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Monday, February 16, 2009

Risk of Inflation is VERY Real

Growthink Blog

Written by Jay Turo on Tuesday, January 27, 2009

...The M0 money supply (currency in circulation) from September to December of 2008, expanded from $905 billion to $1.65 trillion, or a WHOPPING increase of 82%.

Now the argument has been made that the main reason for this is not solely due to the printing of more money by the Fed, but because of the fact that banks, as opposed to actually lending out all of the bailout money poured into them by the Treasury, have simply turned around and bought treasury securities with it. While this is certainly part of what has happened in the last few months, it by no mean explains away the whole 82% increase.

Rather, with the federal budget deficit predicted to swell to a record $1.2 trillion for fiscal 2009 (ends September 30, 2009), combined with ongoing and systemic ...[events and issues], there is only one way that the Fed can keep its book in balance.

By printing more money. And a lot of it. As in over 20% on an annualized basis. ...

How to hedge against inflation risk?

Three ideas: 1. Let go of the false belief that cash is a safe investment. Just a few years of double-digit inflation can reduce the purchasing power of your savings by half. 2. Move cash assets to inflation-hedged vehicles. Equities, both public and private, have historically grown in value at at least the rate of inflation. 3. Be wary of bonds. Both because of the fundamental dysfunction of the debt markets caused by the huge governmental intervention in these last few months, and because a high inflation environment is always a high nominal interest rate environment (driving down bond prices), don't be overly seduced by the very high-paying yields on a lot of corporate debt. It is a LOT riskier than advertised.

... Greatly avoid the temptation to just "wait out" the storm and take action now with New Year's business and investment moves.