What to do about the coming inflation (if it comes)?

[Gone4Good]

Another thought expanding on these comments . . .

Inflation is said to be "too many dollars chasing too few goods." "Too many dollars" obviously refers to accommodative monetary policy whereas "too few goods" means an economy's ability to produce products and services . . . it's "supply side". As long as the supply side grows in proportion to the monetary base, there is no inflation.

What has happened over the past few decades is that places like China and India have unshackled the productive capacity of their economies. But instead of turning that capacity inward in an attempt to meet, and stimulate, domestic demand, they've turned it outward to meet world demand. This has had an enormously deflationary effect on global goods and services. And because central banks focus on the price for goods and services, they've been able to keep monetary growth higher than it otherwise would be.

But something happened on the way to Nirvana. While the global supply of goods helped to prevent normal price inflation, the excess liquidity seems to be causing asset price inflation. Central banks never considered asset bubbles to be within their purview, but that thinking is starting to change in the wake of two giant bubbles in the last decade.

So this period may be somewhat different from either the 30's or the 70's. Instead of being faced with a choice between consumer price inflation or consumer price deflation. The choice going forward may be between consumer price deflation and asset price inflation.

 

[Meadbh]

@Meadbh: sorry for missing orientation, but what do "Au, Ag, RRBs" stand for?

Au = Gold
Ag = Silver
For reference, see the Periodic Table of the Elements:
http://go.hrw.com/resources/go_sc/periodic/SSHK1PER.PDF

RRBs = Real Return Bonds
Real Return Bonds
(I live in Canuckistan).

 

[samclem]

But something happened on the way to Nirvana. While the global supply of goods helped to prevent normal price inflation, the excess liquidity seems to be causing asset price inflation. . .

So this period may be somewhat different from either the 30's or the 70's. Instead of being faced with a choice between consumer price inflation or consumer price deflation. The choice going forward may be between consumer price deflation and asset price inflation.

An interesting observation. At first glance, I don't think I'm as much bothered by asset price inflation. My holdings get artificially inflated, if I rebalance now and again and I sell high (the most inflated categories) and buy low (the lagging categories) maybe I even benefit over the long haul. But, with consumer price inflation, I'm always on the buying side, so higher prices always hurt.

In fact, as a holder of assets, if asset inflation over the long term matches consumer price inflation, I'll be fine.

NONE of the pre-conditions that caused stagflation in the 70's are present today.

Mostly I agree, but I don't think we need a repeat of the '70s to have a repeat of high inflation. My impression is that historically (around the world) most inflation has been caused by governments expanding the supply of currency well beyond the ability of the supply side to produce gods and services of commensurate value. I see the same factors shaping up now--a government eager to pump more money into the economy with another "stimulus," (what will it take to finally discredit Keynes?). With a huge debt to pay in the coming decades, there will be a lot of incentive to keep the presses going. Paying back the Chinese and others with deflated currency may look like the least-bad solution as our fiscal woes mount.

 

[Gumby]

This is one of the best discussions we've had on here recently. Kudos to everyone who is participating, with a special shout out to smjsl for jumping right into the fray with an excellent first post.

 

[REWahoo]

My impression is that historically (around the world) most inflation has been caused by governments expanding the supply of currency well beyond the ability of the supply side to produce gods and services of commensurate value.

An interesting theological twist to economic theory. Might have some real merit.

 

[samclem]

An interesting theological twist to economic theory. Might have some real merit.

Unintended, but I'm going to have to ride it all the way now. I wonder if an expanded M2 will lead to deity inflation?

On second thought, I'll let it go now.

 

[Bestwifeever]

This is one of the best discussions we've had on here recently. Kudos to everyone who is participating, with a special shout out to smjsl for jumping right into the fray with an excellent first post.

I was just thinking that, Gumby. And I was also thinking, dang but these people are all so smart and have such good underlying points to make, wherever they stand on how to deal with potential inflation. This board is so educational!

 

[charlie]

I loaded up on CDIPs about 3 years ago. These are inflation linked
corporates (and one big CD) that pay year-over year CPI plus 2-4%.
I was patting myself on the back until CPI went negative. These
are intermediate term notes maturing in the next 4-6 years. Even
though they are suckey now, I think the sun will shine again by 2011.

