War Causes Inflation ?

Vincent · Member

James Galbraith, a professor of economics at the University of Texas, points out that war causes inflation, and we are in a war in Iraq. Whatever your thoughts about the war, this seems true, and not likely to end on June 30th. The evidence of inflation's return is all around us: higher prices for gasoline, housing, lumber - heck, even my CPA raised his price this year.

So my thinking today is: plan for inflation's impact on investments. Don't buy long term bonds or CDs, avoid companies that lend money in favor of those that borrow it. Loans will be easy to pay off with tomorrow's dollarettes.

TABTrader · Member

I've been thinking more about the prospects for inflation versus deflation, and I have to think inflation is what's coming. The Bush administration is running up a huge national debt. Even with interest rates as low as they are now, the interest payments are a large part of the federal budget. When rates rise, as they surely will some day, the budget will be totally out of whack. There is only so much the feds can borrow before creditors will demand higher and higher rates. Congress doesn't dare hike taxes a lot or cut benefits a lot, nor do they dare default on the debt. The only way out is for a nice rip roaring inflation to reduce the debt (in effect).

So what makes sense to invest in under this scenario? It's much like the 1970s, after Johnson's guns and butter binge. One thing is the Treasury's inflation protected bonds, which pay a rate that goes up with inflation. But what stocks? The Wall St. Journal recently (12/1) ran a piece by Ken Brown with some sector ideas:

Mining and energy companies
Auto makers
Electrical equipment manufacturers
Software makers with foreign competition
Cable television companies and manufacturers
Sectors to avoid:
Banks
Service companies