– Scott Reed
Sometimes I feel like the hypochondriac whose tombstone said, “I told you I was sick!” We have been talking about inflation as a problem for 10 years. It seemed inevitable after the Great Recession. With all the government bailout money being put in the system, how could we avoid it? But we did. It eased up to around 3% for a while, but nothing really came of the fear. And here we go again.
A $2 trillion government bailout is already in the books to help us get through the coronavirus pandemic and it looks as if more is on the way. It seems only reasonable to think that will trigger some inflation over the next few years.
For those of you who say, “Well, it didn’t happen last time, maybe it won’t this time either.” I think that is a great point. In order to understand why it seems more likely this time we have to understand what happened 10 years ago. A lot of the money that was intended for the tax-paying citizens was routed through the Fed. The Fed gave it to the banks to loan out to the people. The banks made business decisions to not loan a lot of the money out and the government also enacted policies and rules that made it more difficult for the banks to loan it out. So …. the people really didn’t get a lot of the money that was supposed to jump start the economy and be the catalyst for the inflation that never really occurred.
This time is different. This time the money is getting to the people. Through the PPP loans, government checks sent directly to the people and SBA loans going directly to businesses that are trying to stay afloat, the people are getting the money and they are spending it. That means that this time should be different. This time it is very hard to see how we can avoid some inflation.
I think the good news is that it is also hard to imagine rampant inflation. We have become pretty good at managing interest rates in the USA. But an inflation rate of 4%-6% seems like a reasonable thing to expect. Of course, it is important to remember that this is coming from the guy who was wrong following the Great Recession, so …
Let’s say that I am right this time. What do you do? Rising rates are not good for the prices of bonds, so even though higher rates would be great for those of you who are using the interest from bonds to live on, it is not good during the ride up. Stock are risky in the short run, but not so much in the long run. And owning stocks has been a tried and true way to fight the negative effects of inflation. So stocks start looking safer and bonds start looking less safe when we view them through the inflationary lens.
It really goes back to time horizon. Short-term money should be in cash. Two- to five-year money should probably be in bonds. And longer-term money should likely be in stocks. Sometimes the safe investment doesn’t feel like the safe investment. If you are having trouble working your way through this, maybe you should get some help. My mother always told me, “Don’t be afraid to ask for help!”
Y’all be careful out there.
