goverment inflation prefvention scenario

Although we acknowledge the possibility, our firm does not support the runaway inflation
scenario for several reasons. Currently, our economy is barely growing. Inflation rates
will probably increase, but at least part of this will be due to a series of “high to low”
monthly rates being replaced with a series of “low to slightly higher” months. Also, we
cannot ignore the reality that we have an unemployment rate of nearly 10%. Wage
growth is nearly non-existent. In time, the employment picture will no doubt improve, but
it is unlikely that this in itself will be a significant contributor to inflation.

Presumably, the government really is dumping a lot of money into the economy.
However, it is difficult to find anybody that claims to have actually experienced any
benefit. Not to sound too cynical, but unemployment is still on the rise, home prices are
still depressed, commercial real estate is in shambles and consumers are still reluctant
to spend. Now, before you walk over to the window ledge, we have no doubt that our
economy will survive and our country will again prosper. However, we believe that while
inflation may move higher, we will not experience anything like what occurred during the
1970s. Finally, should the recent “money flood” result in our economy heating up too
quickly, we believe that the stronger and more independent Federal Reserve of today
will face the task and will be able to maintain inflation at acceptable levels.

In all fairness, there is a scenario that could be troubling. Should inflation increase
primarily as a result of commodity prices, particularly before our economy has sufficiently
recovered, it could mute or perhaps reverse the recovery. Crude prices, for example,
flow through to just about everything in one way or another. With unemployment
at almost 10% and wage growth stagnant, we do not need $4.00 gasoline again.
Unfortunately, the Fed’s inflation-fighting weapon of choice, higher interest rates,
would be ineffective. Higher rates would actually make the problem worse. Owning
commodities would theoretically be a partial defense against this scenario, although
typical institutional allocations to commodities may not offer sufficient protection. Our
firm is not predicting this scenario, although we remain aware of its possibility.