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Inflation (Not hyperinflation): The Equalizer

Discussion in 'Political Discussion' started by PatsFanInVa, Feb 6, 2009.

  1. PatsFanInVa

    PatsFanInVa PatsFans.com Supporter PatsFans.com Supporter

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    Okay, so is hyperinflation, sure. But let's leave that for another conversation.

    I just want to start the ball rolling on the following: If/when we pull out of the current downturn (oh okay, depression,) one school of thought says we'll be heading for high inflation. Since this is a global downturn, you have to imagine that will mean global high inflation.

    Inflation does two things: Unabated and unaddressed at the low ends of society, it pushes working poor into working and not being able to make it. It pushes poor into destitute and destitute into starving, as wages lag cost of basic commodities. Ditto fixed incomes.

    So obviously you have to guard the low reaches, and that will take a great redirection of funding.

    Elsewhere in society, however, for the great mass of people in the middle class:

    Inflation erases debt.

    For those on fixed income, as mentioned, it erases savings. But also for the wealthy.

    In comparative terms, individual by individual, think about which we have more of: Destitute poverty, or debt.

    The amount of spending that we've been undertaking since last September seems to have us fated for that sort of outcome. Yes, we're already on a precipice in the other direction: Frozen credit, low economic activity, job losses in the 1/2 million a month range.

    What would be the average guy's life be like after 10% inflation?

    - your mortgage means 10% less (unless you got an ARM)
    - your wages probably go up, when we are ramping up to satisfy said pent-up demand
    - prices go up, so you can get less for each dollar after inflation is figured in
    - you are able to obtain loans but they are not cheap

    Ergo:

    - it is less of a strain to pay the credit you've incurred, which in America is huge.
    - you trade off the savings on your debt for expenses in more discretionary goods
    - you may still not be able to indulge in luxuries, and while wages are catching up, you might make the calculation that meat's highly overrated compared to eggs or something... depending where you are on the spectrum, you might make the calculation that ramen noodles are a better deal than either... etc. ... but...

    Here's the kicker: the proportion of money going to "average" mortgages comes in line with home values, and finally, after all the other markets, housing rebounds (especially as rents go through the roof.)

    Of course, hyperinflation would wipe all that out overnight, but a barter economy is probably not in the interests of a nation that doesn't really make things anymore :)

    PFnV
     
  2. wistahpatsfan

    wistahpatsfan Pro Bowl Player

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    #75 Jersey

    Personally, I'm hanging on to cash for the bottom of the RE market to hit. It is an equalizer...especially for those who kept their debt to a minimum, avoided speculation in the other markets, and SAVED LIQUID ASSETS. Looking forward to cleaning up and possibly securing my retirement on the uptake in the housing market. I happen to like doing construction and pouring sweat equity into a three-decker.

    I'm also very lucky to have married extremely well. My wife is frugal without being cheap, and is not prone to materialistic gluttony like some other people I know.

    ...Any quarter now....
     
  3. sdaniels7114

    sdaniels7114 Experienced Starter w/First Big Contract

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    The last couple of booms I've made others' rich. That ain't happening this coming time. I got so many plans that I want to implement NOW, NOW, NOW! but I figger there's little sense in fishing where the fish aren't. So I'm waiting, saving and planning...


    As to inflation I'm not real worried. The historical response to high inflation has been ticking up interest rates. We've got room to play with in the current rates at least compared to where we were when Carter raised rates in the 70's to curb inflation then.
     
  4. wistahpatsfan

    wistahpatsfan Pro Bowl Player

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    #75 Jersey

    Patience! Wait for it...wait for it.......
    We need to get back into the habit of saving. Banks and retailers want us to spend, spend, spend...they say that's what will save the "economy. Truth is, that's what will save them. They've got everyone convinced that tax cuts (which I'm in favor of, as long as the majority goes to the so-called middle class), incentive checks, cash payouts, etc will jump-start the economy - and it might. Problem is (to use an over-used metaphor), when you jump start an engine that has bad valves, lifters, cams and pistons, it's only a matter of time before the whole thing crashes. Jump starts are only a band-aid on a gaping head wound (more metaphors).

