Author Topic: Relevance of Inflation  (Read 2855 times)

OWHL

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Relevance of Inflation
« on: April 08, 2013, 03:54:09 pm »
Any thoughts on how relevant inflation really is to a mustachian?

I figure since mustachians try to curb their spending or if not, pay less for used items (in all cases), that inflation would not affect them.
Goods/services/housing prices may inflate over time, but if you get deals where you pay close to manufacturing cost, who cares about inflation?

What do you think is inflations affect on a mustachian (hardcore, softcore, or beginner)?
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matchewed

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Re: Relevance of Inflation
« Reply #1 on: April 08, 2013, 03:58:23 pm »
Inflation can have an affect. If it remained at a historical ~3% rate then maybe not much. If hyperinflation kicked in you could have your savings turn into nothing if they're in investments which do not keep up with inflation.

So yes you're right that someone paying close attention to their spending may be able to reduce the impact inflation may have if it is at a lower level. If it is at a higher level you will not be able to reduce that impact through purchase choices. And manufacturing costs are affected by inflation too. If I make aluminum widgets and you need aluminum widgets and the cost of aluminum goes up due to inflation then you will pay more for my widget.

smedleyb

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Re: Relevance of Inflation
« Reply #2 on: April 09, 2013, 07:26:42 am »
I think inflation does mustachians more harm than good.  In our current economy, inflation figures seem tame because mainstream "wants" (tablets, big screen TVs) are trending lower, whereas things we need (food, education, health care) are trending higher.  In sum it appears inflation is a push (barely trending higher), but under the surface the frugal savers are getting screwed as the cost of essentials far outstrips the average Joe's ability to earn more. 


matchewed

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Re: Relevance of Inflation
« Reply #3 on: April 09, 2013, 07:39:56 am »
From the February Report -

I get what you're saying but I'm not sure you can determine a trend at this point. And I'd like to see some evidence for a claim that the price of essentials is outstripping the average Joe (who also seems to be a frugal saver from your statement) ability to earn more.

smedleyb

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Re: Relevance of Inflation
« Reply #4 on: April 09, 2013, 07:48:38 am »
Try this article out for starters:

Lastly, there is "intervention analysis" in the seasonal adjustment process.  Intervention analysis is critical to the highly volatile areas of food and energy.  When a commodity, like gasoline, goes through periods of violent price swings the BLS steps in and uses “intervention analysis” to smooth out the volatility.  As a result, sharply rising gasoline prices are never fully reflected in the reported headline inflation number.  However, declining prices, which are never adjusted, do show an impact to reducing inflation.

The obvious problem with these manipulations is it changed the measure of inflation from a cost-of-living adjustment to a reduction-of-living adjustment.  The original CPI calculation allowed individuals to understand the rate of return required on investments and incomes to maintain their current standard of living.  However, by artificially suppressing the rate of inflation, the future standard of living is reduced to lower levels.





....This is why the average American has repeatedly lashed out at the current measure of inflation as it doesn't represent the inflation rate that they are personally experiencing.   Rising food and energy costs are consuming more and more of a declining level of incomes....

http://www.zerohedge.com/news/2012-12-20/guest-post-why-reported-inflation-seems-different-reality
« Last Edit: April 09, 2013, 07:55:45 am by smedleyb »

tooqk4u22

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Re: Relevance of Inflation
« Reply #5 on: April 09, 2013, 08:42:49 am »
I think inflation does mustachians more harm than good.  In our current economy, inflation figures seem tame because mainstream "wants" (tablets, big screen TVs) are trending lower, whereas things we need (food, education, health care) are trending higher.  In sum it appears inflation is a push (barely trending higher), but under the surface the frugal savers are getting screwed as the cost of essentials far outstrips the average Joe's ability to earn more.

Another contributor to understating inflation is housing, which accounts for 20%+ of the equation and due to the declining interest rates over the last two decades and more recently declining values it makes a large piece look low.

arebelspy

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Re: Relevance of Inflation
« Reply #6 on: April 09, 2013, 09:17:20 am »
Inflation is the #1 enemy of early retirees, much more important than poor returns.

A portfolio can always recover and go up later, inflation will not reverse itself, that buying power is gone.

It affects a Mustachian as much as anyone else (more so, because you no longer have rising wages, just rely on investments which darn well better match inflation), and you'd better have a plan for it.

