A wake-up call from Art Laffer

Economist Arthur Laffer has a new piece in the Wall Street Journal entitled "Get Ready for Inflation and Higher Interest Rates" in which he points out the enormous increase in the monetary base since September, 2008 (see monetary base graph, above, from the St. Louis Federal Reserve data).

Mr. Laffer points out that this expansion of the monetary base is "so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless." The consequences, he points out, will almost certainly be greatly increased potential for inflation and for higher interest rates.

This is precisely what we argued in our recent post, "Stand still, little lambs, to be shorn!" In that post, we provided a link to a classic Milton Friedman video from 1980 in which he provides vivid historical examples in which expansion of money supply led directly to inflation, time and again.

Art Laffer concludes his piece with what sounds like a note of resignation: "For Fed Chairman Ben Bernanke it's a Hobson's choice. For me the issue is how to protect assets for my grandchildren." However, we believe that all citizens should be asking themselves that same question.

We believe that the terrible long-term corrosive power of inflation on wealth is drastically underappreciated by even sophisticated investors. That is the central message of the original essay, "Stand still, little lambs, to be shorn!" from the AIER.

We have explained that, in terms of financial market assets, the only real way to preserve wealth and to grow wealth fast enough to stay ahead of the ravages of inflation is to be an owner. A post from February 17 of this year, entitled "Return of the 1970s, part 2" dives into this subject in greater detail and examines the period most associated with runaway inflation in this country.

We would also add that, in addition to financial market assets, we believe that investors should understand how to integrate their capital investments between real estate ownership, ownership of shares in private business enterprises, and even ownership of permanent insurance policies (the appropriateness of each area, of course, is subject to the specific resources and needs of different individuals and families).

Long ago we published a post on that subject in which we noted that this approach is analogous to the construction of a rock-climbing anchor in which three or even more individual anchor points are connected to one another in a way that will be mutually-reinforcing in the event of a fall. Everyone can imagine how dangerous a fall in rock climbing can be without a properly constructed anchor -- investors should realize that inflation is a hazard of equal seriousness.

Art Laffer's article should be a wake-up call to investors.

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


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