That's where there's very little economic growth, high unemployment, and high inflation. And if we do, then stocks won't be the best place to have money, although the right dividend-paying stocks - the ones that have a history of raising their dividend - might make some sense for a portion of your money, even in a "stagflationary" environment.
Which, of course, means that while inflation is not something I'm worried about right now, it's never really all that far from my thoughts.
In the end, when you get right down to it, you've really got to be prepared for a number of rather unpleasant scenarios.
For example, talking to some people lately, I hear them confuse the rise in the price of gold with the idea that inflation must be heating up. But that's not necessarily the case.
Gold goes up for a number of reasons. One reason it goes up is that the value of the dollar goes down. But it also goes up even if the dollar goes up too - at least it does sometimes. It does that when a certain percent of people out there look to gold as a "safe haven" asset.
When people talk about gold as a "safe haven," a lot of times that means a place to put your money during some crisis. Some people talk about having some gold because they think that if there's a terrorist attack, or war with Iran, or a new oil crisis, their gold will shoot up in price. And that does happen sometimes.
But some of us see gold as a safe haven from the dollar. It's not so much that the dollar might "collapse" (lose all its value in a heartbeat) as it is acknowledging that the dollar has lost most of its value over the last hundred years or so (about 95% of its value) and that it's a good bet that it will continue to lose its value now and in the future. So instead of having all your money in cash, you hold some gold to help preserve the value of that hard-earned money you saved.
So it's not necessary to think of gold as only something that protects you from a collapse of the dollar, something that might happen if we get very high inflation. You can reasonably use gold as a place to protect you from a dollar that declines over long periods of time, as our U.S. dollar has over the last hundred years.
Some people think stocks are a place to put your money in order to preserve its value. It seems like a way to preserve the value of your money. They see how stocks have increased in value over long periods of time and figure that will offset the decline in the value of the dollar.
Can stocks protect you from this long, lumbering inflation? Wall Street will typically tell you not to buy gold. They say stocks provide better protection in this case. And indeed, you might expect that stocks would keep you a step ahead of inflation over some long period of time. By long, I mean decades. But the thing is, stocks won't protect you if the dollar does, in fact, lose value quickly. If the dollar loses value quickly, stocks will suffer. So why not just buy some gold?
Then there's always the possibility that we get stagflation. And, indeed, at the moment, inflation is not the thing on my mind. In fact, I'm wondering whether we're going to lumber along for a bit before we possibly slip into a period of what became known as "stagflation" in the 1970's. That's where there's very little economic growth, high unemployment, and high inflation. And if we do, then stocks won't be the best place to have money, although the right dividend-paying stocks - the ones that have a history of raising their dividend - might make some sense for a portion of your money, even in a "stagflationary" environment.
Which, of course, means that while inflation is not something I'm worried about right now, it's never really all that far from my thoughts.
In the end, when you get right down to it, you've really got to be prepared for a number of rather unpleasant scenarios.
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