Originally posted by: bobsmith1492
Originally posted by: soccerballtux
Originally posted by: Skoorb
The debate as to whether we'll see nothing, or deflation, or inflation, or some combination thereof is significant and can be argued elsewhere, for sure, but what are the practical ways in which we can defend against either one, should it start to become a significant factor? Here's what I've come up with so far (may be right, may be not).
Deflation
1) Have cash or savings account. Money Market for those with retirements (historically almost as safe as cash but practically speaking maybe not quite)
2) Own treasury bonds that are not indexed against inflation, so even if deflation got huge they'd still be paying out as promised
Inflation
1) Treasury bonds that are indexed against inflation
2) Commondities. This could be gold or silver (btw, which is better? Also, should this really be in the form of actual coinage physically owned?) or oil (and likely others such as copper).
3) Stocks (?) It seems that most advisors like stocks as a long term investment, so how effective are they in the face of significant inflation (assuming the economy isn't otherwise decimated, thus weakening substantially companies' earnings)?
4) Riskiest, but effective if inflation got completely absurd, get as big a mortgage as possible if the interest rate is locked. Evidently, historically hyperinflation has, not surprisingly, had the erasure of mortgages for the home owners paying in that currency.
When I started thinking about the potential future of inflation, the concept of it being wise to carry a certain amount of debt all your life finally made sense to me-- for the very reason you give. In my case I'll get very lucky if inflation takes over; it'll be much cheaper for me to pay off my student debt.
I, for one, am hoping it does.
Related: Intel may be convinced we're headed for inflation. Remember the $7B investment they made in retooling? That investors were questioning Intel about, whether it was the right choice. The surface reaction from critics was "Intel is certain the economy is going to recover by 2010 when these come online." A deeper reason might be they are certain inflation is incoming, and wanted to capitalize on the low rates for retooling.
Keep in mind inflationary pressure typically create bullish expectations among investors-- people are in a hurry to spend their money before it loses value; just like in the 70's. Best would be to spend on credit if you can, have the cash in inflation adverse markets, and start paying it off when it looks like the Fed wants to reign in inflation.
This makes me mad. So many people have so much debt in the US and, when inflation strikes, their debt essentially disappears.
On the other hand, some people save money. When inflation hits, their money is worth nothing.
The net effect is that people who live within their means and save will be stuck with the bill for those who took in all the debt they could.
It irritates me. :| So, what, I should buy a $500K house, brand new car, and a boat and hope that inflation makes them easy to afford?
Taking on massive debt is greed, plain and simple, and it's a bad thing.
(I'm not talking to you, soccerball, just the mentality in general)
Well it doesn't quite "disappear", you have to be committed to paying it off. 8%/year inflation doesn't magically make it all go away; the basic necessities in life are increasing in cost too (should be); it just means your discretionary income number is 8% larger than before. So if you're making $2k/paycheck and your discretionary income is say 5% of that, with 8% inflation you have 8 more dollars than before, for a total of 108 to spend or use to pay off debt.
I think in the long run it's necessary; and much more politically friendly than simply taking money and putting it into someone else's hands. Also keep in mind paying off debt has a net deflationary effect on the economy-- that cash goes back to the banks, and unless they are able to convince people to take on more loans, it stops circulating in the economy. Less money changing hands means less inflation.
It is necessary after bubbles because bubbles were times when money was too easy, and riskier markets received funding, when in times when money was more scarce (higher interest rate) they would not have. It's also safer for the people at the top to deal with inflation. The net effect at the end of the day is the same-- the price in real dollars to the average American has to fall, and it can either fall through a deflationary period where the prices are forced down to a point where the things are cheap enough for the now-extra-debt-laden-because-of-higher-interest-rates buyers are able to afford them, or they can rise through inflation to a point where the people's money at the top is devalued to a point that good growth becomes attainable again.
Example: Imagine you're a company, 15 years ago your net revenue was $50. These last 15 years, your net revenue grew at 5%/year and is now at $150/year. However, you have reached a point where 5% growth on $150 is not possible. If you were back at $100 you could do it, but 5% on $150 is just too much. So, now your stock prices begin to fall as your earnings fall, you become less able to take on debt from banks to fund R&D into new market sectors, you have to cut some workers to keep earnings and profit up, etc. These things combined, happening at all companies across the globe, cause a recession, which simply makes it worse until we reach a point where the excess capacity of the economy in inefficient sectors is trimmed and companies are once again lean and productive and are able to truly evaluate new markets and fund only the most potentially profitable areas. Efficiency is forced through the roof, and everybody has to work harder, until we reach a point where in even the tougher times, we are efficient enough to cover a new market sector. The improvement in efficiency is what allows us to begin growing again at 5%/year; and also now that we're revalued to $100, so growth until we reach say $200/yr in revenue in possible, at which point we are no longer able to continue 5% growth/yr and have to start trimming and becoming more efficient again to accommodate the smaller market.
