Risk of inflation

Nobody with any sense denies that the greatest risk of fixed income investing in inflation. A lot of people are forgetting how insidious inflation is, and don't consider the current low levels (from 2 to 4%) dangerous.

Basically, general macroeconomic inflation is a general raising of the prices throughout the economy. Simply, there's a relative rise in the amount of cash going through the economy compared to the amount of goods and services available for sale in that economy.

My macroeconomics teacher in college used to like to tell us that if we wanted to reduce inflation we should burn money. It was such a shocking thing to say about money (and nobody, including him, volunteered their personal money for this stop-inflation project), that we didn't get that it was one of those jokes that was funny because true.

If you have two apples for sale and two dollars -- each apples costs a dollar. Print two more dollars so you have a total of four -- but the number of applies remains the same -- and the price of apples will go up to two dollars each.

A simplified example like that makes it clear. Our real-world economy is much larger and more complex but operates the same.

We can't eliminate inflation because there's a general call for the government to keep on creating money by spending it. Congress votes to spend some money et voila! checks are issued and then cashed and a welfare mother is paying her rent to her landlord or a defense contractor is paying its suppliers.

Some of this comes from the tax money taken from us taxpayers, of course, but when Congress authorizes more money than is already in the Treasury Department collected from taxpayers, then bonds are issued to raise the money, and the American budget deficit keeps on growing.

But people who receive the money directly (welfare recipients and defense contractors) or indirectly (landlords or raw materials suppliers) like having that cash flowing into the economy.

Retired people who are receiving only Social Security and pensions and interest on bonds are not so happy to see the price of bread go up the next time they visit the supermarket.



inflation
inflation