    We're sunk if we don't revive manufacturing of something that the rest of the world wants and needs. We also have to stop living on debt that we can never repay. Credit cards are killing this country.

    Check out this website on debt. Great graphs on both individual and government debt / spending / employment. Shows a very interesting picture.

    The National Budget, Debt & Deficit :: MarkTAW.com
     
  5. maverick4

    maverick4 Banned

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    It was true last fall but the world is adjusting now so that when we fall in a year, the rest of the world won't be hurt as much.

    Sure it's great that our debts are worth less, but it also means the country/economy as a whole is also worth less. It also means that there is no point right now to save, it's going to get wiped out eventually.
     
  6. PatsFanInVa

    PatsFanInVa PatsFans.com Supporter PatsFans.com Supporter

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    Our friends the market timers (above) are saving while there is value in money (which there is) but while they feel currently they have not hit a bottom in various non-cash equities.

    A dose of inflation will wipe out debt, completing the "delevegering of the world," sure. But it's nonsensical to say the schemes of staying liquid now are foolish.

    Savers now, who do not have debt, do indeed stand to be in an excellent condition to spend 2009 or 2010 dollars -- which will have maximum value -- on non-cash equity (whether real estate, stocks, or goods,) when they actually are at a "bottom."

    In personal terms, if they time things right, these guys are in the catbird's seat, Mav. So it means very little to say that their money won't be worth anything, because their plan is to exchange it at the point when it is worth the most.

    Pisses me off too, but then again, I have debt that needs wiping out, and not too many material things I have my heart set on. Double the price of everything except my mortgage, and I survive.

    The truly poor, not so much--which is why I hope we tax the hell out of Wistah here on his wise investment :)

    He's gonna spend it anyway. If this scenario unfolds, he can't afford to keep it in cash. He has the advantage of a good cash balance right now, which does him no real good right now. Moving forward that cash advantage turns into a gain of X in real value. Sorry Wistah but I'm thinking the gubmit might want .25 X for the people that can't buy bread and clothes.

    All the tax breaks are now, while there's no economic activity... when we come back out of it, the tax holiday will be over.

    PFnV
     
    Last edited: Feb 7, 2009
  7. wistahpatsfan

    wistahpatsfan Pro Bowl Player

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    #75 Jersey

    Damn! You're right, PFinV!
    I guess I'll go dump my savings into some equities, buy a Sam's club membership for some flat-screens and Wii games and pick up a new POS car or two that will be worthless in 5 years.
     
  8. PatsFanInVa

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    Nope you already said you're saving until things hit a "bottom" and getting something you really want for (relatively) cheap... even if that's just equities.

    You're screwed! Stimulative if you spend, future-taxed if you save!

    So anyway I don't want to hear how I'm wicked smaht anymore LOL. If I'm so wicked smaht why ain't I rich?

    PFnV
     
  9. wistahpatsfan

    wistahpatsfan Pro Bowl Player

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    #75 Jersey

    Saying I'm screwed is merely stating the obvious. Today, being screwed is a matter of degree.

    And smaht does not = rich. You can be really rich as long as you're really, really, really good-looking.

    No one knows whether or not I'll be "stimulated" (not even going there) if I spend now and no one knows how I'll get taxed in the future. I just know that it's always been better to save than spend when you don't have to. An example: I fully expect that my '03 dodge will die long before my '89 GMC will. Why? Because I can repair my '89. I can actually replace parts in it without hiring a software engineer and paying $500 every time I put it in the shop. I go for value and the better deal from now on. I will never buy a brand new vehicle again (unless my wife wants one, of course:()

    There's always a chance I am wrong (just ask my #1 stimulator, Mrs. Wistahpatsfan) but I'll take my chances on combining a needed commodity (housing) with my ability to inject sweat equity by myself if I have to. This approach might sink me, but at least I can have the satisfaction of not ignoring everything I ever learned from old guys my entire life: Save your money (avoid debt), buy low, and do what you're good at.
     
