INVESTING: Don’t fret over inflation-debt’s a bigger concern

If you have yourself in a lather about rising inflation, maybe I can offer a little relief. You can work your rosary beads over a lot of things, but runaway inflation is not one of them.

There’s a little twist here, though. And it’s one that will add a challenge to your long-term strategy.

According to our federal government, inflation, as measured by the consumer price index, has not been much of a problem. Excluding food and energy, prices are moving up only about 2.1 percent a year. That’s a nice, comfortable zone that is the equivalent of sugarplums dancing in Ben Bernanke’s head. Our new Fed chairman would be thrilled to see inflation stay at that level until he leaves office.

If you live somewhere in Europe or Asia, inflation has been even lower recently. Except for the obvious commodity culprits, there’s not a lot of upward pressure overseas. The Bank of Japan has signaled it will end its multiyear pursuit of near-zero rates, but people shouldn’t get the wrong idea about what that will mean. In America, we’re conditioned to think in terms of 25-basis-point moves. Japan will probably move rates up in 10-basis-point increments for a while, and might even end the year with rates below a half percent.

While inflation on a global basis is increasing, we in the United States are not going to see a return to the 1970s for two overriding reasons. No. 1, China and India will be ready to crush margins anywhere they can for the next 10 to 20 years. Their willingness to work for cheap will keep a lid on prices for a long time.

Another reason inflation won’t go crazy has to do with Moore’s Law, which states that computing power will double every two years or so, in effect cutting prices in half. Thus the 50 years of relentless deflation we’ve seen in the technology field. A professor at MIT theorizes that as technology becomes prevalent in more of the products we use, Moore’s Law will apply to more of the stuff we consume.

So, even though you don’t have to worry about worldwide inflation, you do have to worry about long-term interest rates if you live, work and spend money in America. Because of our profligate spending, we have created a massive supply of U.S. government debt.

And we are just getting started. In 20 years, when the baby boomers really start to pressure our health care system to keep them alive just one more day, deficit spending is going to spiral out of control.

This is not a problem that will ruin your week, but it could radically alter your long-range plans. Even more annoying is the prospect that the spending power of the Asian nations is going to increase while we pretty much sit still. It’s happening already. Just check the recent price of gold.

The value of the U.S. dollar has declined 92 percent since the enactment of the Federal Reserve in 1913. The slide is going to continue, if not accelerate. Keep that in mind when you are thinking about where you want to be in 20 years.

Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer’s. Hauke can be reached at 566-2162 or at

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