Financial Adviser Sees Peril In Inflation Weakening The Dollar - And Response

Tuesday, December 18, 2012 - by David Tulis

Inflation is a moral issue, not merely a technical one we should leave to statisticians and policy wonks who talk about exports or the global economy. 

Inflation is an ethical matter because it takes from you, the intelligent and thinking person, as well as from the those who suffer poverty of knowledge as well as of purse. It deprives you of value lawlessly. The public knows what to do during inflation; generally, it buys goods now “before prices goes up.” The public, blessed with rationality, understands rising prices, and it acts to saving money. 

Price is the signal. When people act on the inflation signal, they are fleeing a monetary unit. They become monetary actors, whether they realize it or not. They are escaping a trap set for them by wealthy, important and connected individuals, Democrats and Republicans, who maintain a financial monopoly over the U.S. currency and run a secret tax — inflation. 

In downtown Chattanooga, in a corner first-floor office brightly lit from outside, sits Pat Farnsley, a chartered financial analyst with HHM Wealth Advisors. A longtime former banker, he is sought by wealthy investors for advice on how to increase the value of their portfolios. Or, should I say in today’s economy, how to avoid losses of portfolios that face an unfree market and actions of national economy players such as the Federal Reserve System, responsible for the sorry-sorry green rectangle. 

Since 2008, the Fed has been on a credit-creation spree, inflating the money supply with the highly touted goal of reducing unemployment and increasing lending in Chattanooga and every other city. Without inflation, it fears, the U.S. credit system (i.e., the economy) will collapse into a heap. 

Reducing your risk

Mr. Farnsley’s job is to reduce risks for his investing clients and overcome the inflation danger against assets denominated in dollars. 

“For our business the first theme is to control the risk for the client ***,” he says. “You’re going to have slightly different situations for different people, but very similar type of process you go through. But then when you talk about how to manage their money you have to talk about how to manage risk.” HHM manages risk, but can’t guarantee return, he says. A defensive adviser avoids getting a client in a bad position in which “they are extremely uncomfortable and didn’t plan to be there.”

How big a risk is inflation?

“Traditionally, it’s very dangerous. It’s one of the key risks you have to manage for, because it destroys purchasing power. And so you don’t think much about 3 or 4 percent inflation, but now with retirees living in that 20 years plus from the time they retire and start drawing down their earnings, a dollar generated today and a dollar generated 20 years from now doesn’t have the same purchasing power at all, even with a 3 or 4 percent annualized inflation. And if you have an inflation much higher than that, which we’ve seen in the past, it really starts to erode that purchasing power.” 

But Mr. Farnsley seems resigned to inflation, which he said officially is 2 1/2 percent. “Right now, the inflation is very benign, especially if you look at the published consumer price index and other things. I would say the construction of the CPI doesn’t capture the inflation that we see when we go to the grocery store and the gasoline station.” In other words, he goes on, inflation is “much higher” than the official data suggests. 

A spiking money supply forces investors to be defensive, Mr. Farnsley says. Conservative assets give a return that “only cover the cost of inflation, that you’re at least treading water,” Mr. Farnsley says. He favors investing in fixed-income instruments — IOUs, corporate paper  — that earn more than the rate of inflation. Treasury bills may be super safe in preserving principal, he says, but have a 0.25 percent return (pretty poor). A 10-year treasury note is increasingly vulnerable, too, to interest rate changes that “dramatically” reduce the value of that note. “We think that’s a risk you’re not being compensated for,” he says. 

Local economy investing

I mention in our interview the Michael Shuman book I am reviewing, "Local Dollar, Local Sense," about the beauties of local economy and investing in one’s hometown. It says the average rate of return in the U.S. economy is 2.6 percent, and that investing in local economy could be 5 percent annually. 

Mr. Farnsley says he gets few inquiries such as mine, about investing in local businesses. He says that the economic and cultural picture of Chattanooga are favorable to local investment. Growth in the area is “probably a little bit higher than nationally.” We are doing relatively well with capital investments in the area. “It’s really helped our side of the economy.” 

I ask if VW shares are a good investment, but HHM is “not big on automobiles” as carmakers are capital intensive and traditionally have a low rate of return. He mentioned CapitalMark bank as a company an investor might want to invest in. Cornerstone Bank, a locally owned company, is seeking to raise $15 million by offering 600,000 shares, according to a June prospectus. For some HHM clients that offering his attractive, he says. 

He mentions the attraction of the Chattanooga area to U.S. retirees, the area’s low cost of living and housing, its favorable tax picture. But are these part of the local investment picture? 

“Absolutely. If you’re wanting to invest money here, or you want to create a small business, or you’re looking to put down roots here, then yes, you are community that offers a lot to people who are moving in, or potential new residents.” A revived downtown is part of the set of impressions that matters to people looking to build a business here, Mr. Farnsley says. 

How likely is Uncle to openly default?

I ask about a default by Uncle on the national government’s debt. Mr. Farnsley says it won’t happen. 

“We don’t see a default where you repudiate your debt and you can’t pay our debt because your debt is payable in U.S. dollars and we can also print U.S. dollars. So we can print as many as we want and that’s what we’re doing right now. Our printing presses are running full speed, or maybe not, we’ll see, they may build a few more. But what happens of course is that you devalue the dollar as you print more of them. So you don’t have to repudiate or default in that situation because of these other ways to lessen your debt load.” 

“So the federal government,” I reply, “which doesn’t want to default on paper, will default in practice by inflation? Are you thinking inflation is going to accelerate in the next 10 years to 30 percent or something like that?” 

“I have know idea what it could do,” Mr. Farnsley says. “It generally occurs when you have a large amount of your currency being printed. Inflation, in our opinion, is a monetary phenomenon, so it occurs because of that.”

-- David Tulis writes for Nooganomics.com, which covers local economy and free markets in Chattanooga and beyond.


* * * 

In 1964 the U.S. government debased our coinage by removing the 90 percent silver content and replacing it with a cupronickel composition.  In 1971 Richard Nixon took the U.S. dollar off the gold standard essentially ending the Bretton Woods system of monetary management and making the U.S. dollar a fiat currency.  In the early 1980's the mint stopped using copper in the penny as the copper was worth about 3 fiat cents; that is 100 pennies were worth about three paper dollars.   

We have recently experienced QE1, QE2, QE3, and now QE4 which are called "Quantitative Easing" but in reality the U.S. Treasury is simply printing more money.  Add freshly printed fiat to a $17+ trillion U.S. debt on a regular basis and what you will eventually have are worthless dollars.   

In the entire history of mankind no fiat currency has ever survived so whether you have billions of dollars or just a few dollars when our currency crashes it won't really matter. 

Ike Conn



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