Inflation is Coming

Inflation is Coming

This is going to be an interesting week. Today, the Fed kicks off a two-day meeting that will determine the fate of the $600 billion QE2, the second round of quantitative easing, i.e. printing money, and set the policy course for the Fed over the next few months.

By way of reminder, quantitative easing is when the Fed bolsters its balance sheet by buying treasuries to keep interest rates low. It's the equivalent of you or I printing dollars to pay off our credit cards. The thinking behind the plan is that by keeping interest rates low, businesses and investors will borrow more money (which is also a form of printing money) and make more purchases.

The result of quantitative easing is always inflation since the Fed printing more and more money, and each dollar printed devalues the dollars already in print.

If you've been paying attention to the facts, inflation is already happening across the world. For instance, last year I said that buying silver under $20 an ounce would be a good investment. Since then, it has skyrocketed to $45 an ounce. Gold is also up significantly—as is oil, food, and interest rates for consumer loans.

Yet, Ben Bernanke and the Fed continue to say that inflation is not a problem. This week will be interesting because while the rest of the world is worried about inflation and tightening their policies to counteract inflation, there is every indication that the Fed will continue with loose fiscal policies that promote inflation.

This week, while it's expected that Ben Bernanke will announce that the Fed doesn't plan on extending its QE2 program after it expires on June 30th, he is expected to announce that the Fed will continue to work to inflate the money supply in other ways. As Dennis Gartman writes, "Where the ECB, the Bank of Canada, the People's Bank of China, the Reserve Banks of Australia and New Zealand shall all err upon the side of tighter, disinflationary policies, the Fed will continue a while longer with holding the Fed funds rate effectively at zero."

Translation: the Fed wants easy money, which always leads to inflation.

And it's not just economists that are predicting inflation. Perhaps the best indicator that inflation is coming—despite the talking points from the Fed that it's not—is the comments from the CEO of WalMart, Bill Simon, at the beginning of April. Inflation, he said, is "going to be serious…We're seeing cost increases starting to come through at a pretty rapid rate."

The reason Simon says this is because his company, which is the largest retailer in the US, works direct purchasing deals with countries like China. WalMart is seeing significant increases in the costs they pay for goods coming out of China and other countries. These costs will be passed onto the American consumer.

When the CEO of the largest—and cheapest—retailer in America says inflation is coming, I tend to believe him instead of Ben Bernanke, whose policies are criticized and counteracted by nearly every other sovereign central bank.

So, "significant" inflation is coming. So what?

Personally, I'm investing expecting inflation. That means I'm dumping dollars and moving into commodities and precious metals. I'm also buying real estate with other people's money, locking in low interest rates and expecting inflation to pay off my debt with cheaper dollars.

It's my belief that investing in assets that hedge against inflation is the best bet.

I may be wrong, but I feel safer with this strategy than with the prevailing one—saving dollars and investing in stocks, bonds, and mutual funds.

As always, I'm not telling you how to invest. I'm simply telling you how I'm investing. You must do the hard work of examining the facts and figuring out whether you think I'm right or wrong.

I encourage you to increase your financial education and your financial IQ. Dig deep, don't listen to what the Fed is saying, and question everything. In the end, you have only yourself and your financial intelligence to save you from the hard times ahead.

But I have every confidence that you can thrive while others struggle to survive.

Original publish date: April 26, 2011