I also like Templeton Global Income (GIM). It is a fund that invests
in international soverign debt. It pays a monthly dividend, currently
about 5.4% annual, with a big December bonus normally. This fund
has beaten the c**p out of Vanguard's Wellington the past 20 years
and I like and own Wellington as well. Don't bet the ranch, however.

I have been raising my stake in International Explorer. This
fund invests in small cap international stocks. Again, don't bet the
ranch.

Finally, I AM betting the ranch (in my IRA) on Wellesley Income.

All the above are in my IRA.

My after tax money is in Managed Payout Growth and Distribution, with distributions reinvested until the return of capital component settles down. This fund is the most diversified of all of Vanguard's balanced funds. It is a 70/30 stock to equity with 30% of the equity being international. Included in the 70% equity is 5% REIT. The bond component includes some TIPS. This fund is slightly ahead of Wellington
YTD.

Keep in mind that I am 75 and investing for inflation "protected" income
and capital preservation. My wife starts RMD in 2011 and I am thinking
about converting her IRA to an Immediate Annuity at that time if interest
rates are favorable.

Cheers,

charlie

 

[MichaelB]

Another voice here not convinced inflation is the threat we should fear the most. Just a couple of random thoughts:

High, chronic inflation is difficult without wage inflation, and in the US real wages declined over a decade that saw immense credit growth. The recent increase in real wages was via deflating CPI, not wage increase.

Net credit is declining even as the Fed floods the world with US$.

Consumer credit capability is impaired and will not improve as long as so many homeowners (more than 15%?) have outstanding mortgages that exceed total market values for their homes.

Between 2003-2007 we saw 3X increases in commodity prices, 2X increases in residential housing and an breathtaking increase in consumer credit, yet inflation averaged around 3%.

We may see something new – continued deflationary pressures combined with rising tax rates.

 

[Gone4Good]

Mostly I agree, but I don't think we need a repeat of the '70s to have a repeat of high inflation. My impression is that historically (around the world) most inflation has been caused by governments expanding the supply of currency well beyond the ability of the supply side to produce goods and services of commensurate value.

True. But you do have to assume a bunch of stuff that hasn't happened yet. Chiefly that the Fed will keep printing money even after supply & demand comes back in to balance. While you cite some reasons they may, there are also plenty of reasons that they won't. I happen to think economists today know a lot more about monetary policy than they did in the 70's. I wouldn't count on them making the same mistakes.

I take some comfort in the hawkish statements of some Fed governors recently; indicating that interest rates may need to move upward as aggressively as they've moved downward and that they may need to tighten monetary policy even when unemployment is high.

We won't know for several years, of course. But if I had to place a bet today, I would put my money with the majority of mainstream economists who are forecasting benign inflation and not with the gaggle of internet and TV commentators forecasting hyper inflation.

 

[antmary]

Hi Y'All
It's been awhile since I visited...here's the story:

We are finishing up building a small 3/2 house on 10 acres with a good well, ditch water for irrigation, and close to a small town. We have been planning this for years (not tin-foil hat thinking, either, but diversifying in as many areas as possible). We built it ourselves, and paid as we went.

Re investments:
non-taxable (Roth IRAs) - 35% TIPS and Intermediate Treasuries all through Vanguard.
Taxable - 37% stocks (Vanguard) 60/40 TSM/FTSE All World ex US
Gold - 5%
Cash (CD's) 23%

We are seriously think about re-balancing vis a vis Harry Browne's Permanent Portfolio:
25% Cash in Treasury Money Market fund
25% Stocks - 60/40 US/International
25% Bonds (US Treasury)
25% Gold - coins
When one sector tanks, then another will hold up the boat.

We love this country, and plan to stay.
antmary

 

[ejman]

True. But you do have to assume a bunch of stuff that hasn't happened yet. Chiefly that the Fed will keep printing money even after supply & demand comes back in to balance. While you cite some reasons they may, there are also plenty of reasons that they won't. I happen to think economists today know a lot more about monetary policy than they did in the 70's. I wouldn't count on them making the same mistakes.

I take some comfort in the hawkish statements of some Fed governors recently; indicating that interest rates may need to move upward as aggressively as they've moved downward and that they may need to tighten monetary policy even when unemployment is high.

We won't know for several years, of course. But if I had to place a bet today, I would put my money with the majority of mainstream economists who are forecasting benign inflation and not with the gaggle of internet and TV commentators forecasting hyper inflation.

