Common knowledge is that inflation is a bad thing.  It lowers your buying power, which thus makes things more expensive to acquire.  For example, in Zimbabwe (the country with the highest rate of inflation in the world), CNN reported last year that the cost of everything increased dramatically: 

In February, the price of a loaf of bread in the country was less than 200,000 Zimbabwe dollars. On Monday, that same loaf of bread cost 1.6 trillion Zimbabwe dollars.

But how does inflation impact the stuff that you’ve already acquired?  Let’s look at the hyper-inflation in Israel as an example: Israel faced a tremendous amount of inflation from the late 1970s to the mid 1980s.  According to the Israeli Ministry of Foreign Affairs: 

Inflation accelerated in the 1970s, rising steadily from 13% in 1971 to 111% in 1979. Some of this higher inflation was "imported" from the world economy, instigated by extreme oil price rises in 1973 and 1979. This introduced a new phenomenon in world economy, which came to be known as "stagflation" - an unprecedented combination of rising unemployment and economic stagnation (always accompanied in the past by deflation) now coupled with inflation. In Israel, a post-1973 full-employment government policy postponed this depressing development until the 1980s.

But inflation kept gathering pace. From 133% in 1980, it leaped to 191% in 1983 and then to 445% in 1984, threatening to become a four-digit figure within a year or two.

Back then, there was a system in Israel for fixed-interest mortgages (which has since been eliminated).  The exploding rates of inflation quickly eroded the financial value of these loans, and people ended up paying (the equivalent) of pennies on the dollar for their mortgages.

Now, this is a pretty extreme example of maybe the only positive side effect of inflation.  But consider this likely scenario (which we have discussed in previous articles):  inflation will become a very large issue in a relatively short amount of time.  This can be attributed, in part, to the economic stimulus packages of both the previous Bush Administration, and the current Obama Administration.  Whatever your political bent, there can be no denying that churning money out of a printing press leads to inflation.  The typical cure for inflation is to raise interest rates. 

This, then, becomes a matter of timing:  how to take advantage of the current situation (lowest interest rates since 1971), and to position yourself for the probable future situation (galloping inflation).  The important thing is to continue educating yourself, have your strategic goal in mind, and be prepared to make a swift decision before the opportunity passes you by.

Have you lived through periods of hyper-inflation?  Do you think we're heading in that direction?  Tell us what you think. 

Questions?  Comments?  Contact Us!

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Ofer Goldenberg is the Owner and CEO of Capital Growth Investment.