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Brown Spots on Bananas

Posted: February 6, 2013

Author: Jonathan Hoenig

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Starting in the late 1960s, three different American Presidents promised to curb inflation even as they simultaneously pursued policies that fanned it.

Nixon vowed to cut inflation in the late 1960s when it was running around 5%.  Instead of slashing government spending, he instituted price controls and initiated the disastrous “War on Drugs”.



President Gerald Ford pledged to curtail inflation in the early 1970s, which by that time had risen to 8%.  Yet Ford ran a budget deficit every year he was in office.



By the time President Carter promised to confront inflation, it had spiked over 11%.  His response was to increase government spending on a myriad of entitlement programs, adding $200 billion to the national debt.



Guess whom he blamed?



Inflation isn’t caused by greedy businessmen or private individuals, but by the government, which artificially expands the money supply to support deficit spending.  As economist Ludwig von Mises explains, “Inflation is not an act of God or a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.”

Our current political leaders contend that inflation remains low and well controlled, exactly what officials were saying in the late 1960s when inflation was near 3%.  Within a decade, the purchasing power of the dollar had fallen by 50%.

“The thing about inflation is that it accelerates,” notes historian Amity Shlaes.  “The greater the denial before, the faster the inflation accelerates after.”  Similarly, central banker Henry Wallach was once quoted as saying that “Inflation is like a banana.  Once you see one brown spot, it’s too late.”

The national debt has grown roughly 60% under President Obama, meaning that every man, woman, and child in the United States owes more than $52,000 as his or her share.  That’s not merely a brown spot, but an economic melanoma.

In 2000, I predicted bonds would outperform stocks for 3 to 4 years:

Now I’m on the opposite side of that trade, positioned against bonds and anticipating higher inflation and interest rates.  For our Fund, the lesson from history is clear: brown spots beget rotten bananas.  We’re investing accordingly.


Related merchandise: “Public Enemy #1”


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