It would certainly appear that the long term bond markets are in agreement with your assessment. If there was one lesson from the 70's is the pervasive destructiveness of high inflation. Paul Volker showed that this could be controlled (albeit with substantial short term pain). I see no reason the same approach wouldn't work again if needed particularly since a similar minded economic team (heck even Paul is hanging around in there) seems to be in charge.

 

[smjsl]

@FIREdreamer: PIMCO's Commodity Real Return Fund for fighting inflation sounds interesting but active management scares me (although I plan to post on that subject separately)

@Meadbh: Thanks for the explanations. It's been a while since I had to take chemistry Have you considered I-bonds instead of or in addition to RRBs? Or are you ineligible for some reason for I-bonds or are there RRB advantages (e.g. I would be wondering how I-bonds are taxed with dual citizenship)?

@samclem: Thank you for interesting article. Some thoughts on it:
- I did not quite get why backwardation is considered as a source of extra income, while contango is not mentioned at all. I would expect contango during high inflation times but maybe they are implying that backwardation is normal in not-so-high inflation environment? Did not seem convincing.
- Interesting points on REITs (both yours and article's) - I guess it needs to be moved down in the list.
- I agree with you that stocks have done well in low-inflation environment. However, I am more concerned about high inflation environment (again, even if not now, maybe in 10-20 years for some new reasons). Article points out stocks on average outperforming inflation in the past but with major volatility. And, well, that's the past... (separate post might be coming on this subject)
- Regarding TIPS, there is nothing new (they did mention how taxes may reduce the earnings)
- Article says how treasuries had "5.5% annual return, edging out inflation at 4.1%. That's before taxes." Well, that means they will lose on after-tax basis.
- I keep coming back to why are CDs not considered in such an article? Would not they be better than treasuries or should they not at least be compared? In the past they have seemed to provide higher yields (from my own observations at least)

One more general comment on how I currently plan to approach retirement. What would be ideal for me is to have a guaranteed match for after-tax inflation, not an "average" match via stocks/reits/commodities/other highly variable vehicles. If I can accumulate enough $$ for say 60 (years) x[minimal survival level] (e.g. 1.2M for 20k min expenses), then I would use such inflation protection and would not have to ever worry about deflation, recession, boom or inflation (i.e. all 4 "seasons" by Harry Browne). Inflation would really be the only one that would need protection under such plan. Anything over the minimal-survival level would go into stocks and other "gravy". So, I think I might be stuck with CD/SPIA/I-bond/Treasury kind of approaches for this core sum.

As samclem observed, perhaps it's a form of high-cost insurance.

P.S. Appreciate the shout outs!

 

[traineeinvestor]

Inflation is a major issue for retirees looking at more than a short term horizon. Even 2% pa inflation can kill a retirement plan which does not address this issue given enough time. Historically, just about all asset classes have a patchy history of matching or beating inflation (including the much touted gold which underperformed inflation for a quarter of a century following its previous high).

Short term high levels of inflation/rising inflation also require different strategies than longer periods of low inflation - it seems to me that strategies that work well in one scenario may not work as well in others.

Like OP I am looking at 40-50 years in retirement and have heavily weighted my investments to (i) real estate and (ii) equities - in effect assets that have at least the potential to grow over time. I have to recognise that if inflation starts rising and interest rates follow, then the value of these assets may decline in the short term. For this reason it is (IMHO) important to have enough money to cover at least two years expenses in cash or short term funds.

I have relatively little in bonds and relatively little in commodities. There are no TIPS type instruments available here and overseas investments usually raise tax issues that outweigh the benefits of the investment .

If I was either living in the US or had sufficient knowledge of that market, right now I would be looking for direct investment in real estate (depressed prices) and locking in 30 year mortgages at today's current low rates expecting the rise in the value of the asset and its rent to combine with the fall in the real value of the mortgage to protect myself against long term inflation. (I only wish I could get fixed rates in Hong Kong .) Needless to say, I would adjust gearing to ensure a positive cash flow.

I'm looking into timber and farm land, but not having much success in finding something suitable.

 

[samclem]

Apologies in advance for another long-ish post.

