Michael Sivy has a think piece on inflation in Time Magazine. His premise is that, based on what economists think they know about deficit spending, economic stimulus, and money creation, we should be having serious inflation. But so far that hasn’t happened.
The economy of the past three years has puzzled experts and policy makers in all sorts of ways, but the greatest mystery has been the recent decline in the rate of inflation. That may not seem remarkable in a stagnant economy, except that all the major economic theories suggest that prices should now be rising at a fast clip.
What’s most striking today is that all three of these factors are now at extremes that should be fanning the flames of inflation. Deficits of more than a trillion dollars a year are the highest in history. At close to zero, short-term interest rates are at their lowest level in more than 30 years. And the Fed’s monetary base has been expanding at an unprecedented rate. The remarkable thing is that none of this is translating into serious inflation. Over the past three years, some volatile prices, such as those for food and gasoline, have indeed gone up. But there still haven’t been sustained widespread price increases throughout the economy.
Mr. Sivy has a preferred explanation for this inflation mystery, and also suggests what may happen when things change.
The explanation is that all the money in the world won’t push up prices unless people are willing and able to spend it. So the dog that didn’t bark in this story is the money that didn’t get spent.
The current stagnation may simply have to run its course. But once it does and the economy really begins to rebound, it could well be accompanied by a surprisingly fast resurgence of inflation.
I think his viewpoint is worth considering. Inflation hasn’t been a problem so far, but that doesn’t mean it will never become a problem. Investors, many with bond-heavy portfolios, may be ill-equipped to deal with a bout of inflation. If inflation does occur, it may catch a lot of investors off guard, if only because they have seen declining inflation over their entire investing careers.
Relative strength might be a useful guide to solving the inflation mystery. If traditional inflation-sensitive assets like commodities or energy and basic materials stocks start to pick up significant relative strength versus other asset classes, it might be time to focus on portfolio protection.
