Rodney Johnson | Tuesday, November 19, 2013 >>

I know inflation is not literally a four-letter word, but neither is theft. Both should be, but more importantly, the two are very closely related… at least in the way that inflation is being thrown about these days.

I was reading The New York Times recently and came across the headline “In Fed and Out, Many Now Think Inflation Helps.”

At best, this is incompetence. At worst, it’s targeted theft. And make no mistake… you are the target.

Inflation itself – a general rise in prices and incomes – is not a good or a bad thing. In fact, there can be times when inflation, fueled by rising wages through greater production, reflects growth in an economy.

This has happened many times in history. There’s a clear correlation between growth and inflation.

However, and this is a BIG caveat, no one should mistake correlation for causality.

Just because there have been times when inflation and growth showed up to the party together doesn’t mean that inflation always asks growth to the dance. They can go their separate ways, and when they do the results are one-sided and painful.


The Fed – that faux fiscally-conservative body tasked with protecting our currency – has traditionally been on inflation-watch. The goal was always to keep our economy from suffering a bout of currency devaluation.

Now it’s desperate for any sign that inflation still exists.

The reason it’s struggling to find it, even though it’s printing $85 billion a month, is because our natural course at this point in the economic cycle is deflation… not inflation.

We’re busy trying to shed credit (a money-contracting activity) while the Fed wants us to take on more.

Now it’s clear why individuals want less debt, but why is the Fed so bent on more credit outstanding and more inflation?

Because that greases the wheels of economic growth of course.

The Fed – and now others, per that New York Times article – is hoping for textbook answers to inflationary pressures. It hopes to generate inflation so that people scared of losing their purchasing power will rush out to spend.

This trend would hopefully spark retail activity and flow through as greater employment. At the same time, the Fed wants retailers to be able to raise prices to match inflation, thereby giving the retailers more funds with which to increase wages.

Finally, everyone seems to want inflation so that dollars fall in value, allowing debtors – from the U.S. government to the average Joe with a car note – to pay back what they owe using cheaper dollars.

There’s only one problem.

Manufacturing inflation DOES NOT WORK. At least, it doesn’t create the good outcomes the Fed and others are wanting.

Just because the Fed cheapens my dollars doesn’t make me spend everything I have. It simply makes me look harder for ways to keep up with, and beat, inflation with my investments.

As for retailers having more funds with which to increase wages… really!?

With people lined up around the block to apply for jobs, what company will use greater revenue to increase payroll costs?

As for cheaper dollars used to pay debts, that one works, as long as you’re getting your increased share of dollars.

While the U.S. government has no trouble borrowing money and paying back loans with cheaper bucks, the average Joe can only do this if his paycheck gets bigger due to inflation while his debts remain the same.

What if inflation arrives but paychecks don’t go up and consumers don’t spend?

Oh yeah, then we simply have a lower standard of living!

This is exactly what has happened for five long years.

How many years of reality do these people need to understand how things work?

Unfortunately, it appears they need at least one more year. And then one after that…

Of course the other side of the coin always works. This would be the place from which inflation derives its power – stripping wealth from savers.

As the Fed works its hardest to gin up inflation so that the broad economy begins to function like it “should,” at least in their eyes, there’s no question that the losers are people who have accumulated wealth held in conservative investments (cash, cash equivalents, and fixed income), as well as those who are on fixed incomes.

It always seems strange to me that the people speak so easily of wanting inflation, or how inflation will solve all of our economic woes, but they never say what they really mean.

The real goal is to take money away from people who’ve built up wealth, but aren’t using it in the way that others – the Fed, economists, etc. – think they should. If these greedy savers would simply go out and squander all their money, then the economy could function properly again!

With such deluded people in control of both fiscal and monetary policy, it’s hard to escape the inflation loony bin. The best that savers – those who have lived within their means, built up some wealth, and are watching as others try to strip it away – can do is to try to match or outpace inflation through investing beyond the conservative choices that they would normally use.

It’s a tough game.

The stock markets are out of whack, the bond markets are over-valued, real estate seems toppy, and commodities appear to be in a downtrend.

It takes guts in this environment, but that’s the job. Working on your own, with a financial advisor, or however you do it, you’ve got to act so that the Fed and others like Congress are kept at bay. Otherwise, you’ll wake up to the worst of outcomes – they stole your money (by inflating away the value) and still failed to grow the economy.


P.S. If you own a small business, work for one, or even have a good idea for a business, Harry has an important message for you. Watch it here now.

Follow me on Twitter @RJHSDent


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Rodney Johnson
Rodney works closely with Harry to study the purchasing power of people as they move through predictable stages of life, how that purchasing power drives our economy and how readers can use this information to invest successfully in the markets. Each month Rodney Johnson works with Harry Dent to uncover the next profitable investment based on demographic and cyclical trends in their flagship newsletter Boom & Bust. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. Along with Boom & Bust, Rodney is also the executive editor of our new service, Fortune Hunter and our Dent Cornerstone Portfolio.