Thanks to all who have chimed in so far. The discussion has been very useful for me.
Here's what I've learned so far:
1) There's no magic bullet out there--no investment that will keep up with inflation regardless of its genesis and effects and which will also produce market-matching returns if inflation remains at bay. Buying protection from inflation is like purchasing insurance, and you have to give up something else to get it. I feel after this discussion that we' haven't missed any big factors or possible solutions--that's valuable, thanks.
2) The belief that high inflation is coming is not unanimous. There are smart people here making informed arguments supporting the idea that the big inflation monster might not come at all. This has somewhat reduced my willingness to pay for a lot of inflation protection. And, for those (like me) who have less faith in the Fed's ability and willingness to get inflation in check once it starts, the existence of these alternative viewpoints explains why assets that offer some protection from inflation haven't yet been bid up and out of sight. But, that might not last forever--so if you need the "insurance," know that the premiums could escalate quickly.
And . . . audrey1, YearstoGo, FIREdreamer, MichaelB, ejman: I want you guys to be right. Inflation is a bad beasty, especially for us ants (the grasshoppers are less affected). If you are wrong, I hope I (and FinanceDude) are big enough not to say "I told you so."

What I'm going to do: Option C, but that's because of my particular situation. I have a COLA'd pension that covers our basic needs. In addition, 10% of our portfolio is I-Bonds I happened to buy when they were a great deal (approx 3.5% real return. I wish I could buy more at that rate. We won't see those days again unless a raging bull stock market returns and inflation fears are very low). But, I am going to buy a small bit of additional energy exposure (via VGENX)-just 2% of our total portfolio. Without this, only approx 8% of our equities were in the energy sector, with this addition we'll go to approx 11%. The S&P 500 stands at 12% in energy stocks. So, I can tell myself I'm NOT making a sector bet, I'm just taking active steps to bring us in line with the broad US equities market. (If the bet goes right, I'll be crowing from the rooftops about my genius. Maybe start a newsletter).

Other thoughts:
- I reconfirmed that the M* X-ray tool and their other resources are very handy for seeing what is in your portfolio and making informed decisions. A 14 day trial of the membership is free. If you want more time, a one-month membership is just $18.95. Yearly rates also available, but I don't look at/mess with my allocation enough to justify the expense. The search function on their site, though, is terrible.

- freebird5825: It's interesting how closely our situation parallels yours. COLA'd pension, some I-bonds, a small bit of Vanguard Energy (VGENX), some REITs (in VGSIX--now down to 4% of total portfolio).

- REITs: I think I've convinced myself that they aren't as useful in my portfolio as I'd previously believed. I put them in my portfolio long ago for inflation protection ("hard assets" undergirded them, etc) and because they had low corellation with other asset classes. Now, I'm not so sure. As we discussed here, they are really more tied to the business cycle (can owners of commercial real estate demand higher rents?), not to property values. And, REIT prices are increasingly correlated with other stocks. Per M*'s Andrew Gogerty (link may require subscription) in regards to the previous assessment that REITs offered valuable diversification to an equity-heavy portfolio:

. . . But recent Morningstar research has rained on that parade. The correlation between U.S. REITs and U.S. large-cap stocks has been increasing at a steady pace since the beginning of the liquidity boom in mid-to-late 2000. The real strike, though, is that the category's performance is becoming increasingly more-correlated with small-value stocks, indicating that the early-decade diversification benefits may have really only been from avoiding the tech and dot com boom-and-bust cycle. With the higher cost of debt likely remaining for some time as lenders remain concerned about lower occupancy and rental rates, it's tough to pound the table for the equity returns here in the short to midterm. We're no longer sure that the risk of holding U.S. REITs is outweighed by the potential return or diversification benefits. As such, we think real estate funds--at a maximum--should be no more than 5% of a portfolio.

I don't think this reconsideration of REITs is just because they've done so poorly in the last 2 years. They just don't seem to behave in a significantly different way from holdings I've already got. traineeinvestor: I wouldn't mind finding a cheap way to get exposure to residential properties-- the actual buying owning/renting, and re-seling of them. I do think they offer inflation protection, and agree that their prices are presently depressed. This would obviously be a long-term "bet." (I don't want to be a landlord or fix-and-seller).

-charlie: CDIPs might be a good investment for some folks. I'd be worried about the abilty of some corps to make the payments in a bout of inflation big enough to upset the financial markets and business cycle. An investor should demand healthy compensation for taking that risk, IMO.

