Bonds in inflation

In "Moneywise" for Feb. 13 you indicated that increases in the supply of money result in repudiation of paper currency. Later, in the same column, you suggested investing in deep-discount bonds. What is your current thinking about fixed-income securities when paper currency may be repudiated? -- D.O.

Time appears to be the missing element among the quotes. History indicates that increasing paper currency leads to rapid inflation and eventual replacement of that currency with another. However, hyperinflation and repudiation do not appear imminent.

Fixed-income securities are poor investments in a continuing inflation if -- and this is important -- you continue to hold them. My suggestion about deep-discount bonds has been to profit from the ups and downs of our inflation cycle. The time to buy discounted bonds is when interest rates are high, preferably when they are topped out. Prices for bonds (and utility income stocks) are severely depressed now because interest rates are high. Interest rates do cycle up and down, and you can expect a decline in long-term interest rates sometime within the next two years. When interest rates decline, bond prices will likely rise. That is the time to sell. Bonds under these conditions become a trading medium, not a long-term investment. Until inflation appears to be under control, long-term holdings of fixed-income securities should be avoided.