It is, in my opinion, the least talked about crucial issue in early retirement circles (and partly because of how many struggle to understand it - they see market crash and understand that and think it's scary, but it's the silent killer of inflation that scares me).

but if you get deals where you pay close to manufacturing cost, who cares about inflation?

...what?  And what happens when manufacturing cost goes up?
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brewer12345

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Re: Relevance of Inflation
« Reply #7 on: April 09, 2013, 09:22:52 am »
Why am I not surprised that the tinfoil hat crowd has shown up for this one?  Google the billion prices project if you want a non-gubmint take on inflation.

Inflation definitely affects the frugal, perhaps more so than the general populace.  Flashy tech crap and the like has been falling in price dramatically, while staples steadily move upward.  If you are frugal, you do not buy much new flashy crap, but you have no choice on staples.  Happily, it isn't that hard to offset these effects with a few well placed investments.
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arebelspy

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Re: Relevance of Inflation
« Reply #8 on: April 09, 2013, 09:34:29 am »
Why am I not surprised that the tinfoil hat crowd has shown up for this one?  Google the billion prices project if you want a non-gubmint take on inflation.

Feel free to ignore that poster.

Inflation definitely affects the frugal, perhaps more so than the general populace.  Flashy tech crap and the like has been falling in price dramatically, while staples steadily move upward.  If you are frugal, you do not buy much new flashy crap, but you have no choice on staples.  Happily, it isn't that hard to offset these effects with a few well placed investments.

+1. Read, and take notice, fellow potentially ERers.
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DoubleDown

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Re: Relevance of Inflation
« Reply #9 on: April 09, 2013, 09:38:48 am »

it's the silent killer of inflation that scares me.


And here I always thought firecrackers were the scariest silent killer (sorry, obligatory Simpsons reference)!

And yes, the shame is that in their attempts to mitigate risk, many are tempted to move all their money to "safe" investments, not recognizing they have essentially guaranteed themselves to lose money and have inadequate retirement plans through inflation.

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smedleyb

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Re: Relevance of Inflation
« Reply #11 on: April 09, 2013, 11:46:17 am »
I think inflation does mustachians more harm than good.  In our current economy, inflation figures seem tame because mainstream "wants" (tablets, big screen TVs) are trending lower, whereas things we need (food, education, health care) are trending higher.  In sum it appears inflation is a push (barely trending higher), but under the surface the frugal savers are getting screwed as the cost of essentials far outstrips the average Joe's ability to earn more.

Another contributor to understating inflation is housing, which accounts for 20%+ of the equation and due to the declining interest rates over the last two decades and more recently declining values it makes a large piece look low.

It's amazing that housing prices don't even factor into the determination of the CPI.

And what's with the ad hominem attacks, people?  Just trying to have an intelligent discussion.  No need to ignore anybody for offering an opinion.  For example, if a certain poster says "sell Hewlet Pakard at $12" only to watch the stock double over the next 4 months, is that cause to ignore that poster?  Absolutely not.  It's merely an opinion gone awry. 

Jack

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Re: Relevance of Inflation
« Reply #12 on: April 09, 2013, 11:59:12 am »
Inflation definitely affects the frugal, perhaps more so than the general populace.  Flashy tech crap and the like has been falling in price dramatically, while staples steadily move upward.  If you are frugal, you do not buy much new flashy crap, but you have no choice on staples.  Happily, it isn't that hard to offset these effects with a few well placed investments.

In my opinion, there's a much bigger reason why inflation affects the frugal more so than the general populace: the non-frugal buy on credit and then pay their debt off later with inflated dollars, while the frugal save their hard-earned dollars now and then buy later, after they've depreciated.

I guess said another way, I think that the best hedge against inflation is [low fixed interest rate] debt.

matchewed

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Re: Relevance of Inflation
« Reply #13 on: April 09, 2013, 12:19:55 pm »
Here's a great explanation of the intervention analysis, why it is not only for higher prices (it is for lower prices too) but the context which it is used. You may not agree with the use of it. But at least understand the why it is used and what numbers it affects.