- smjsl: Regarding TIPS and taxes: I'm assumng you can't make room in tax-favored accounts (401K, IRA, etc)? One other small thing--don't entirely forget I-Bonds. Maybe someday they will offer attractive real returns again, and you'd probably want to hop aboard then. No taxes until you sell, and government backing. And yes, I think CD's could offer some inflation protection, assuming banks have to at least match inflation to get any takers. You'd want to keep the duration short (which reduces yield) so you don't get caught with 5 year 3% CDs when inflation has shot up to 8%. Bonus: The bank might send you a calendar, a toaster, or an oven mitt!

Again, sorry for the long post.

 

[Meadbh]

@Meadbh: Thanks for the explanations. It's been a while since I had to take chemistry Have you considered I-bonds instead of or in addition to RRBs? Or are you ineligible for some reason for I-bonds or are there RRB advantages (e.g. I would be wondering how I-bonds are taxed with dual citizenship)?

Only US citizens can purchase I bonds. I'm not a US citizen.
https://www.treasurydirect.gov/RS/BPDLogin?application=rscreate&page=rscreate

 

[audreyh1]

Apologies in advance for another long-ish post.

No problem about the long post. You started a very valuable thread.

I don't worry overmuch if some asset classes become more closely correlated for some periods of time. IMO this "correlation drift" is not necessarily in a permanent direction. IMO we go through periods where some asset classes are more closely correlated and then other periods where they diverge again. So over the very long run, you can still benefit from the diversification.

I hold 5% of my equity holdings in REITs. I have rebalanced many times over the last 10 years, because the REIT position seems to be much more volatile compared to my other equity asset classes. I had many years of taking profits and many years of adding due to losses. To me, if I observe within my own portfolio big swings between asset classes over a several year period, that means my diversification is "working". I don't care what anyone speculates for the future.

Even though I don't expect a huge inflation monster over the next few years, that doesn't mean I don't take steps to protect my portfolio from inflation over the long term, because moderate inflation over many years still can impact a portfolio, and it is still prudent to invest accordingly.

So, I keep a fairly healthy equity exposure, with a 5% of equity position in REITs, and international exposure as well, to offset US inflation versus other currencies. In my bond funds I own diversified bond funds including one that gives international and emerging market exposure. That fund also owns TIPs, but I don't own TIPs directly. I prefer to let the bond fund manager decide when to own TIPs.

I have been watching this fund: Fidelity Strategic Real Return FSRRX Fidelity Strategic Real Return, mutual funds, quote, price - Morningstar. As I increase my bond allocation over time (due to growing older) I may build a position in this fund.

So you can see, even though I am not overly concerned about high inflation, I still own some asset classes that hedge against inflation.

Audrey

 

[FIREd]

And . . . audrey1, YearstoGo, FIREdreamer, MichaelB, ejman: I want you guys to be right. Inflation is a bad beasty, especially for us ants (the grasshoppers are less affected). If you are wrong, I hope I (and FinanceDude) are big enough not to say "I told you so."

Actually, what I was saying is: Maybe we will or maybe we won't see high inflation. I become wary when a large group of people convinces itself that it knows, without the shadow of a doubt, what will happen in the future. When, everyone starts hawking gold, oil and the Euro, I think it is wise to take a step back and look at the situation from a different perspective. I am just saying that the situation might not as clear cut as some people portrait it to be.

So, since I don't know what the future holds, I prefer to permanently devote a portion of my portfolio to assets providing insurance against inflation, just as I permanently devote a portion of my portfolio to assets providing insurance against deflation.

 

[youbet]

Even though I don't expect a huge inflation monster over the next few years, that doesn't mean I don't take steps to protect my portfolio from inflation over the long term, because moderate inflation over many years still can impact a portfolio, and it is still prudent to invest accordingly.........................................................................................................

So you can see, even though I am not overly concerned about high inflation, I still own some asset classes that hedge against inflation.

I agree with this outlook 100%. Folks that think inflation is only troublesome if it reaches so-called "hyperinflation" levels will be in for a big surprise when we have a decade or two of 3% - 5% inflation with investment returns lower than historic trends.

 

[ejman]

I agree with this outlook 100%. Folks that think inflation is only troublesome if it reaches so-called "hyperinflation" levels will be in for a big surprise when we have a decade or two of 3% - 5% inflation with investment returns lower than historic trends.

Agree also, but in fact we have lived over the last decade with inflation at about 2 % a year or so and equity investment returns have been very poor over that period and probably not kept up even with that low inflation. But many individuals (myself included) have returns from a diversified portfolio that bettered both inflation and an all equity portfolio

I think this just points to the value of a diversified investment outlook. One never knows exactly (or even approximately) how events will unfold and many pots cooking certainly seems to me as a safer approach than betting it all in one or a few pots. After all, once one is ER'd (if the planning was realistic) it doesn't take much more than a few % points over inflation to stay ER'd.

