Inflationary Pressure is not Necessarily an Evil

There has been a growing amount of debate and thrown barbs in both the mainstream media and the Internet lately regarding perceived or possible inflationary pressure on the economy of the United States.  Such commentaries on this issue seem like a debate, or political campaigning, rather than a meaningful deliberation about prudent investment strategies.  Towards deliberation, I offer the following observation and analysis.

If I remember correctly, the last of the “Jimmy Carter” era 30-year Treasuries matured in 2007.  Whilst studying these particular Treasuries, I noticed some had a coupon rate of 17.5%.  That rate was neither particularly high nor particularly low for the particular type of treasuries.  Now, if you were a farmer and had to take out a $100,000 loan in 1977, or 1978, with a 17.5% interest rate, you probably fell victim to the farm crisis that gripped the country in 1985.  In fact, many farmers did lose their farms precisely because of the crushing interest rates.  The interest rates were driven by of out of control inflation, a petroleum crisis initiated and controlled by OPEC, and a president more interested in micromanaging the day-to-day affairs of the White House than in managing the economy.

Recall, further, that within a few years after Ronald Reagan defeated Carter, inflation was brought under control and the coupon rate on the 30-year treasuries dropped considerably.  For those investors who take a long-term view of investing and personal financing, this fact is essential to both remember and understand

Nevertheless, suppose that you were a prudent investor and bought, say, $100,000 of the 30-year treasuries in 1977 that were yielding 17.5%.  Also, say that you were sensible enough to invest the dividend in instruments that were yielding reasonable returns, say 10% per year, and you did so for 30 years.  You would have received a total of $525,000 in interest payments from the treasuries and you would have received the $100,000 face-value of the treasury at the end of the 30 years.  Much of that $525,000 would have been received in years in which inflation was relatively modest.  Returning to our computations, investment of the annual $17,500 dividend at 10% would yield a portfolio worth $2,878,645.40, not accounting for taxes and not accounting the initial $100,000 paid for the treasury, at the end of the 30th year.  If the original $100,000 and the $2,878,645 portfolio were invested from 2007 through 2011 at the same 10% interest rate, the current value of the portfolio would b $4,361,034.

Even with the years of high and low inflation between 1977, or 1978, and the current date, I cannot imagine anyone today complaining that either $2,878,645 or $4,361,034 is a paltry amount of money, particularly when that amount arose out of an investment of $100,000.

I am currently hoping for a few years of extremely high inflation.  I will purchase as many high coupon rate, 30-year treasuries as I can afford.  Then, I will see a secure long-term financial situation based upon reinvesting the  interest.

As anything in investing, it is essential to take a long-term view.  Sure, the situation might be a bit rough at times, and the short-term financial situation might be difficult: however, investing prudently at the correct time will provide a secure long-term financial position.

Nathan A. Busch

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