Don't get me wrong I'm not saying inflation doesn't exist or that it isn't a problem (when it is a problem). I'm saying there is no evidence that inflation is a problem this instant. It can be.

brewer12345

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Re: Relevance of Inflation
« Reply #14 on: April 09, 2013, 12:23:44 pm »
Inflation definitely affects the frugal, perhaps more so than the general populace.  Flashy tech crap and the like has been falling in price dramatically, while staples steadily move upward.  If you are frugal, you do not buy much new flashy crap, but you have no choice on staples.  Happily, it isn't that hard to offset these effects with a few well placed investments.

In my opinion, there's a much bigger reason why inflation affects the frugal more so than the general populace: the non-frugal buy on credit and then pay their debt off later with inflated dollars, while the frugal save their hard-earned dollars now and then buy later, after they've depreciated.

I guess said another way, I think that the best hedge against inflation is [low fixed interest rate] debt.

Very true.  This is part of the reason why a little less than a year ago I refinanced to a 30 year fixed mortgage for the first time in 15 years of being a homeowner and I have no plans to ever pay more than the scheduled monthly payment.
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smedleyb

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Re: Relevance of Inflation
« Reply #15 on: April 09, 2013, 12:38:33 pm »
Here's a great explanation of the intervention analysis, why it is not only for higher prices (it is for lower prices too) but the context which it is used. You may not agree with the use of it. But at least understand the why it is used and what numbers it affects.

Don't get me wrong I'm not saying inflation doesn't exist or that it isn't a problem (when it is a problem). I'm saying there is no evidence that inflation is a problem this instant. It can be.

Inflation is definitely a problem this instant.  Inflation is eroding the purchasing power of the masses (who are witnessing a concomitant reduction in real pay).  It's a double whammy, or what esteemed market tactician Dough Kass refers to as "screwflation."

What we need is more deflation (lower food prices, lower stock prices, lower housing prices) in order to make this world affordable again for the masses.  Stop trying to re-inflate the markets (via dubious QE tools) for the benefit of the one percenters who control most of the hard assets in this country.

Inflation kills the savers, and rewards the indebted and over-extended and insolvent.  That's pure insanity from a mustachian perspective, but it's exactly what central banks across the globe are attempting to do, especially our own.   


matchewed

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Re: Relevance of Inflation
« Reply #16 on: April 09, 2013, 01:13:20 pm »
Quote
Inflation is definitely a problem this instant.  Inflation is eroding the purchasing power of the masses (who are witnessing a concomitant reduction in real pay).  It's a double whammy, or what esteemed market tactician Dough Kass refers to as "screwflation."

What we need is more deflation (lower food prices, lower stock prices, lower housing prices) in order to make this world affordable again for the masses.  Stop trying to re-inflate the markets (via dubious QE tools) for the benefit of the one percenters who control most of the hard assets in this country.

Inflation kills the savers, and rewards the indebted and over-extended and insolvent.  That's pure insanity from a mustachian perspective, but it's exactly what central banks across the globe are attempting to do, especially our own.   

But I haven't seen evidence of unusual inflation. I do see from the same site (BLS) that Mean Annual Wage increase from 2010-2011 was about 1.84% and from 2011 to 2012 was 1.24%. Given that the previous calculations for inflation are around 2-3% yes the cost of goods is outstripping wage increases. I don't necessarily think that is a long term thing but I imagine my crystal ball is just as clear as yours.

I've got no comment on your second paragraph. It is a lot of opinion on which direction things should be going in and what policies we should not do. Not really a substantial part of a discussion of - Is inflation a problem right now?

Yes inflation (at high rates) is a killer for the saver. I'm not sure what the second sentence has to do with the first. I'm assuming you're referring to the QE policies. Again with the crystal ball, I don't know if it is a good thing or not. Our current metrics seem to show it's a good thing but I'm not sure I understand nor can I predict all the long term affects from QE policies.

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Re: Relevance of Inflation
« Reply #17 on: April 09, 2013, 01:29:31 pm »
From an economic perspective, "saving" too much (meaning hording cash) is a bad thing, because that money stops circulating. So some level of inflation is good to discourage this, and encourage investment instead.

Stock market investments, the major tool of a Mustachian, are not strongly affected in value by normal levels of inflation. They will keep up over the long term, although there will be short-term fluctuations that may cause them to lag behind a bit.
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smedleyb

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Re: Relevance of Inflation
« Reply #18 on: April 09, 2013, 01:34:03 pm »
From an economic perspective, "saving" too much (meaning hording cash) is a bad thing, because that money stops circulating. So some level of inflation is good to discourage this, and encourage investment instead.

