Inflation in 2021?

That’s a 1975 cover. Let’s look at three 12-year periods covering from 1956 to 1992. From 1956 to 1968, inflation averaged 2.6%, close to the numbers we see today. In late 1968, inflation took off. For the next 12 years it averaged approximately 8% annually. By 1973, inflation had more than doubled to 8.8%. Later in the decade, it would go to 12%. By 1980, inflation was at 14%. Of course, in late 1979, Fed Chairman Paul Volcker dropped the hammer on a Friday afternoon and raised interest rates. This action didn’t put out the fire but it slowed it before it destroyed the dollar. The next 12 years saw inflation averaging 4.5%.

In the fall of 1968, the CRB index was at 98 and the S&P 500 was at 97. The CRB/S&P ratio was 1.01. 12 years later the S&P had recovered from a low of 72 in 1975 to gain 30% in nominal terms, but with inflation the loss was 45% in real, purchasing power, terms. The CRB index was 330 or 137 in real terms. The CRB/S&P ratio was 2.54. The 10-year Treasury rate had a 5 handle in fall 1968 and an 11 handle 12 years later, though by 1981 it had a 15 handle.  However, the 3-month rate had been less than 1% in 1958. There seems to be general agreement that the inflation was caused by easy money and deficit spending for political advantage. William Greider, in his book, Secrets of the Temple: How the Federal Reserve Runs The Country, reports Nixon (’69-’74) as saying: “We’ll take inflation if necessary, but we can’t take unemployment.” The nation eventually had to take both. Note that Fed Chair Powell has indicated a willingness to let inflation “run hot” to encourage economic growth. That’s what they thought in the 1960s, too.

Today, the CRB/S&P index is 0.04. The CRB is 165, but for comparison this is 22 in 1968 dollars. Commodities are stunningly cheap. Stocks at S&P 3756 are at the highest valuation, relative to GDP, in history. Interest rates are low and the Fed is flooding the economy with credit. Deficit spending for political advantage is at astounding levels, helicopter money is being dropped into bank accounts even as I write.

My strategy is to avoid holding dollars. Commodities, or stocks correlated with commodity prices, and foreign currencies offer the potential for hedging or even modest real returns if history is any guide. US financial assets – stocks, bonds, real estate are scary.

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