The time has come to declare the war on inflation over.
The administration says that inflation will slow to 10.4 percent this year and 8.6 percent in 1981, which is nice. But if you compound those numbers, you get a 20 percent price increase over the next two years. Every dollar today will be worth 80 cents 24 months from now.
When the forecasted 1980 recession passes, inflation may rise again to greater heights. Even if, by some miracle, inflation continues to edge downward, it will be many years before it is wrung out of the system. Charles Schultze, chairman of the Council of Economic Advisers, said recently that licking inflation is a 10 to 12-year job.
Some people think that if the federal government balanced the budget, inflation would come to a dead halt. But that's a pipe dream.
The administration could conceivably balance the budget over the next couple of years, and then what? We'll still be contending with 9 to 10 percent annual wage increases built into the system; energy and housing shortages, which will continue to push prices up; and rising world demand for American food. Today's inflation won't submit to a quick fix.
Prices doubled over the past 10 years. They may double again in less than 10 years. Under these circumstances, what is the best way to manage your money?
Start with your cash-value life insurance. The cash in that policy will lose 20 percent of its purchasing power over the next two years and continue to deteriorate in the years after that. You're paying your premium in what passes today for hard dollars and will be repaid, years hence, in softer dollars than are now imaginable.
People with dependents continue to need life insurance. But in a time of inflation, it pays to buy the cheapest term insurance possible and put your cash somewhere else.
Bank savings accounts are another loser. Congress is discussing a small tax break for savings-account interest (perhaps allowing the first $100 to pass tax free), but that is not going to rescue a 5 1/2 percent passbook account from financial oblivion.
Any cash account loses value during inflation. If you must keep more than a modest amount of money on hand, put it in an 11 to 12 percent, six-month bank certificate (minimum deposit $10,000) or a 12 to 13 percent money-market mutual fund (minimum deposit, usually $1,000).
Bonds cannot survive long-term persistent inflation. Many people buy tax-exempt bonds or bond mutual funds in order to avoid income taxes. But a 6 percent tax-exempt bond leaves you farther behind inflation every year.
What, then, survives inflation? Real estate remains a good bet for the near term. The housing shortage in America (aggravated by the current steep drop in housing starts) means that residential real estate and condominiums will continue to increase in value once the 1980 housing recession passes.
Also consider commercial property in prosperous areas and apartment houses in improving neighborhoods. Professionals and business people should try to own their buildings instead of renting space.
Popular tangible assets, like rare coins and stamps, will continue to do well. But to get your money's worth and avoid being taken, you'll have to learn a lot about the field. More Americans also should think seriously about keeping part of their savings in gold coins.
The stock market is the only tangible investment that has not kept ahead of inflation over the past 10 years. But with the price of other investments, such as gold and real estate, up so high, it is possible that people will start to seek bargains in stocks.