Swedroe: Inflation-Risk Reality Check

December 30, 2013

Sure there’s a risk of an inflationary spike, but it’s hardly assured, Swedroe says.

What should I do about the inevitable rampant inflation we’re going to face because of the huge fiscal and monetary stimulus that’s been injected into the economy? This has been one of the most persistently asked questions I’ve received since 2009.

Part of the collection of forecasts I regularly save—I save them to hold people accountable, something the financial media virtually never does—is a 2010 article by Vernon C. Sumnicht, the chief executive officer of the investment advisory firm Sumnicht & Associates LLC, titled “Why is U.S. Inflation Inevitable?

Sumnicht certainly wasn’t alone in his forecast—many others were predicting doom. Articles such as these fueled investor fears and led many to sell their intermediate- and longer-term bond portfolios and move to cash or very short-term bonds.

Among the reasons Sumnicht cited for the inevitability of inflation was a study that showed that the tipping point for hyperinflation occurs when the government’s deficit exceeds 40 percent of its expenditures, a figure the U.S. crossed in 2009.

Peter Schiff, CEO and chief global strategist of Euro Pacific Capital, is one of the “gurus” who became a fixture on financial TV shows, constantly warning about how expansionary monetary and fiscal policies were about to produce hyperinflation, which further fueled investor fears.

While there certainly was, and still is, the risk that the massive budget deficits and the monetary stimulus will translate into rising inflation, this outcome wasn’t ever, and still isn’t, inevitable.

There’s another related myth that persists among many investors. I frequently hear that the growth rate of our money supply is exploding. That belief has probably been fueled by those commercials that recommend buying gold because central banks are printing money as if the U.S. were Weimar Germany all over again.

The fact is that M2, a broad measure of the money supply, hasn’t been growing at rates that would suggest rampant inflation should be expected. The following data is from the Saint Louis Federal Reserve’s website and presents the last five years of growth in M2.

Date M2 in Billions Date M2 in Billions Increase Over Prior
Year (%)
11/25/2013 10,935 12/03/2012 10,338 5.8
12/03/2012 10,338 11/28/2011 9,612 7.6
11/28/2011 9,612 11/29/2010 8,778 9.5
11/29/2010 8,778 11/30/2009 8,487 3.5
11/30/2009 8,487 12/01/2008 8,068 5.2



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