Is Inflation a Certainty?

Things are looking pretty grim for the world economy. Production is sputtering. Unemployment is soaring. And we don’t know when the COVID-19 quarantines can safely end.

But in every crisis – including this one – there are silver linings.

For the past few decades, much of the world has depended on ever-increasing debt to keep growing.

We all know this isn’t sustainable. But we’ve put off dealing with it because we’re afraid of the consequences. I believe this current crisis will force us to deal with the world’s debt problem – one way or another.

My view has long been that the powers that be will deal with the debt problem via inflation. If an economy sustains 10% to 15% inflation per year, for example, even massive debts can quickly “shrink” in real terms.

Now the COVID-19 crisis has given governments around the world the support they need to begin printing huge amounts of money – and use that freshly printed money to pay for massive deficit spending, bailouts, and direct payments to corporations and citizens.

It’s becoming clear that over the coming years, the U.S. and many other governments around the world will print unprecedented amounts of money. I continue to believe this will soon result in sustained inflation. And those who warn about an impending deflationary crash ignore the fact that central banks and governments will go to incredible lengths to prevent this from happening.

If the ongoing monetary madness somehow doesn’t lead to inflation, I suspect the Federal Reserve and the government will do whatever they can to trigger it. Inflation is an “easier” solution compared with the alternatives, which are raising taxes dramatically and slashing spending. It’s the path of least resistance.

Here’s what I wrote last October.

And if that doesn’t cause enough inflation, then I bet the Fed will do just about anything to make it happen. It might give out $25,000 checks every year to every citizen. Or fund huge development projects with newly printed money.

Historically, inflation is how governments tend to deal with unpayable debt. After World War II, the U.S. public held a record amount of debt: 108% of GDP. Economists from Dartmouth College and the University of California, Santa Cruz explain how we got the debt down to a more manageable level:

In 1946, the debt ratio was 108.6 percent. Inflation reduced this ratio about 40 percent within a decade.

This is a story we see over and over again. After World War I, World War II and the Vietnam War, we had periods of high inflation. Today, we’ve been at war for almost 20 years.

Today, the timeline for money printing and inflation has accelerated significantly. I simply don’t see any other way out of this mess besides an inflationary period that helps to wipe away the world’s debt.

After we get through this difficult time, my hope is that corporations and people will start living in a more sustainable fashion. We need to get back to living within our means. And I believe that this crisis could be the catalyst that returns us to a more sustainable path.

Anything but Bonds?

There’s been considerable discussion lately about formal “debt jubilees” – the widespread forgiveness of loans. A recent op-ed in The Washington Post proclaimed that “a debt jubilee is the only way to avoid a depression.” I have no idea how this would work, but it would be incredibly disruptive, to say the least.

If this inflationary thesis proves to be correct, or a debt jubilee happens, the one asset that will likely be hit the worst is bonds. Many yields are already negative once you factor in inflation. So I won’t be touching bonds for the foreseeable future.

As I’ve written about extensively lately, I believe gold is the best of the “safe haven” assets for the foreseeable future. Precious metals should be an important part of every investor’s portfolio in times like these.

Over the long run, high-quality stocks should do relatively well in an inflationary environment. However, I still think we will get a chance to buy most stocks significantly lower than today’s prices.

Startups are one of the few asset classes with the potential to grow faster than even high (10%-plus) rates of inflation, and I will continue to invest in quality opportunities.

We don’t know exactly how this situation will play out, so it’s best to take a diversified approach to portfolio management. However, bonds are one area where I don’t see any upside at all.

These are just my opinions, of course. I could be wrong. These are unprecedented times, and it’s difficult to predict how this will all play out. But as I’ve said repeatedly, the one thing I am certain of is that gobs and gobs of money will be printed.

One last note about potential silver linings… If the ongoing monetary experiment does weaken the dollar substantially, this could lead to a resurgence in U.S. manufacturing and exports. Because the dollar is so strong versus other currencies today, it makes domestic manufacturing noncompetitive with foreign markets.

A much weaker dollar could make large-scale domestic manufacturing feasible again. Though it will likely take years to play out, this could be the ultimate silver lining in this crisis.