The Hyperinflation Scam

There is a lot of skepticism about the plans of the Federal Government and the FED to defrost the credit markets through its many stimulus plans. One of the biggest fears for some investors is that pumping too much money in the system would lead to hyperinflation and a complete devaluation of the US dollar against hard assets such as gold, oil, land and others, which would eventually lead to everyone living in caves hunting for food. There are even several ETF tracking Gold (GLD, IAU) and Crude Oil (USO, OIL).

I disagree with those fears. First of all I do expect average inflation of 3% annually for the next 3-4 decades to continue. The best way to hedge against that is to buy common stocks, which are not just pieces of paper, but rights to ownership of real businesses which would be able to pass any price increases on to their consumers. At the same time these businesses would share a portion of their profits with shareholders, by paying out dividends. Over the past 80 years dividend growth in the Dow Jones Industrials Index has more than compensated for the eroding forces of inflation. Dividend Growth for the 1920-2005 period was 4.9%, which was almost 2% higher than the 3% average inflation rate. The best ETF to track Dow Jones Index is Dow Jones Diamonds (DIA).

Over the past few decades the wealth of US households has been primarily comprised of Real Estate, stocks and fixed income. The real estate has been the primary residence of families; stock ownership was through owning mutual funds or owning stocks directly, while the fixed income portion consisted of deposits, bonds and cash on hand. As the value of stocks and real estate rose steadily, consumers felt richer and spent more, which in turn stimulated the economy. The past 2 years however have brought low stock prices, and declining real estate values.

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