  10. PatsFanInVa

    PatsFanInVa PatsFans.com Supporter PatsFans.com Supporter

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    Definitely agree with you there, Wistah... in the end all a man owns is what he can do, not what he owns at any given point. Skills and health are the greatest wealth.

    Anyway, it might not be "good for the 'conomy," but I think you've got it pretty well figured. All sorts of crap could happen in the future, but assuming something like a recovery, one day, it makes sense to me.

    That's why I was teasing Mav -- I think it's classic sour grapes to say, "yeah you're saving now but later there will be inflation ha ha." Thing is, you're planning to move that cash to a better instrument when cash starts to be a bad holding. I can only say good luck as I await the inflation tsunami that makes my mortgage cost the same as my groceries, and hope I can hang on until my wages catch up.

    PFnV
     
  11. wistahpatsfan

    wistahpatsfan Pro Bowl Player

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    #75 Jersey

    I'm no genius. I've just been lucky enough to have been allowed to hang around some great old guys with tons of experience. My old man used to pound into my tick mick skull that I should listen to experience and never follow trends. The biggest mistake I've ever made with money was due to narcissism thinking I needed a new truck because everyone else had one. I lost 8 grand the minute I drove that thing off the lot - it literally took a split second!

    Anyways, I don't know how much land you have, but it might be a good idea to start a garden. Another thing we do is join organic farmers co-ops for fruits, veggies and meat. We buy shares in a cow and some chickens as well as crops (in different places) There's really gaining ground out here in Central New England and you save a ton. You just have to get a freezer and some dry storage areas. Like you've said before, this re-setting of the economy will bring some beneficial changes to the way we live and consume (I hope). I'm a bit of a luddite, but I think we need to get back to basics in some aspects.
     
  12. PatsFanInVa

    PatsFanInVa PatsFans.com Supporter PatsFans.com Supporter

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    I'm afraid I'm inexorably tied to the reverse lifestyle, though I'll tell you straight up, I'm feeling much more appreciative of the old Thoreau-style common sense way of living where you grow a bunch of your own food, etc. My own condo association pretty much frowns on agriculture on any useful scale, however :)

    Truth is, I'm not feeling too "on the bubble" myself, but I know there's going to be a lot of pain out there. More and more of us are going to know those "left behind", if I may adopt the phrase without any implication of rapture and the like.

    Your suggestions are probably going to look eminently sensible in a lot of ways... ps I think you've got to be a reformed luddite, given the computer bulletin board and all. But right about now, I'm wondering whether there are any Amish saying "oh, tough times now, Jedediah." Somehow I doubt it... it's not like they're looking for a good auto loan or a lower cable bill.

    PFnV
     
  13. maverick4

    maverick4 Banned

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    Into what!? I'd like to know. All assets get devalued when major inflation happens, so how exactly is that supposed to be comforting? There is almost nothing you can buy right now that won't get devalued when inflation occurs.
     
  14. PatsFanInVa

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    First of all, the moment's not "right now" as proposed by the market timers here.

    Secondly, the evaluation is made for a stockpile of already earned dollars prior to their inflation (devaluing.)

    You are exactly the opposite of right in saying "there is almost nothing you can buy right now that won't get devalued when inflation occurs."

    Almost everything will be valued higher when inflation occurs. That's what inflation means. It is the currency that is worth less, not tangible assets. You can say my paycheck will only be worth a peanut butter sandwich; but if you have peanut butter sandwiches, you can say "Hey! My peanut butter sandwich is worth a week's pay!"

    So if you buy, say -- heh heh I love even SAYING this -- real estate, at its bottom, and prior to the general inflationary wave we're all speculating will occur, it is predictable that the real estate will be worth more; at the very least, the debt you incur now will be paid back using fifty-cent pieces rather than dollars, if you get a decent interest rate, and the dollar is eroded by 50% over a few years.

