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Investment Insights, Inc.

Will We Get Inflation This Time?

In response to the financial crisis in 2008 the Federal Reserve crashed interest rates to zero and went about buying bonds at an unprecedented rate. These were necessary, important and effective responses to the unfolding crisis. But many, myself included, thought the long term effect would be inflationary.

As a result the price of gold went on a tear and by 2011 had reached all time record highs. But a funny thing happened. There was no inflation. It never showed up.

Over the years I have made friends all over the world. One of them is the chief precious metals analyst for a major multi-national bank. In 2009 I asked him if all that stimulus by the Fed wouldn’t create inflation.

“Oh no” he said. “They’re just filling a hole.”

In other words, the damage to the economy by the financial crisis was so great that all the money printing going on was really the authorities throwing money into a hole for the purpose of filling it.

By all accounts they appear to have gotten it right.

And that sounds like an enormously complex thing to get right, requiring great precision. But I suspect that isn’t actually correct.

The economy of the United States is so huge that almost everything about it is complex and that is true with inflation. No one really knows why inflation occurs. Lots of people have pet theories. But a few things are clear.

The price of anything is determined by the market and it comes down to supply and demand. If there is more demand than there is supply, then the price goes up. Likewise, if there is more supply than there is demand, then the price goes down.

Whether we are talking about one item or the total of all goods and services in the economy, the effect is the same.

In good times, when consumers have money to spend and are confident about the future, the danger is that their desire for goods and services can rise to levels that are more than the economy is capable of producing. Inflation will very likely occur at these times.

But what happens when people have money but they are afraid to spend it? No inflation.

An economy grows when there is growing demand for goods and services, and that demand is met by industry. Demand can rise from an overall increase in the standard of living and it can also grow from population growth. This last one is interesting.

In those countries where the standard of living is generally very high, and the population is not growing, or even shrinking, it’s very difficult to grow the economy. Japan and Italy are two countries that come to mind.

Japan has one of the oldest average age population in the developed world, and its population is shrinking. The standard of living is very high. The population is shrinking by 0.2% per year. The economy is growing by roughly 0.8% per year and inflation is roughly the same, 0.8% per year.

Japan’s experience shows just how hard it is for a highly developed nation with a shrinking population to grow its economy. The lack of inflation comes along with that.

The US population growth rate is now down to 0.6% per year, a new post WWII low, and if the current level of immigration continues, as well as the current birth rates in the US, I anticipate that we will soon join Japan as one of the nations with a shrinking population.

Our economic growth might not fall all the way to 0.8% and our rate of inflation might not fall as far as Japan’s, but I think that as our population ages and our population growth rate declines it will be harder and harder to create inflation simply because overall demand growth for goods and services won’t be there, and that means the economy’s ability to fulfill that demand is unlikely to be maxed out. The ability of companies to raise prices will be hampered.

These assumptions are based on continued decline in the population of the US. That might change. A new administration might allow, might even encourage immigration. American families might decide to have more children. Things might change. But if they don’t, I have a hard time seeing where inflation will come from.

Hal Masover is a Chartered ReOrement Planning Counselor and a registered representaOve. His firm, Investment Insights, Inc is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. SecuriOes offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor RepresentaOve, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and quesOons can be sent to These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results. Indices mentioned are unmanaged and cannot be invested in directly.

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