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Sanguine About Inflation ?

07/18/2021

Wartime veterans often have a certain understandable, justifiable smugness.  Veterans of the war on inflation during the 1970’s are no different.  They tend to think the current inflation is as explosive and pernicious as it was back then.   Fed Chair Jerome Powell doesn’t think so, and neither do I.

Powell agrees with monetary economists that the huge increase in liquidity is inflationary, but that increase is “transitory”.  It is a self-draining tsunami of liquidity caused by one-time emergency Federal spending.  He also agrees with Keynesian economists that the current surge in inflation reflects increased demand from the massive reopening of the economy, which is a temporary event.  As long as inflationary expectations remain “well-anchored”, inflation should be temporary.

One other little-noted factor makes me even more sanguine about inflation.  The bond market is much larger than the stock market.  Bond traders consider themselves much smarter than stock traders . . . and they probably are.  However, the bond market doesn’t see inflation as worrisome.  If they did, interest rates would be rising, instead of falling.

If you are truly worried about long-term inflation, you might consider more real estate, gold, commodities, and banks.

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