Chapter 12
Inflation - Coexisting and Even Profiting with Inflation

As we know, interest rates generally rise during periods of inflation inasmuch as the value of present money is considered greater than the value of future money. Since borrowers of present money will be repaying in future money, lenders will ask for higher than normal interest payments during inflationary periods to cover the losses of buying power anticipated in the future.

If you are a borrower during periods of inflation, try to secure loans that carry fixed and predictable rates of interest rather than loans whose interest charges are tied to rates of inflation, rising as prices rise. (When interest rates start to fall, you can then try to refinance fixed interest debt with new loans for which interest charges may be variable depending upon inflation trends.)

If you are a lender or income investor, invest in short-term debt instruments or in bond investments whose rates of return are variable, rising and falling with inflationary trends. Long-term bonds are likely to continue to pay interest even during periods of inflation but their prices are subject to decline as higher yielding bonds come on the market. Prices for gold, collector coins, jewelry, perhaps homes, are likely to rise during periods of high inflation. However, related markets are generally more suitable for investors who are familiar with such specialized investments than for the typical investor.

Periods of runaway inflation do often end, it appears, suddenly. If and when you are able to detect a reversal – interest rates spiking to a peak and then falling rapidly, the media writing consistently about the problems of inflation, a surge in the amount of investment schemes offering inflation protective investments such as raw or processed gold – take advantage of the opportunity to transfer your investments in short term debt instruments to investments in longer term debt, long term bonds. By so doing, you will be able to lock in high yields from such bonds which are also likely to advance in price over the years as interest rates follow rates of inflation downwards.

Treasury inflation protected securities (TIPS), represent fine investments that protect against the ravages of inflation, while offering the utmost in security, if not excitement...

Adjustable Rate Bonds – Pretty good but watch out for the joker in the deck...