Black swans bet big on big inflation

The Wall Street Journalreports (subscription required) that Universa Investments L.P., a hedge fund firm tied to bestselling author Nassim Nicholas Taleb, is betting big on serious inflation over the next few years.

According to the Journal, "The new strategy . . . aims to post big gains if inflation and interest rates take off as they did in the 1970s. Universa will invest in options tied to commodities such as corn, crude oil and copper, as well as options on stocks such as oil drillers and gold miners."

Many economists have downplayed inflationary fears, arguing that low consumer spending and falling asset prices make deflation a more serious concern. But Taleb argues that the government's efforts to prop up the economy with aggressive monetary policy will overpower deflation -- because the government doesn't have any limits on its money-printing capability -- and lead to rising prices.

Lgicially, Taleb's argument makes sense. Deflation can be overcome by printing more cash and devaluing the currency. But once all the debt is taken on and all the cash is circulating, how exactly can runaway inflation be avoided?

Given that Universa's funds were up more than 100 percent in the bloodbath that was 2008, they aren't having any problem raising money from investors. If the hyper-inflation hypothesis comes to fruition, most other investors won't fare so well -- especially not the United States Treasure Department, which has spent billions buying up bonds to drive interest rates down. While there may not be any nominal losses if the securities are held to maturity, the decline in purchasing power will leave taxpayers deep in the hole.

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