A couple of thoughts on inflation

The holidays are here and its made posting a bit tougher. Its hard to work on a post with family members all around, left over turkey and pumpkin pie all over the place. Not that I am complaining. For today, I found a couple of interesting charts on inflation.

Its hard to find a more controversial topic today than the US dollar and inflation. There is a lot of gloom and doom on the US currency these days and rampant fears of its precipitous decline with accompanied hyper inflation. I find during times like these it is instructive to look at history and in particular historical situations in other world markets. The first chart is a comparison of US inflation to Japanese inflation since the big crisis moments in both markets. Here is the chart.

Since Japan’s housing crisis in 1991 its economy deflation has been the dominant theme in its economy. That crisis was driven by massive debt levels and exorbitant housing prices. To paraphrase Mark Twain, ‘history may not repeat, but it often rhymes’. This chart begs the question, is the US following the developments in the Japanese economy? Maybe. There are a lot of similarities. My point is that inflation is not a given especially when looked through a historical context.

But what if there is inflation? Would the tales of mass economic disruptions come true? Will the only accepted currency become gold in such a scenario? Again, looking at history provides context and perspective. The following chart shows the historical real value of the US dollar and a dollar invested in other asset classes.

The blue line in the chart is what you often hear about, the destruction of the dollar’s purchasing power since the dawn of the fiat currency. But you would only have suffered such a massive onslaught had you held your dollars in your mattress. Holding your dollars in government bonds would have more than protected your wealth and actually grown it. In stocks you would have done even better despite the ups and downs. One important point I would like to make is that today holding your cash in a bank account could be considered holding your dollars under your mattress.

In summary, inflation is not a given. In the de-leveraging cycle the US economy is in, deflation is a serious risk as history shows. And even if inflation shows up in a big way it is not so hard to protect yourself from its ravages even with very conservative investments like 10 year US treasury bonds.