The Inflationary Fed

Here is a picture of inflation: two tickets to a lower box seat to see the San Francisco Giants, the first (on the left) from 1985 and the other from 2005.

The price of the lower box seat ticket in 1985 is $8.00.

The price of the lower box seat ticket in 2005 is $31.00.

What changed? Granted, the Giants got a new ballpark, but the seats are not any bigger. What changed was the dollar itself got a lot smaller. It used to take eight dollar bills to cover one lower box seat, in 1985. By 2008, it took thirty-one bills to cover a seat of similar size.

The dollar shrank in size by a tremendous factor. In fact, if you calculate the annual rate of inflation of lower box seats between 1985 and 2008, the inflation rate for lower box seats to see the SF Giants works out to be over 7% annually.

Always remember that when someone talks about "the inflation rate" that rate is different for every specific good and service. The CPI or the PPI are looking at specific goods and services in order to try to measure inflation in a more general sense. Giants tickets have clearly been inflating at a higher rate than the CPI over time; college tuitions have been inflating at an even higher rate.

In general, the fiat money system instituted in this country with the initiation of central banking (and the Federal Reserve) in 1913 has resulted in an inflationary monetary regime. The level of inflation has increased and decreased over time: one of the primary factors in the positive growth of business and innovation from 1981 to 2000 was a more predictable level of inflation than had existed in previous decades.

Currently, inflation numbers have been rising at more alarming rates, in response to Fed measures to prevent a "impending recession" that (as we have written previously) we do not believe was actually impending (and the credit crisis that caused the angst in the first place was directly related to earlier inflationary behavior by the Fed).

So what is the best protection for the purchasing power of your assets given the nearly unbroken decades of history of an inflationary Fed?

While a traditional response has always been to run to gold or other commodities, there is a better (although perhaps less glamorous) answer: invest in businesses.

Well-run businesses that are providing value can deal with adverse situations that arise, whether the problem is a shrinking dollar or some other problem. In the case of higher costs from their suppliers, for example, a business can take one of many courses of action (including passing those costs along to their clients or customers), but if they are a well-run business in front of a fertile field of growth and they can continue to grow their earnings, you have an excellent ability to stay ahead of inflation by owning shares in that business.

In fact, ownership of common stocks has an unsurpassed track record of outpacing inflation -- there has been no other asset class when comparing any thirty-year period since 1872, or any twenty-year period since 1929 which comes close to the performance record of common stocks, and that includes gold and other commodities (see statistics discussed here; for a more recent comparison against real estate you can see statistics posted here).

For later blog posts dealing with the same subject, see also:


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