Stock market investments, the major tool of a Mustachian, are not strongly affected in value by normal levels of inflation. They will keep up over the long term, although there will be short-term fluctuations that may cause them to lag behind a bit.

Hoarding cash under your mattress is a bad thing.  But saving your money and putting it in a bank does not take that money out of circulation.  Just the opposite happens, in fact.  You're making money available for investment which should in theory expand the economy and thus the level of income in a society. 

tooqk4u22

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Re: Relevance of Inflation
« Reply #19 on: April 09, 2013, 02:26:38 pm »
It's amazing that housing prices don't even factor into the determination of the CPI.

Well it does indirectly through the concept of Owners Equivelant Rent, which in technical terms means a guess, and this combined with rent combine for the shelter category and account for 20%+ (may be 25%) of the CPI calculation.   If the actual value changes for housing were included we would see much higher inflation trend although likely deflationary over the last few years. 

tooqk4u22

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Re: Relevance of Inflation
« Reply #20 on: April 09, 2013, 02:38:46 pm »
Here's a great explanation of the intervention analysis, why it is not only for higher prices (it is for lower prices too) but the context which it is used. You may not agree with the use of it. But at least understand the why it is used and what numbers it affects.

Don't get me wrong I'm not saying inflation doesn't exist or that it isn't a problem (when it is a problem). I'm saying there is no evidence that inflation is a problem this instant. It can be.

Inflation is definitely a problem this instant.  Inflation is eroding the purchasing power of the masses (who are witnessing a concomitant reduction in real pay).  It's a double whammy, or what esteemed market tactician Dough Kass refers to as "screwflation."

What we need is more deflation (lower food prices, lower stock prices, lower housing prices) in order to make this world affordable again for the masses.  Stop trying to re-inflate the markets (via dubious QE tools) for the benefit of the one percenters who control most of the hard assets in this country.

Inflation kills the savers, and rewards the indebted and over-extended and insolvent.  That's pure insanity from a mustachian perspective, but it's exactly what central banks across the globe are attempting to do, especially our own.

Inflation kills savers but not investors, deflation kills everything.

From an economic perspective, "saving" too much (meaning hording cash) is a bad thing, because that money stops circulating. So some level of inflation is good to discourage this, and encourage investment instead.

Stock market investments, the major tool of a Mustachian, are not strongly affected in value by normal levels of inflation. They will keep up over the long term, although there will be short-term fluctuations that may cause them to lag behind a bit.

Hoarding cash under your mattress is a bad thing.  But saving your money and putting it in a bank does not take that money out of circulation.  Just the opposite happens, in fact.  You're making money available for investment which should in theory expand the economy and thus the level of income in a society. 


This is correct - banks take your balances and lend them out on a leveraged 8x basis.  This increases the money supply and velocity and results in inflaiton.  Without inflation there are no investment returns.  Without investment returns there are no investors.  Without investors there is no economy.  Thus inflation (modest) is good and deflation is bad.   Moral of the story is that we are just living in one big pyramid scheme but living in the Matrix is blissful.

smedleyb

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Re: Relevance of Inflation
« Reply #21 on: April 09, 2013, 06:26:19 pm »
This is correct - banks take your balances and lend them out on a leveraged 8x basis.  This increases the money supply and velocity and results in inflaiton.  Without inflation there are no investment returns.  Without investment returns there are no investors.  Without investors there is no economy.  Thus inflation (modest) is good and deflation is bad.   Moral of the story is that we are just living in one big pyramid scheme but living in the Matrix is blissful.

Deflation is good, too.  I like buying stocks and real estate at a discount; I like cheap produce and meat.

For the vast majority of the planet, deflation is a godsend.   

brewer12345

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Re: Relevance of Inflation
« Reply #22 on: April 09, 2013, 08:55:31 pm »
This is correct - banks take your balances and lend them out on a leveraged 8x basis.  This increases the money supply and velocity and results in inflaiton.  Without inflation there are no investment returns.  Without investment returns there are no investors.  Without investors there is no economy.  Thus inflation (modest) is good and deflation is bad.   Moral of the story is that we are just living in one big pyramid scheme but living in the Matrix is blissful.

