Financial Opinion and Insights

Hyper Inflation May Be On The Way

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Every family probably has at least one `real world’ economist – the one that does the family purchasing.  Anyone who buys food, whether at the supermarket or at Walmart, knows that the packages have been getting smaller for some time; an example of  ‘stealth’ inflation – you can’t ‘see’ the price hikes.

Over the past year, we’ve all seen food and energy costs increase dramatically, even if a couple of short-term dips make us feel like it must be getting better; the way you feel when someone quit hitting you with a hammer for five minutes.

We’ve gone through the stock market bubble, the tech bubble, and the housing bubble.   We may be at the peak of the bond bubble. 

First, it’s important to understand how interest rates affect bond values.  Over recent years, interest rates have been headed south.  Anyone who may have purchased a long-term high-rate bond in the past has seen the value of that bond increase as rates headed down.  The reverse is true, as well:  When interest rates head up, the older lower-rate bonds are worth less to a potential buyer.  A seller has to drop the price before a purchaser will buy the bond.

Now, of course, rates appear to be at rock-bottom.  Many would argue that the Fed has run out of bullets and there’s nowhere else to go with monetary policy.  But, what would drive rates up?  A demand for capital, of course, which usually accompanies a recovery, would be one way.   But, recovery doesn’t appear to be on the immediate horizon.

Government spending is an issue, too.   Our federal debt has grown from $9 trillion to over $13.5 trillion in the last 36 months… a 50% increase in all the debt accumulated in our nation’s history [Source: http://www.treasurydirect.gov].   This debt will come due; and when it does, the government will likely be printing money to pay it, also likely devaluing the dollar, as well as dollar-denominated assets in the process.

There’s more:  The ‘stealth’ inflation, already in the pipeline, is very likely due to many companies continuing to pad cash positions as they’re still uncertain about the effects the new health care law, as they’re already dealing with Sarbanes-Oxley and Dodd-Frank, let alone whatever new tax legislation will come down the pike in coming months.   Add to that uncertainty over energy sources from the mid-east, U.S. trade policy, and an aging population, and it’s easy to see the potential problems.   The demand for capital to meet a myriad of obligations and issues won’t be hard to find.  And, it could be big.

Whether hyper-inflation hits in one month or five years is anyone’s guess, and there are economists in every camp on that scale; but many agree that hyper-inflation is on the way and some say it won’t come slowly. 

In fact, there appears to be a significant number who believe that it will hit the economy, along with a bond bubble-bust, surprisingly fast, reminiscent of the other bubble busts we’ve seen in the past, surprising a lot of people!

If that’s true – and I can be counted as one of the believers – investors should get prepared now for a big drop in bond values, which could happen surprisingly fast.    

The good news:  It’s manageable.   There are ways this phenomenon can be managed without destroying your existing financial plans; but, since I provide investment advice only to clients and not in posted blogs – a practice most advisors follow – I would suggest this as a topic you discuss with your advisor immediately.

What?  No advisor?  Gee, what can possibly be done about that?

I wonder.



Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.