In the 1970’s financial writers such as Harry Brown and Howard Ruff made a nice living writing books and newsletters about investing in an era of inflation. Howard Ruff sold food storage products and advocated buying household commodities in bulk just because inevitable inflation would make them more expensive later.
Middle class investors following their lead bought gold coins and Swiss Francs. Harry Brown advised anyone how to set up a Swiss Band account. Inflation they advised would end up horribly and the government would be forced politically to make the dollar more and more worthless.
Gold ran up to $800 and ounce. I had opened a Swiss bank account and started accumulating a few gold coins. I got married in 1979 and we honeymooned in Europe and I saw how weak to dollar was. Because I read these guys I went with Travelers’ Checks denominated in British Pounds, French Francs and Swiss Franc. This was before the Euro.
I recall one French restaurant in Paris that refused to take my travelers checks UNTIL I explained that they were NOT in dollars but in Francs. My new bride was impressed.
But just as the more astute investors in the middle class suddenly became mavens in currency valuation and gold, the unexpected happened.
The inflation ended.
Reagan and Volcker brought it to a screeching halt by accepting a painful recession in 1981-82. Inflation approached 11%, and both parties resisted the political pain, but it succeeded and the country’s economy prospered for 20 years while Japan’s sunk like a rock.
Gold fell to $200 an ounce and the dollar soared. Gold did not begin to rise again for another 20 years. Even today it is only slightly above the highs of the 1970’s.
Today in the midst of trillion dollars bailouts and a deep recession, many expect that the government again will have no choice but to inflate the currency to repay the loans. Sure, gas and house prices are down and with rising unemployment wage inflation will be contained; but this huge deficit must surely result in inflation….. or so we think.
But perhaps this crossroads will force those spending cuts later that we should have been facing for the last ten years. Deep cuts in Social Security, Medicare, and other federal departments may be inevitable.
Perhaps our economy may benefit by the simple fact that many other economies like Britain’s may be doing even worse. Lower oil prices will even impact the oil sheiks of the Middle East.
When the increased money supply takes root perhaps we will see a sharp rebound and the prospects of the Government getting repaid for their TARP funds may surprise everyone.
Perhaps this is blind optimism or just wishful thinking, and the ridiculous so called stimulus bill does not exactly generate confidence that the one party congress will have the will or the desire to make the tough choice that we will face.
But when the markets move to extremes the contrarian opinion often prevails.