Inflation

Since 2008, the Federal Reserve has tripled the size of the assets that they own.  You hear that in the media, but what does that actually mean?

Buying and selling financial assets is the way that the Federal Reserve controls the amount of money that is in circulation and therefore, interest rates.  Over the last several years as they have fought a valiant fight against deflation, the Federal Reserve has purchased assets because one of its major tasks is to be the buyer of last resort.

In a financial crisis, financial assets plummet in value as everyone seems to head for the exits simultaneously, which increases the panic as everyone tries to get cash.  Historically there has to be a “Buyer of Last Resort” that will step in and acquire those assets providing liquidity to the market in order to break the downward spiral.  In the USA, that is the key role of the Fed, and they have played it beautifully.

However, being the Buyer of Last Resort since 2008 they have tripled their balance sheet of financial assets.  Additionally, to discourage saving and encourage investments they have dropped interest rates to quite unusually low levels.

By purchasing assets, the Fed has flooded the market with money thereby potentially setting the stage for inflation.  In our mind there is no doubt that inflation is coming.  The questions are when and how much.

Our guess is that if there is a change of administration in November, the economy will begin to recover as some of the unusual $7 Tn on the sidelines begins to move back into the economy.  Under that scenario, we will probably see inflation in 2014 and beyond.  While we are not smart enough to be able to predict the amount of inflation, unless the Fed is especially successful in removing the excess liquidity without causing a recession, the inflation will be significant.

In inflation, hard assets thrive.  In our analysis land, the source of all wealth, will benefit the most.  Buying now means that you will be ahead of this curve whenever inflation begins to move up.

We believe that those investors who buy good tracts of land today will look exceptionally brilliant in five years.  Let us help you.  We enjoy making our clients look brilliant.