Investor Column | The inevitable effect of hyper-stimulus is runaway inflation

Attending Professor Melton’s Economics class at Manatee Junior College was unbelievably boring. MJC students used to call Melton affectionately “Mumbles.” Economics is annoying enough, but it was painful listening to Mumbles blathering about monetary policy, Keynesian economics, and Milton Friedman.

Now I wish I paid more attention to Mumbles. You see, I am starting to feel super-anxious about the pandemic and civil unrest affecting our economy.

More than $2.4 trillion of stimulus provided checks of $1,200 to most adults and $500 to kids, business survival loans, and payroll continuity programs. Providing unemployment benefits to COVID-19 displaced workers is also incredibly expensive.

Newly enlightened and encouraged by Black Lives Matter and other protests, it appears the government may seriously start funding efforts to redress a range of discriminatory policies. Once a longshot, reparations to descendants of slaves is now on the fast-track.

Robert L. Johnson is leading a $14.7 trillion reparations plan that hopes to bring Black Americans equal to white Americans with opportunity, wealth, and income. Johnson is the founder of Black Entertainment Television and was America’s first Black billionaire. More than 42 million African American eligible descendants of slaves may deserve a $350,767 onetime cash payment. And California Senator Kamala Harris, a possible future vice president is advocating reparations in the New York Times and on The Breakfast Club.

More COVID-19 stimulus and reparation dialogue is now ongoing. Costly single-pay health care and free college might happen, despite the odds, might occur, too.

So, as a financial advisor and a CPA, here is what worries me. The stock market has been chaotic, and interest rates remain low. Still, it appears that the USA is throwing caution to the wind and just printing up money and spending it on people, health care, infrastructure, and subsidies. Indulge me. I am either prophetic or a nervous Nellie.

Admittedly it is simplistic, but governments can raise taxes and incur debt, mainly because we must fund the pandemic’s cost. But what you might know is that The Federal Reserve can purchase bonds from the Treasury. While the Federal Reserve lists these bonds on their books, it is now a little more, in my opinion, than a financial limbo.

History, of course, has lessons. For example, big-spending during the Vietnam War and funding President Johnson’s Great Society sparked colossal inflation. Inflation was terrible in the late 70s and the 80s. President Gerald Ford once devised a Whip Inflation Now, or WIN promoting anti-inflation initiatives. Flipping Ford’s WIN buttons upside down revealed “NIM, no immediate miracles.”

Not until President Ronald Reagan appointed Paul Volcker to the Fed’s chairman was inflation brought under control. According to the Federal Open Market Committee, the short-term Federal Funds Rates hit a record of more than 20% in 1979-80. Paul Voelker, skillfully, managed inflation and whipped the economy into shape.

When wild spending reaches a tipping point, we could have another depression. Other countries have been here before. After World War II, Germany’s Reichsmarks became nearly worthless, and unbelievable sums of Reichsmarks were needed to buy a loaf of bread.

Hyperinflation, inflation occurring at an extremely high rate, I believe, is headed our way. When it arrives, the economy will not respond to excessive money printing, and things for you and me will get awfully expensive. So, for example, if you have one million dollars saved for retirement, it might dwindle, possibly, to the spending power of about $400,000. No one knows for sure, though.

As we enter the 2020 presidential election, expect a lot of discussion about deficits, budgets, and spending. Traditionally a lot of politicians are against significant debt, but their numbers are thinning. This is especially true, I believe, for those worrying about the solvency of Social Security Benefits thirty years from now.

So, remember, public spending does not always have to be paid for with taxes or debt assumption. Printing money, unfortunately, according to conventional economic wisdom, usually leads to hyperinflation.

It is ironic, but printing money excessively will likely sustain political parties and power. Ultimately this may create wild and uncontrolled inflation for you and me.

So, here is my advice. Always invest for the long term and use diversified investments to reduce market risk, and now — more than ever — defend against inflation or, conceivably, another depression. And, if you are in college today, pay attention in economics. Understand that a diversified portfolio does not assure a profit or protect against loss in a declining market.

Jim Germer is a Bradenton CPA and financial adviser at 100 3rd AVE W., Suite 130. Call (941) 746-5600 or email jim.germer@ceterafs.com. Securities offered through Cetera Financial Specialists LLC (doing insurance business in CA as CFGFS Insurance Agency) member FINRA/SIPC. Advisory services offered through Cetera Investment Advisers LLC. Cetera entities are under separate ownership from any other named entity. The opinion contained in this material are those of author, and not a recommendation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Financial Financial Specialists LC cannot guarantee or represent that it is accurate or complete.