Inflation

Inflation is caused by shortages. Consumer prices increased 150% in 1914-20 (WW I), and 250% in 1971-96. In the late 1970’s, banks were paying 5-7% annual interest (before an income tax of 30%) on certificates of deposit, but the inflation rate was more than 10%. All inflation hurts people with savings and those living on fixed incomes. The beneficiaries are debtors, including governments. Once an inflation rate exceeds 10% per year, there is no upper limit, and prices can change monthly, weekly, or hourly. The society sinks into poverty. Goods begin to disappear from stores at inflation rates of 20-40% per year unless there is reliance on a hard currency for trade. The U.S. dollar served this purpose in Russia and South America in recent years. Inflation decreases generally require government actions. The runaway inflation in Germany during the 1920’s stopped abruptly when the government announced that a new currency would be backed by the value of the national forests. Recently, inflation in Argentina stopped when the government announced that each new peso would be backed by a U.S. dollar.

An ownership interest in a profitable growing business is usually worthwhile in a period of inflation. Other relatively safe investments are real estate (including rental property if rents can be increased), nonperishable farm products (including timber), and possessions that have a wide market and little depreciation. The prices of new and used guns have tracked inflation as consis-tently as anything else in the last 50 years; gold and silver coins were best in earlier periods. Stock prices are usually depressed in a period of high inflation but rise to new peaks (nearly a sure thing) when the inflation rate drops. The worst investments are savings accounts, life insurance, and bonds, including those that pay interest weekly.