It has been thirty-eight years since America experienced high inflation. Only aging baby boomers will remember the 1970s when annualized inflation rates hit the mid-teens, and the price of everything relentlessly spiraled upward. To Generation X’ers and Millennials who never experienced it, a return to such inflation would be shocking.
In his book “From Boom to Bust and Beyond”, Jerry Tuma looked ahead to a day in America when the “ice” phase of deflation and a lackluster economy would transition to a “fire” phase, ushering in a return of 1970’s-style inflation levels. Recently Jerry has made it clear in his workshops and on radio that he believes the early stages of that have begun, as price increases are accelerating.
We don’t have to consult history for illustrations on how inflation ravages an economy and its citizens. We can look right now to an unfolding inflationary crises south of our border. It is Venezuela, where the socialist government’s mismanagement of fiscal and monetary affairs has produced 13,000 percent inflation.
Yes, you read that correctly. That’s 13,000 percent annual inflation.
Yolanda Abreu, a cardiologist with the Caracas University Hospital received a severance pay check after five years of service. The news site France 24 reports that the amount would barely pay for a cup of coffee at current prices. She bitterly related her story on Twitter which was retweeted 11,000 times, receiving 1,400 comments.
“I never thought it would have such an impact. I wrote it because the check was so ridiculous that it made me laugh, and suddenly you find so many people who feel like you that all your work, your effort is just disregarded,” she told AFP.
In the last ten years, graduating medical students have left Venezuela to practice medicine elsewhere. Dr. Abreu understands. “We are not a bunch of money grabbing quacks,” she said. “You just can’t live on these salaries.”
Looking out for the working class?
If doctors cannot live on their salary in Venezuela, consider the plight of the common working person who doesn’t have the means to flee the country to a place offering a better future. The government of Venezuela reports that the poverty rate is 23 percent, but a university study places it more realistically at 87 percent. Inflation is destroying the fabric of Venezuelan society.
But according to the President of Venezuela, the working class need not worry.
In 2013 after socialist dictator Hugo Chavez died, his successor Nicolas Maduro doubled down on the same disastrous fiscal and monetary policies, steering the economy over the cliff. Rather than rein in government deficit spending, he has cranked up the printing of money to pay for government programs and instituted a series of worker pay increases in a futile attempt to help workers survive the very policies he is conducting. Both strategies have further fueled hyperinflation. Rather than see the error in these moves, he gushes self-congratulations even as the nation burns.
“In times of revolution, as never before, the policy of Comandante Hugo Chavez, which I have perfected… is to care for the working class,” said Maduro.
Retired university professor Mery Rojas offers grim testimony to the perfection of Comandante Chavez’s policies. When she cashed out her retirement savings after 16 years of service, the amount was equivalent to the cost of two liters of ice cream.
Will America repeat history?
Former Federal Reserve Chairman Alan Greenspan has predicted that he foresees a return to 1970s-era stagflation in America. Stagflation occurs when prices rise sharply even as the economy slows.
The economy should continue to grow into 2019. The Trump tax cuts and deregulation seem to be stirring the economy to life after the feeble “growth” of the last nine years.
But similar ingredients are in place as happened in the 1970s and in current day Venezuela. Federal government deficits are now projected at $1 trillion a year for the foreseeable future. The Federal Reserve pumped $4.5 trillion of new money into the economy during the Great Recession of 2008-09.
Meanwhile the economy is stirring to life, unemployment is very low and competition for workers is driving wages higher. These last two factors will appear at first to be a return to happy days. But rising wages will be passed along to consumers by raising prices. As consumers realize prices are spiraling upward they typically buy more goods at current prices to avoid higher costs later. The accelerated spending will boost demand for goods, adding to upward price pressure, fanning inflation.
One other exacerbating factor is that oil prices are spiking, which is also what happened in 1973 with the Arab Oil Embargo. At that time, when oil prices jumped in combination with rising government debt and inflationary monetary policy, it was off to the races for consumer prices.
We are not predicting price inflation nearly at the level of Venezuela, but even a return to 15 percent annual inflation would ravage peoples’ savings and retirement. When your paycheck or retirement income cannot keep up with rising monthly living costs, you continually dip into savings to make ends meet. Over time savings evaporate.
Since America hasn’t seen stiff inflation in almost forty years, it is almost certain that your portfolio is not positioned for it. That is why we urge you to schedule a free initial consultation today.
Be sure to listen to the latest edition of Jerry Tuma’s Smart Money Radio.
You can sign up for our next Smart Money Investor Training workshop as well.