No one seems worried about inflation today. The symptom of inflation is rising prices, which doesn't seem to be happening -- except perhaps for medical services and college expenses. But inflation is specifically a money issue: more money pushing prices higher. And even all the money that has been "created" in recent years around the world hasn't led to inflation yet, except for one place: Stock markets around the world are hitting new highs. That's where all the money is going now.
The Fed doesn't see inflation on the horizon, so it's holding back on interest-rate increases. Banks will give you a 30-year mortgage for only 3.8 percent; they obviously don't fear inflation. Energy prices are collapsing, keeping a lid on everything from trucking costs to airline fares. The latest figures show the Consumer Price Index (CPI) unchanged on an annual basis, and it's hard to get a raise if you're working.
In fact, most people have forgotten the inflationary period of the late 1970s when the CPI climbed at an annual rate of 13 percent, mortgage rates hit 15 percent, and the then-popular business prime lending rate hit 21 percent as Fed chairman Paul Volcker raised rates to kill inflation expectations.
That's such ancient history that we even have people hoping that a "bit" of inflation -- in wages, in prices -- will help the economy grow. But here are five reminders from history about how inflation destroys savings and value.
- Inflation can grow quickly. In 1974, the Nixon administration put on wage and price controls because inflation was approaching 4 percent. Six years later, despite the controls -- and the shortages they created -- inflation was in double digits.
Inflation is truly a monetary phenomenon. The Fed and other global central banks have created a lot of money to keep the world economy from spiraling into depression in recent years. Central banks in Europe, Japan, and even China continue creating more liquidity (money) even today. That's why their stock markets are soaring.
Still we haven't seen inflation in consumer prices -- yet. Why? Two reasons. First, there continue to be failures and write-offs of bad loans around the world, effectively destroying money and offsetting new money creation. And second, we haven't had the mentality -- the fear of rising prices -- that ignites inflation, along with the desire to exchange paper money for things.
Right now, there is plenty of money sitting on the sidelines -- in banks, in corporations and even in private savings. One of the few places money is being exchanged for "stuff" is in the stock market -- and prices there continue to rise.
But beware of wishing for just a little bit of inflation to "get things going." Once the inflation mentality is ignited, there is plenty of fuel (money) waiting to burn out of control. And that's The Savage Truth.