The Beat Inflation Strategy, by Roger Klein and William Wolman, New York: Simon & Schuster, 1975, 192 pp., $7.95 (hb).
The people who lose in an inflation are the people who follow Poor Richard's advice to work hard, save their money, pay bills promptly, and avoid debt. To become an inflation winner, say the authors, you must break these sturdy American habits and follow the guidelines of their Beat Inflation Strategy. If you follow Poor Richard's advice, you too will be poor.
Klein and Wolman base their Beat Inflation Strategy on two obvious but seldom analyzed propositions: (1) Inflation is not a continually accelerating phenomenon, but waxes and wanes in an inflationary cycle; and (2) the optimal investment strategy will depend on where you are on this inflationary cycle.
Inflation is a fact of economic life which, once understood, simply changes the way the game is played. It does not, according to the authors, destroy your chances to enjoy the good things in life. "The basic finding of economic research spanning many centuries and many countries is that there is no fixed relationship between the rate of inflation and the growth in real income." (p. 50).
Note that they are talking about everyone's real income, not just those who are crafty speculators. Inflation creates covert wealth transfers, described by the authors, which may snare the unwary, but the normal wealth-producing channels will still be open. They even suggest that the market is responding to ease the problems of coping with inflation through indexing of wage contracts, Social Security benefits, and variable rate debt securities.
This benign view of the impact of inflation is, they acknowledge, at the opposite pole from that held by the gold bugs, the silver bugs, the Swiss franc bugs, and others of the economic underground who see inflation as a terminal illness whose ultimate (and almost inevitable) outcome is a breakdown of economic activity in depression, anarchy, or worse.
Unlike many of the "underground" investment advisors, some of whom (e.g., Harry Browne) are better known than conventional analysts, Roger Klein and William Wolman are definitely "above ground" members of the economic analysis establishment. Klein is Director of Economic Research for the Securities Industry Association, whose members include most brokerage houses and investment companies. Wolman, a frequent contributor to The New York Times and The Wall Street Journal, is a senior editor of Business Week. Both were formerly associated with First National City Bank and Argus Research Corporation.
Disdainful of the standard gold bug advice to buy and hold gold, Klein and Wolman argue that gold, like any other commodity, will perform well in the accelerating phase of an inflation. On the other hand, in a subsequent, decelerating phase, the buy-and-hold-gold strategy will be disastrous, a prediction which does in fact fit the events of this past winter.
For every investment there is a season; a time to gather in gold and a time to sell it out, a time to buy bonds and a time to switch to common stock. The fits and starts of the inflationary cycle affect the price of every investment. When inflation is rising, gold, commodities, or real estate are part of the Beat Inflation portfolio. When inflation decelerates, stocks and bonds come into their own.
Investment strategy is keyed to one variable: inflation. When money growth starts up, and the "monetary illusion" is still working, employment and output rise. In this part of the inflation cycle, the strategy dictates common stocks. As the illusion of the inflated money begins to wear off, commodities come into their own. When the Fed puts the brakes on, the Beat Inflation Strategy calls for liquidity. Stocks and commodities are dangerous then and the investor can afford to sit out the market in high interest, short term paper. And so it goes.
The Beat Inflation Strategy seems beguilingly simple. It is, further, based on assumptions of political veniality and market response comfortable to libertarian sensibilities. And, more importantly, it offers a more or less testable hypothesis which seems to have been validated by the events of the months since the book's publication.
It all sounds so simple. "With good reason," reply the authors, "it is relatively simple."
Davis Keeler is director of the Law and Liberty Project at the Institute for Humane Studies. Formerly the editor of the Research Review economic newsletter, Keeler writes the bimonthly Money column in REASON.