How long can inflation continue? Where to invest now?



  • How long can inflation continue?
  • Where to invest now?
  • Nifty view
  • Opportunities

Hello everyone, we will explore the most critical topic today – how long this inflation may continue to rise, and also some good opportunities.

Last week on Friday, the US markets went down sharply as a report showed that U.S. consumers raised their expectations for future inflation. It offers another signal the Federal Reserve may have to continue aggressively hiking interest rates to temper stubbornly hot inflation. It raises the risk of a recession.

Root of the inflation problem

The key to finding the right answer to most questions lies in understanding the root cause of an issue. Because, if we assume that this inflation is due to lockdowns, it should have started to decline by now. If we think the root cause is Ukraine war, it should have started only after the war, but it had started to rise even before the pandemic, so war and pandemic are boosters, but noone of them is the root cause.

As mentioned in previous newsletter, a rise in money supply is a very strong reason to create inflation and all over the world, most of the big countries have been increasing money supply since the financial crisis of 2008 by giving stimulus to their economies. Giving stimulus means printing money, and that activity has shot up so high that there is no historical equivalent! A look at the chart below should clarify it –

US Money Supply M1 & M2


Both M1 and M2 have gone up, but M1 which consists mostly of cash and liquid assets has shot up sharply after 2020 (read pandemic). Such a spike is a sure recipe for disaster – in form of inflation. No other country has witnessed such a sharp spike, but since the dollar is the world’s reserve currency, it creates inflation globally.

You can find more details here – Inflation Super Cycle, where we had predicted in September 2021 that a massive financial risk is looming.

Note: One must understand that no government will take responsibility that their loose monetary policy is the cause of inflation. They always succeed in blaming it on other factors.

How long the inflation may continue to rise?

helicopterMoneyWhen the world is choke-full of helicopter money, what else can one expect other then inflation! This is the first time that world has seen such massive amounts of liquidity, and we do NOT have any historical precedent to judge how long the effect of it will continue. Countries are hiking interest rates which is not showing any effect on rising inflation. In 1970s the global inflation lasted for a decade and stock markets took a total of 25 years (see this interesting chart) to reach same level!!! This period of inflation came to be known as the Great Inflation.

The Great Inflation was blamed on oil prices, currency speculators, greedy businessmen, and avaricious union leaders. However, it is clear that monetary policies that financed massive budget deficits and were supported by political leaders were the cause. The seeds for this inflation were sown by US president Nixon when he came to power in 1969.

Causes of the Great Inflation

Upon his inauguration in 1969, Nixon inherited a recession from Lyndon Johnson, who had simultaneously spent generously on the Great Society and the Vietnam War.

Nixon ran budget deficits and supported Keynesian inflationary policies.


In 1971, Nixon took the world by surprise and overnight broke dollar’s link to gold, turning the American dollar into a fiat currency – it is known as the Nixon shock. It meant that now US can print as many dollars as it wants to fund its budget deficits.

President Nixon’s primary concern was not deficits or even inflation, he wanted to win his second term election. He feared another recession. He and others who were running for re-election wanted the economy to boom. The way to do that, Nixon reasoned, was to pressure the Fed to lower interest rates.

Nixon fired Fed chair William McChesney Martin and installed presidential counselor Arthur Burns as his successor in early 1970.

Although the Fed is supposed to focus solely on money creation policies that promote growth without excessive inflation, Burns was quickly taught the political facts of life. Nixon wanted cheap money. That meant low interest rates to promote growth in the short term and make the economy seem strong as voters went to cast their ballots.

Results of Cheap Money

Nixon put the pressure on Burns for cheap money. Burns and the Fed’s Open Market Committee, which decided on money creation policies, soon provided cheap money.

The key money creation number, M1, consists of total checking deposits, demand deposits, and traveler’s checks. It grew from $228 billion to $249 billion between December 1971 and December 1972 (9% rise).

As a matter of comparison, during 2020-21, M1 grew from about $4500 billion to over $16000 billion (355% jump!!!). See the US Money Supply chart shown earlier.

Adding to the money supply worked in the short term. Nixon carried 49 out of 50 states in the election. Democrats easily held Congress. Inflation was in the low single digits. However, the country paid the price in higher inflation once the election year festivities ended.

In the winters of 1972 and 1973, Burns began to worry about inflation. In 1973, inflation more than doubled to 8.8%. Later in the decade, it would go to 12%. By 1980, inflation was at 14%.

Was the United States about to become another, post-WWI Weimar Republic experiencing the brutal effects of crippling inflation?

The Great Inflation period would finally come to an end once later Fed chair Paul Volcker pursued a bold but painful contractionary money policy to control it.

Richard Nixon would be forced to resign from the presidency in August 1974, as a result of his proven connection to the scandal involving the break-in at the headquarters of the Democratic National Committee at the Watergate Office Building in Washington, D.C.

This mess was proof of what Milton Friedman wrote about in his book, Money Mischief: Episodes in Monetary History. Inflation is always “a monetary phenomenon.”

Impact of The Great Inflation on life

It took another Fed chair and a brutal policy of tight money and a recession—before inflation would return to low single digits.

Millions of Americans were suffering by the late 1970s and early 1980s, joblessness had crossed 10%.

Yet, few remember Fed chair Burns, who blamed others for the Great Inflation without mentioning the disastrous monetary expansion. Nixon didn’t even mention this central bank episode in his memoirs. Many people who remember this terrible era blame it on Arab countries and oil pricing.

Still, The Wall Street Journal, when reviewing this period in January 1986 wrote, “OPEC got all the credit for what the U.S. had mainly done to itself.”

What can end current inflation

Just like the Great Inflation was controlled by Volker, we again need contractionary policies this time. Most central banks are following it including US and India. US Fed has increased rates five times in 2022 but the inflation is still rising. It is on right track but there can be serious problems that can force it to abandon its strategy. To understand that, take the case of UK, where recently elected PM Liz Truss has made a series of policy blunders. On 22nd September the Bank of England had increased rate for the seventh time, then on the very next day Liz Truss announced a big tax cut, a loose monetary policy, in total contrast to the rate hike. The reason was that she was afraid of recession, as most politicians are. It created a crash in UK markets and its currency pound dropped to all time low. She is now on verge of losing power just within a month!

This highlights the point that will US (as well as other countries) be able to stick to its policy or it will pivot? Sticking to tight money policy is extremely painful to the economy – demand falls, unemployment rises and politicians fear losing power. On the other hand, loose money policy always makes people happy (in the short term) as it boosts demand, creates jobs, income levels rises, and politicians boast of creating economic growth. Excess of loose money leads to inflation.

If central banks stick to contractionary policies, inflation will be controlled in few years. But US, and even India and several other countries have general elections in mid 2024. If by that time it is not under control, the central banks will come under immense pressure to reverse their policies.

Compared to 1970s, the increase in money supply is now over 35 times higher!

During 1970s, the US Fed interest rates had peaked near 20%, in our case, the current fed rates are just 3.08%! May be we have a long way to go.

During 1970s, the US debt to GDP ratio (see chart below) was lowest around 35%, now it is 137%. More debt means more interest burden.

All facts indicate the current situation is many times worse than what it was in the 1970s.

US debt to GDP ratio


Where to invest now

Inflation is here to stay for quite a long time and the best opportunities to invest are those which benefit from inflation.

There are two good options – gold, and land. Both are proven hedge against inflation in the long term.

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