In general, inflationary decades are risky for speculative activities because sharp spikes in the inflation rate can wipe out the expected real rate of return from a short-term gamble. This overview is not intended to allow you to get rich quick. It is a strategy guide, written in generalities because each person who reads this will have different risk tolerances, risk exposures, and even differing levels of incomes and sources of those incomes.

On Incomes
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In general, inflationary spasms which are not anticipated fully usually impact asset-holders more than wage-earners, but those people who are on fixed incomes not indexed for inflation also are affected. Welfare recipients definitely fall into this category. EI recipients are partially protected via indexation of the tax system (as EI benefits have tax clawbacks). Canada Pension Plan recipients should receive full indexation of benefits.

For those on babble who work in unionized environments, COLAs in your contracts will compensate for the effects, and the indexation of the tax system will ensure that the compensation for the rise in prices will not have adverse tax consequences.

For those on babble who work in nonunion jobs, governments may feel some pressure to increase minimum wages. The tax system's indexation will also partially protect you.

Business owners face a mixed bag. Some will have stable input costs and rising final product prices. Others will face rising input costs and little ability to raise final product prices.

For those on babble whose incomes derive entirely from assets, too bad, so sad. However, fear not, because after a few years the real rate of return on your investments will again outpace the fall in the value of money.

On Debt
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If you have debt, it does make sense to use inflationary wage gains coupled with locked-in low interest rates to beat the bank at its own game. If you've locked in now for, say, 4% for three years, and inflation rockets up to 10% per year, and your wages right along with it, you're ahead by 6% every year. You don't often get such chances to beat the bank on loans, so use this advantage if you can.

On Savings
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In general, your target is to match the inflation rate that is expected to prevail over the entire decade. In this circumstance, your best bet is to determine how GICs, savings accounts, and money-market accounts will behave as interest rates themselves begin to mount up as the Bank of Canada tries to combat the inflation. Plan for an inflation rate of 6% per year on average, and locate such savings vehicles as will match that rate of return. You may not come ahead of the fall in the value of money, but you certainly won't come out worse - especially if you're in for the long haul.

Another possible avenue is government bonds. Bond markets tend to behave inversely to stock markets, and in general when inflation strikes, stocks tumble. Ergo, bonds begin to gain luster.

Precious metals tend to do well in inflationary times, but since they're so expensive I do not really recommend them except if you have money to burn and don't mind watching the gold price every hour to see if you can come out ahead of the game.

Summary
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Don't take on new debt. Pay down old debts. Make sure your job is at least partially insulated from the fall in the value of money. Get a raise if you can. Don't speculate in anything. Between 1973 and 1982, on average a stockholder would break even (So if you bought a random sampling of stocks in 1973, on average you would find no gain and maybe a slight loss by 1982).

All this, of course, is predicated on some educated guesses about the way the US (and thus the Canadian) economy will behave, and thus about the way inflation ebbs and recedes over the years. I may be wrong. We all may.

So don't take this as gospel - but do use it as a general guide if things begin to happen the way this overview postulates they will. If such things happen, you know what to do.

[ July 18, 2002: Message edited by: DrConway ]