At the moment, Lewis Altfest, the head of Altfest Personal Wealth Management, a fee-only financial management firm based in New York, is reasonably sanguine about the prospect of inflation.

Despite the media hype about the soaring levels of government borrowing, “Right now government debt is at 70% of GDP,” he notes. And while he allows that that’s a substantial rise, Altfest doesn’t believe it’s reached the tipping point. “Seventy percent--that’s not so terrible!” he declares.

By way of comparison, Altfest points to Japan, whose national debt has soared to 200% of GDP. He also cites a report from the “smart, impartial people” of the Congressional Budget Office, which calculates that the level of U.S. debt will remain at its current level relative to GDP for the next ten years. “So we’re not in such bad shape,” he concludes.

Altfest also allows that a little inflation wouldn’t be such a bad thing: “If inflation goes up, government debt goes down and the countries we owe money to would be the losers,” he observes. “The U.S. would do better—real estate and other assets would go up.”

But then he acknowledges that “The U.S. dollar is like being the croupier at a casino: Everybody plays and we take something off the top. We haven’t taken a lot—so nobody’s been complaining too loudly, but if the dollar starts to go down that could change things and people will stop playing with us.”

A falling dollar would cause foreigners to stop investing in the U.S. and to stop buying our debt. That would drive up prices and interest rates, leading to an inflationary feedback cycle.

What could cause the dollar to fall and inflation to rise? Altfest says planners should keep their eyes on three potential triggers:

  • Potential bubbles and the degree of market speculation that’s taking place, since this is inflation reflected in terms of investible assets as opposed to the overall economy.
  • The unemployment rate and the level of factory capacity; if the economy is moving and inflation is under 6% —then it’s time to crank up the inflation watch.
  • The direction taken by the Fed; if the Fed were to step up its easy money policies—then this would be a major red flag.

As for right now, Altfest says that “If you can find a good investment that’s also a hedge against inflation—that’s like having your cake and eating it too.” He doesn’t put inflation-indexed bonds in this category, since their yields are so low; they will only pay off if inflation takes off.
He thinks real estate, however, could be a good move, since prices are still on the low side and will go up with inflation. So, for example, if your client bought a second house in his neighborhood, “as long as he can make a little money renting it out for the time being, that would be a very good investment.”