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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Axel Gunderson who wrote (658)	8/24/1998 7:20:00 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 1722

Axel, >> I mentioned back in post #622, I also recommend the book. << I bought it on your recommendation!!! Thanks! >>But take a look at the inflation data. I think that really poses a question for this "non-inflationary era" outlook. Even the recent, "low" inflation we've had is above the historical norm. So rather than arguing we are in a new era of low inflation, we should be pondering "are we in a new era of high inflation? or is this high inflation an anomaly, and we will be returning to the norm?"<< You are asking a very good question. One in which I have only thoughts and no answers. So here they are: Our experience prior to having active central banking (1914 - I think) was one where deflation was the norm except during war time. So I believe anything prior to the modern Fed is not relative. The average inflation level since the modern Fed was created is higher. It is even worse since we went off various watered down versions of the gold standard in 1972 and prior (which were never true gold standards to begin with). As Reynolds has correctly pointed out, even in the modern central banking era, most episodes of inflation were related to either war or war economies. The Oil Shock and its monetization is the one exception. So there are very good reasons to be hopeful that future inflation levels will be lower than recent decades. I have several small problems with this view though: First, it assumes that war has been eliminated as a human activity. I am hopeful, but I wouldn't bet on it. Second, it assumes no unforeseen economic shock (like another oil crisis) or other event won't require a lot of money printing to avoid an even worse alternative. Thus producing inflation. Third, it assumes that central bankers are perfect and never make monetary errors. I definitely don't believe this. Fourth, there are enormous off the books future health care, pension and other liabilities of government that will be somewhere between difficult and impossible to fund via taxation. The true government debt on an accrual basis is many trillions of dollars higher than the official numbers. I can already hear them warming up the presses. Lastly, we are an enormous debtor nation with a large current account and trade deficit. These are very significant long term risks for our currency. Meaning, if foreigners lose faith, or our liabilities grow to dangerous levels, the dollar may weaken very substantially and our inflation rate will rise. We have rarely been faced with that risk as a nation until the last decade or so. We were almost always large creditors. When you sum all these things together my thoughts are these. I am very hopeful that the optimists are right. I just wouldn't invest on the assumption that they are though. For the short term I am in Reynolds camp all the way. I am just much more of a worry wort than he is on this issue from a longer term perspective.