In large part because I couldn’t think of my own rant, I took the suggestion of listener JimmyYukka who asked if I was concerned about hyper-inflation, a recent concern expressed by politician Ron Paul.

I’m not sure if I ranted quite enough to call this a rant, versus just an uninformed opinion, but, no, I’m not concerned with the possibility of hyper-inflation for several reasons.

First, the bond market, which seems to have been inflation sensitive since Paul Volcker wrestled inflation to the ground in the 1980’s, is showing no sign of inflation concern. The 10-year treasuries are around a 4% yield, which barely offers much of a current real return, not to mention the next 9 years after that. Sure, that could represent a discount yield for safety, but then even the better corporates are around 6% – again no sign of inflation fears in that number.

Second, if the typical cause of hyper-inflation is runaway money supply growth by way of a run-away printing press, then while I appreciate the concern, the data suggests it’s not quite that bad yet. While there was a spike in both money supply proxies M1 and M2 last year, both settled down in 2009, with M1 year-over-year growth around 6% and M2 growth around 0% most recently. Longer term, that shouldn’t be cause for alarm if the long term nominal GDP growth rate is in the same ballpark.

There have been some unusual shifts in some monetary indicators, and I talk at some length about how little I know about this, and frankly, how little anyone seems to know about it. I encourage listeners or readers to go to the St. Louis Federal Reserve website and download a copy of National Monetary Trends. This has numbers such as the Adjusted Monetary Base, which after decades of flatlining at a few percentage points per year, jumped at a 350% annual rate at one point in 2008 only to then fall at a 100% annual rate in the following quarter. These changes are unprecedented, and I have no idea what they mean. There are several other, equally unusual changes that I also know nothing about. I encourage listeners that do to write me at val@thevalueguys.com. I will share the discussion on a future show.

My summary is that hyper-inflation takes action on all sides that would be unlikely now. A well informed consumer base is unlikely to pay prices growing at hyper-rates when online price shopping is a click-away, or when money market yields are soaking up some former demand for goods, putting downward pressure on demand and prices. But, that said, the long term bond rate, less a few percent of real return, may be the best indicator of inflation expectations that we have.

Val Hughes

2-12-2010

www.thevalueguys.com