Thinking Out Loud About Inflation

With the Fed having just printed over $2T of unbacked greenbacks in the past two years and commodity prices having shot up, I don't think it's unreasonable to expect to see a high rate of inflation pretty soon. How high? Well, here's a chart of inflation, unemployment and the Fed's interest rates during the last bout of high inflation about 40 years ago. It peaked at about 20% way back when. There's something else that sticks out on that chart, too.

1979 != 2011
Unemployment was low during the time of high inflation. It wasn't until the Fed stepped in to crush inflation that the job situation got bad. For this reason, I think it's a bad idea to draw conclusions from the 1970s about what's going to happen this time. Here are some random, untested thoughts to mull over:

• Housing wouldn't seem to be a hedge against inflation at all. Prices are set by supply and demand. There's still a ton of foreclosed houses out there which haven't been released onto the market and with unemployment as high as it is, there is a smaller than usual pool of potential buyers.


• Any firm that sells things that aren't necessary is going to suffer. After paying more for food, gas, clothing and housing, there's going to be a lot less left over. Atlantic City and Las Vegas, Macys and Nordstroms, high-priced restaurants are all going to take it on the chin.


• Government bonds are going to be dumped and that's a fact. Only an idiot would hold on to bonds that are paying 3% when inflation is at 8% or higher. How this doesn't end up in QE III is beyond me. The government has been borrowing with mostly short-term bonds, so they're going to be revolving a HUGE amount of debt every year. Trillions of dollars worth of bonds are going to come due and we'll have to refinance at the higher rates or simply print more money and have the Fed buy them resulting in ... yet more inflation.


• Stocks would seem to be a bad place to be as well because I can't figure out how anyone is going to make any money in this environment other than the discount retailers and the folks what make necessary consumables like oil and food.


• I have no idea what to do with gold. That's such a charged topic and I know so little about it that it seems pointless to touch it.


• Companies with a lot of debt are going to suffer. Interest rates are going to rise and with it, interest on corporate debt.

That's about the limit of my thinking right now. I guess it says that if I had $$ to invest, I'd pick companies that make things people have to buy in order to live and who have low levels of debt.

Update: Would it make sense to use your disposable cash to retire all the debt you could? I think that some mortgages (all?) can be called due at any time. If you had no debt, you'd have no exposure to panicky debtors whose own bills are eating them alive.