Inflation

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Inflation: The Next Crisis, And How To Protect Your Investments

June 5, 2012  | 20 comments  |  includes: CYS, GLD, RWT, TBT

Over the last two decades, inflation has been largely a non-issue. Sure, there were times when inflation crept up a little over 5%, but even that is a far cry from 12% we saw in the late '70s. You may ask, why has inflation been tame as of late? I can tell you one thing, it is certainly not hawkish sentiment from the Fed. Over the last three years alone the Fed's balance sheet has more than tripled to over $2.8 trillion! Not to mention that the benchmark interest rate has been below 1% for four years and is currently at 0.25%.

So why have prices of goods not risen? Recently the answer has been quite obvious: We have been in and recovering from one of the greatest recessions in history. As you learned in Econ 101, a recession can cause deflation due to less demand for goods, increased saving, and rising unemployment. Aside from the recession, there is a larger force at play, and that is the advent of globalization and technology.

Globalization and technology have made companies far more efficient, and therefore reduced the prices of goods they produce. For this reason, the prices of goods has remained stable despite a weaker dollar. The Fed has seen the stabilization of the prices as a sign that they can indeed print more money to "stimulate" the economy without excess inflation.

That is about to change. As China and India become industrialized, U.S. companies are no longer able to source their products as cheaply because cost of doing business in those countries is increasing. Examples of this are everywhere, such as the wage growth in China, where wages have already risen 10% this year. This is causing the resurgence of American manufacturing, which has lead much of the job growth for the last few quarters - meaning that higher prices are on the way...