There seems to be no doubt that, in general, a managed, diversified portfolio of US common stocks has provided investors with ample protection against inflation over the last half century.

There is, however, a question as to whether a similar level of inflation-protection through common stocks will continue to be available over the next fifty years.

Intrinsic Kernels of Inflation Protection

To the extent that a class of securities has a legal claim to assets that will increase in value with inflation, that class of securities may be said to have inherent protection against inflation.

Certain assets offer no protection against inflation whatsoever. These assets include investments in cash, fixed-principal-and-interest bonds, and accounting intangibles such as good will.

Other assets, such as real estate and commodities, tend to increase in value with the consumer price index.

It is useful to think of different investments as offering varying degrees of protection against, depending upon how large a “kernel” of inflation-resistant assets they have relative to the assets that make up the investment.

	Intrinsic Inflation Protection Varies

For a simple example, let us define inflation as the price of gold. Let us imagine two boxes of equal size, one entirely filled with gold, the other empty, except for a small cube of gold.

If both of these boxes sell for the same price, it is clear that the box entirely filled with gold has a greater “kernel” of inflation-protection that the box with only a small cube of gold.

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It has been widely-publicized that Ben Bernanke, the new Federal Reserve Chairman, has strong views regarding the Federal Reserve Bank’s responsibility and ability to control inflation in the United States.

	Is the Fed Wizard a Humbug?

Fed watchers jump at the Chairman’s every utterance.

Security prices zip up and down at shifting hints of future interest rate policy.

Few indeed would contend that inflation is a good thing or would say that government should adopt a laissez faire attitude to the value of money.

Arguments begin, however, when we discuss exactly how inflation might be controlled or what part of government is responsible for the task.

Short-Term Rates and Inflation

Many seem to believe that by manipulating short-term interest rates in some precise fashion, the Federal Reserve Board should be able to keep inflation ‘under control’, without throwing the economy into recession.

However, among economists, there seems to be no consensus as to what the Federal Reserve’s magic formula should be regarding the timing and amount of short-term interest rate manipulation.

The lead story in the Wall Street Journal of July 5, 2020 reported that many leading economists fear that Chairman Bernanke has reached a ‘crossroads’ and may be about to go too far in raising rates — thereby pushing the economy into recession.

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Market capitalization of REITs reached $330 billion by December 2005, according to data published by the industry association, NAREIT.

	Income and Inflation-Protection

Although REITs have been around since the 1970s, this market sector only began to become important in the 1990s, as the graph, at the end of this article, shows.

Market capitalization of the REIT sector is still small compared to the equity market ($11.2 trillion) and mutual funds ($6.4 trillion), and is of a similar order of magnitude as closed-end funds ($278.2 billion) and exchange-traded-funds ($321.6 billion).

Although the REIT sector got off to a rocky start and earned a bad name in the 1970s, when large commercial banks recklessly set up REITs to hold construction loans, causing substantial losses to investors, the business now has been reorganized and is focused on owning and operating large scale commercial properties for the long-term, rather than short-term speculative real estate financing.

Investing the Old-Fashioned Way

For investors who are fed up with the stock buyback-option games and other unethical shenanigans of the main equity market, REITs are a breath of fresh air:

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