The alternative to the deflationary cycle is an inflationary one. Instead of the company revenue falling to $100 from $150, we stay at $150 or grow perhaps to $175/year, but are forced to pay our workers more each year; to do that the company has to become more efficient. Either method we pursue, there has to be a resetting back to what I would call the naturally allowed multiple of real incomes between the people at the top and the people in the middle/at the bottom. IE, if the people at the top have too much money, 5% growth on their wealth is not possible; only 3% is. My problem with inflation is I would argue it can allow inefficient companies to continue to exist when they should have failed (GM), which would allow the companies Toyota and Honda and better-car-making-companies-in-general to grow. But if GM is still there sucking up some of the market for cars, Toyota et al. face difficulty growing. IE if GM had failed, say every 2/6 cars GM sold, those sales would now go to Toyota, 1/6 would go to Honda, 1/6 would go to Kia, etc; and Toyota would fair better and be able to hire more workers to produce more cars. This is why recession are good, given no government intervention they reallocate resources to the most efficient and hard working; and force the least efficient, least innovative companies to fail (ie GM-- I know they've got some good stuff in the pipes but they were just too slow, their good stuff is not coming until 2010 and I'm sorry but that's just not fast enough-- Ford is in a much better position, they knew they had to innovate and have a better 2009 lineup than the same old crap GM has been pumping out). The downside to the recessions is people lose their jobs, they foster political instability (just look at Europe, there are already facist demonstrators on the streets; that stuff is
right under the surface over there and it is in the countries' best interest to try to keep people to happy to stem any potential for a new Hitler to show up. Fortunately over here it's less of a problem, but there are other problems right under the surface that we would rather remove incentive to mobilize from than risk the recession and giving them an audience), etc. I think the upsides outweigh the downsides though; specifically I am a very firm believer that people often need a kick in the butt to start working and thinking smart again (because I've seen myself get lazy and complacent without these "incentives" to work harder); and it seems our newfound (last 20 years) attitudes of withholding this discipline from children are catching up to us in that we now have a majority that thinks the Union workers getting paid $70/hour shouldn't be forced to cut back and move back into an affordable home, rather we should just take from the rich and give to the poor. If you take from the rich and give to the rich at least the rich can employ us at making something; but nobody likes that because the Rich are Evil (TM) and We Don't Want To Work.
That said, if the Fed begins purchasing Tbonds directly from the government, monetizing their debt, then I think it will become clear what policy our nation is pursuing-- it will be one of sure inflation. With our current financing of this mess through Tbills (Tbills mature much more quickly than Tbonds), we don't have any hard basis for fears of inflation because once the Tbills reach maturity the money will be extinguished from the economy and no longer be sloshing around.
Now as for this potential inflation, if the hard workers are educating themselves then they'll see this coming, or at least be thinking about it like we are; and put their assets into inflation-adverse investments. On the whole yes it may be bothering to some that it makes debt easier to pay off, however keep in mind the alternative (deflation) makes debt ever more burdensome and would give the debtor-middle-class even less discretionary income to spend to buy the efficient people's products. So there are people that will be harmed no matter what. For instance if we had serious deflation, my student debt could become much harder to pay off-- and I'm not spending this on some silly liberal arts education, I'm pursuing an engineering degree at one of the top 5. I certainly don't want deflation, not after having to take these loans out that financed the rapidly increasing costs of education (thanks to Pell Grants, but that's for another post); and especially not seeing as I'll have to be paying the taxes to the government to finance Medicare and Social Security for all the soon to be retiring baby boomers (10,000 new / day until 2020).
Now the thing that confuses me about inflation is how we didn't see much inflation in 90's and from 2001-2008, but it would seem we should have given the availability of money. Money was just sloshing around during these times-- 2% interest rate under Greenspan, 1% under Bernanke after 9-11-2001 to free the markets up. We saw "inflation" in the stock market during both of these times; first in the tech stocks and during 2001-2008 in the whole market in general; and we saw asset appreciation in some sectors (housing, for example), but we did not see it anywhere else. Why not?
My theory is that most other areas in the market had very elastic production capabilities-- and if production of something increases with money supply then there will be little to no inflation. Things that may have had elastic production could have been cars, food, computer parts (anything made in China really, thanks to China's ability to scale production with practically limitless pools of cheap labor to pull from). Things with more inelastic production curves were houses/land, stocks(? Definitely elastic during the 90's tech bubble but perhaps there was _so much_ money available it perhaps met and overcame even the explosion in creation of new companies?), OIL.
My opinion-- some combination of the two. A little recession, but a little inflation to make the debt burden easier to pay off. It appears that during times of recession people become more worried about future income expectations and start paying their debt down more. That's good! So my stance would be we should allow the inefficient companies to fail, let people start the feel the weight of too much debt, to the point where they learn their lesson and become interested in paying the debt off and in starting a savings plan. Then, and only after this, pursue mild to medium inflation to facilitate this-- because otherwise the minimum payments would become too burdensome and would just amount to a perpetual tax on consumers. My theories stop here; I'm not sure what would happen to this extra cash that the banks make from all the interest payments of people who cannot pay off their debt, and are unable/unwilling/unallowed to take on any more.
Of course it may be that no matter what we do, the debtors would return to spending as soon as they gain the benefits of inflation and the economy starts to improve. At which point we're all out of luck, because we need them to deleverage their debt. As CS Lewis wrote, "You cannot have a good society without good men..."
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