I am concerned that for some people the current common knowledge that commodities + Gold/Silver will be the impregnable refuge for the inevitable coming hyperinflation will result in over concentrated portfolios. I got burned with this approach In my reckless youth when I used to think that oracles actually were such. I bought Gold at about $800 or so an oz back in 1980 and then watched it go down to $250 and change when I finally sold it mid 90's. Thank God that in the meantime I also started constructing a separate diversified Portfolio that did allow me to ER. If I had remained with my original thinking I'd still be at the salt mines...

 

[youbet]

Agree also, but in fact we have lived over the last decade with inflation at about 2 % a year or so and equity investment returns have been very poor over that period and probably not kept up even with that low inflation..

The difference between a couple of decades with 2% inflation and a couple of decades with 3% - 5% inflation (as suggested in my post) will be huge. Not a good comparison. I'm suggesting that folks who mistakenly think that mid-level inflation over a prolonged period will look the same as the recent mild 2% are going to be in for trouble.

I'm three yrs into retirement. The FireCalc run built on my situation at retirement uses historical CPI as the inflation factor and has a survival rate of 99.1%. I'm hoping that future inflation is no worse than historical inflation. If I plug in some other inflation rates, I get different results, some kind of scary. Here are some examples of my retirement plan survivor rates assuming other rates of inflation going forward:

Historical CPI - 99.1%
2% - 100%
3% - 99.1%
4% - 91.7$
5% - 47.7%

It doesn't take too much inflation (certainly not "hyperinflation" levels) over a retirement to kick the ever loving pajeebees out of survival rates of your portfolio. I lived through the WIN buttons and high inflation rates of the 70's and made it OK. But I am worried that inflation rates during my retirement will creep up to regularly be in the 4% or 5% range and that's going to hurt if I don't find a way to cope via portfolio performance.

BTW - no cola'd pensions here......

 

[Gearhead Jim]

...
I happen to think economists today know a lot more about monetary policy than they did in the 70's. I wouldn't count on them making the same mistakes.
...

Unfortunately, politicians DO keep making the same mistakes.

You've heard about the May Day parade is Russia where they had the economists marching with the army? Putin asked why the economists were there, and an aide replied "Because they have done so much damage."

Unfortunately, my crystal ball remains very cloudy.

 

[Gone4Good]

Unfortunately, politicians DO keep making the same mistakes.

You've heard about the May Day parade is Russia where they had the economists marching with the army? Putin asked why the economists were there, and an aide replied "Because they have done so much damage."

Unfortunately, my crystal ball remains very cloudy.

We'll I'll agree once we start using the military as a political goon squad.

In terms of political pressure on the Fed, things couldn't have lined up better. Bernanke has essentially secured his re-appointment as Chairman already. Withdrawing liquidity will be a chore for the early part of his second term - long before he has to worry about a 3rd term. And that 3rd term will be appointed by the next president, not this one.

Besides, Bernanke stands to go down in history as the man who prevented the second Great Depression. He's fully aware that he can only claim that title if he doesn't mess up the final act. There is no way he jeopardizes his legacy in exchange for a 3rd term. No way!

 

[Gone4Good]

Historical CPI - 99.1%
2% - 100%
3% - 99.1%
4% - 91.7$
5% - 47.7%

I suspect this sensitivity gives misleading results because it changes one variable and leaves other dependent variables unchanged. Negative real interest rates come to mind. Inflation during the Great Depression is another.

Meanwhile, from 1970-2000 the average annual increase in CPI was 5.1%. According to FireCalc a 4% WR on a 60/40 portfolio still survived those 30 years.

I'm not saying higher inflation isn't bad. I just think modestly higher inflation probably isn't as devastating as your sensitivity suggests.

Psst. TIPs

 

[samclem]

Besides, Bernanke stands to go down in history as the man who prevented the second Great Depression.

I dunno. Being a "preventer" is not a road to fame and adulation (ask anyone who flew for SAC or spent years beneath the waves on an SSBN. These guys are still waiting for the parade they deserve). OTOH, if inflation somehow gets out of hand such a way that the Fed doesn't get blamed and Bernanke can muscle it down, he might take the crown from Volker.