Why the government likes inflation
Are bonds really safer than stocks?
The worst time to buy bonds
The German hyperinflation of 1922 - 1923
The Hungarian hyperinflation of 1945 - 1946
Inflation in the US
The government is the largest debtor
Debtors love inflation because it means that they can repay the debt with less valuable dollars
The government also likes inflation because inflation creates hidden taxes
Bracket creep
Inflation pushes you into a higher tax bracket
Taxes on phantom capital gains
You buy $100,000 in stocks
Over ten years prices double
You sell your stocks for $200,000
You have a real gain of $0, but the government says you have a capital gain of $100,000
In general, short-term bonds (maturity of five years or less) provide greater safety of principal than stocks
But long-term bonds, like 30 year US Treasury bonds, are very volatile in price
But, over the long run, stocks can be said to be safer than bonds
- The biggest risk of investing solely in bonds is inflation risk
- Over the long run, bonds have a negative return after taxes and inflation
- Stocks have short-term risks, but long-term safety because of ability to resist inflation
Don't buy bonds during or after a war
For some reason wars scare investors out of stocks
But stocks have the best chance of surviving the inflation that always accompanies wars
The US had it's highest recorded inflation of 18 percent in 1946 - immediately after World War II
The US also had high inflation after World War I and the Vietnam War
Wars always bring inflation, but the losers in a war face hyperinflation
High Russian inflation after end of Cold War
Most famous modern case of hyperinflation
Monthly inflation averaged over 300 percent
Prices increase about 10 billion times over one year
Marks in circulation increased about 7 billion times
The link between inflation and printing of money is obvious
Hyperinflation ended when
A new currency gained a link to gold
An independent central bank was formed that refused to monetize the government's budget deficiets
More vicious than Germany's hyperinflation
Monthly inflation averaged over 19,000 percent