Important Lessons can be Learned from 1970s Inflation

Economists are not in agreement, but the best guess is that the current budget deficit is likely to produce some inflation. Now is the time to talk to your financial advisor about how well you are positioned for such a scenario.

The history of inflation in the 1970s can give investors valuable insight into what happens to different market sectors during a time of great inflation. While it is not possible to predict an inflation scenario near term, paying attention to what happened in the 1970s can be illustrative for an investor who wants to prepare for a possible inflation scenario for the US Economy.

Economists are not in agreement, but the best guess is that the current budget deficit is likely to produce some inflation, and the same deficit is likely to undermine the value of the dollar as it continues depreciating while currency markets gradually adjust to reduce the massive trade imbalance.

In a USA Today review of The Great Inflation and Its Aftermath, reporter David J. Lynch reports that author Robert Samuelson calls the spiraling prices of the 1970s and the painful national belt-tightening that eventually quelled them is an underappreciated watershed in US economic history. Samuelson, a longtime columnist for Newsweek and The Washington Post, rightly describes the era as worthy of renewed attention, according to USA Today. After the sunny growth of the 1960s, inflation suddenly spiked to double digits and stayed there for three consecutive years: 1979, 1980 and 1981. It reached an annual high of 13.5% in 1980. At some point, after the current crisis has eased, Samuelson believes that all of the new money that the Fed has pumped into the economy will make itself felt. And when it does, "great inflation" could reappear.

Over the past 30 years annual inflation has averaged 3.85%. Recent inflation has been more tame but it can erode the value of your assets quickly.

Investors must evaluate the wisdom of leaving assets in a savings account or CD with, at best, a 3% return and often far less. Inflation could rise to a 6 to 7% level over the next 18 months. Real, absolute returns will be negative for such an investor.

In the 1970's, gold went up more than eight-fold in three years and five months and commodities and interest rates offered some of the greatest opportunities of a generation.

Now is the time to talk to your financial advisor about how well you are positioned for possible inflation. There are inflation protection strategies that can be implemented in an investor’s portfolio.

Brad Bersh is a Senior Portfolio Manager and Senior Vice President at Morgan Stanley focusing on preserving his clients’ wealth and building that wealth prudently, using customized strategies that take volatile markets into consideration. He can e reach ed at brad.bersh@morganstanley.com or (847) 831-7888