    If you buy gold (and there is no gold bubble, which unfortunately there may well be right now,) you have the same effect.

    The only difficulty is that real holdings as opposed to currency will all respond to market timers with their own bubbles; it's pretty clear that right now, as capital flees equities, we have a bond bubble on our hands. And so it goes.

    Sic Transit,

    PFnV
     
    Last edited: Feb 7, 2009
  15. PatriotsReign

    PatriotsReign Hall of Fame Poster

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    #18 Jersey

    Excellent points PFiVA! You're right regarding the correct strategy if one believes high/hyper-inflation is inevitable is to buy real estate. You don't even have to wait until the bottom comes. Start buying now if that's what you belive is going to happen.

    I'm still not convinced that we'll have high inflation. My belief is that the economy will linger in malaise for another 5+ years...maybe even up to 10 years. Regarding "sideline money" and "pent-up" demand...THERE IS NONE! How can there be pent up demand when most people have huge amounts of debt they're paying off? For the 15% (the real number) of people who are unemployed or under-employed, they obviously have no pent-up demand.

    The new psyche of the American people is that of caution, frugality & saving. No one is "waiting" for things to get better so they can go on a spending spree. And the increases in demand that will ocurr as the economy turns around will barely trickle back in rather than return in a flood.

    In my opinion, there is a perfect storm evolving for stable and balanced recovery because it will not and can not happen quickly. If anyone here can show me a scenario where demand will suddenly sky-rocket, I'd love to see it. High inflation can only happen with sudden and dramatic increases in demand. And that can only happen with sudden & dramatic increases in disposable income for a very large percentage of Americans.
     
    Last edited: Feb 8, 2009
  16. PatsFanInVa

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    Definitely agree with you there. And I also think we're so burned by bubbles that the new wave in treasury thinking will be to watch out for, and actively deflate, bubbles - to the extent that Treasury has the reach to do so (obviously, they have control in bonds.)

    As to pent up demand, it's not a "now" thing. It's a matter of "oh thank GOD I finally have a job I trust" (eventually,) or "Oh thank GOD I finally am done paying down the credit card debt" (eventually), or a few other mid-range concerns.

    At some point it makes sense for people to get what they have wanted all along. So the guy using the old car another year or two or three just in case, may see a quasi-recovery, where we have positive growth at 1% a year and think, okay, it's just about on its last legs. I'll buy the new car (maybe Honda or Toyota, but a new car nonetheless.)

    Real estate becomes an exception only to the extent that 1) it hits bottom, 2) the local labor market can support buying activity 3) loans become available on a mass scale (not just for the top of the buyers,) and 4) Rent again costs more than mortgage, for the same property, same location.

    We're a ways away from any of those, so in general: yeah, it's not going to be a V shaped recession or a U shaped recession, it's going to be a bathtub.

    PFnV
     
  17. maverick4

    maverick4 Banned

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    I didn't say all, I said almost all assets are not worth buying. I can see a justification made for gold, but not for real estate. The prices are going to keep dropping so even if you think high inflation is going to happen, it doesn't make sense to get into real estate right now
     
  18. STFarmy

    STFarmy In the Starting Line-Up

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    Wistah, PFiv, and PR - thanks for this discussion. Good stuff here. I have nothing to contribute, but I have found it very informative. Thanks guys!
     
  19. PatriotsReign

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    #18 Jersey

    There is only one scenario where real estate will "keep dropping" and that is complete collapse of the world-wide economy. Not just the US economy. If our economy collapses but most of the world recovers (not likely), even then real estate will increase in value due to foreign investors.

    The world population is increasing and will continue to increase and land will always be in demand. It will always have value.
     
  20. maverick4

    maverick4 Banned

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    ... in the Middle East, Europe, and East Asia. Land does not automatically become more valuable simple due to population increase. Look at Africa.
     

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