Deflation is good, too.  I like buying stocks and real estate at a discount; I like cheap produce and meat.

For the vast majority of the planet, deflation is a godsend.   

Are you on crack?  Want to know what a "godsend" the last extended bout of deflation was in the US?  Spend some quality time reading "Hard Times" by Studs Terkel.
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matchewed

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Re: Relevance of Inflation
« Reply #23 on: April 09, 2013, 09:06:33 pm »
Can you point out why it is good for the vast majority of the planet to move investments to cash? Or reduce stock investment? Or if they have debt to have that debt take a greater value to the person paying it off?

It just seems a bit short sighted to state cheaper groceries and write off the negative affects of deflation.

arebelspy

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Re: Relevance of Inflation
« Reply #24 on: April 09, 2013, 09:50:13 pm »
Are you on crack?

Hah, one of my favorite replies to him yet.  And that's saying a lot, because grant has some good ones.

Feel free to ignore that poster.

You'll learn.  :)

It took me awhile too.
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smedleyb

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Re: Relevance of Inflation
« Reply #25 on: April 10, 2013, 04:54:43 am »
Can you point out why it is good for the vast majority of the planet to move investments to cash? Or reduce stock investment? Or if they have debt to have that debt take a greater value to the person paying it off?

It just seems a bit short sighted to state cheaper groceries and write off the negative affects of deflation.

The vast majority on this planet have no cash, investments, or debts to pay off.  Global central bank reflation efforts are putting intense upward pressure on commodities (as all the extra money piles into commodity speculation) which disproportionately harms the billions who eke out a living day to day. 

Furthermore, deflation is a natural part of the business cycle, the inevitable effect of overcapacity and hence overproduction.  Some have likened deflation to a kind of economic wildfire that removes old growth and sets the stage for future economic expansion.  While it's effects are harmful to owners of assets and devastating to the highly leveraged, it's a necessary process every economy must traverse in the ongoing cycle of boom-bust capitalism.  Now, the Federal Reserve has taken it upon itself to completely eradicate this component of the cycle; it has, via excessive money printing and interest rate manipulation, tried to eliminate the deflationary component of the business cycle and has pushed the economy into dangerously rarefied space.  This too will end badly, and will make the crash of 2008-2009 seem like child's play, IMO.

Finally, we live in the in the age of the internet, perhaps the greatest deflationary force in history, and yet is there a single soul out there that would argue that it's deflationary effects (driving the prices down on nearly everything) are negative or undesired?  On the contrary, it's cited as a good thing for consumers.  So let's stop pretending that deflation is some kind of inherently evil force to be avoided at all costs and begin to recognize the positive, therapeutic, and inevitable effects/role it has in the unfolding of the business cycle. 


   


smedleyb

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Re: Relevance of Inflation
« Reply #26 on: April 10, 2013, 05:45:45 am »
Hah, one of my favorite replies to him yet.  And that's saying a lot, because grant has some good ones.

While Grant and I have had some major disagreements in the past, I believe there exists a modicum of respect between us that allows us to transcend our earlier, contentious relationship to the point where we can comment thoughtfully and honestly upon what the other says/writes, even to the point of acknowledging that there is tremendous agreement regarding the proper method/style of investing (think long term, avoid the day-to-day noise) and the proper vehicle for said investment (low cost index funds).  I personally enjoy having the limits of my beliefs tested and criticized, and have learned to sharpen my own thoughts by engaging posters like Grant, tooq, King Koin, Detroit Mark, and even yourself.
   




   

matchewed

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Re: Relevance of Inflation
« Reply #27 on: April 10, 2013, 06:31:59 am »
Quote
The vast majority on this planet have no cash, investments, or debts to pay off.  Global central bank reflation efforts are putting intense upward pressure on commodities (as all the extra money piles into commodity speculation) which disproportionately harms the billions who eke out a living day to day.

Furthermore, deflation is a natural part of the business cycle, the inevitable effect of overcapacity and hence overproduction.

But if production slows down who gets the lions share of that now limited production? Those who are scraping by and are therefore less likely to get the goods and services from production or those who do have that cash and realize their opportunity. Would developing nations benefit as a whole in a deflationary period?

I'm sorry I'm stopping on the first sentence of your second paragraph but the remainder of your point hinges on this. You state that this is part of some natural cycle. The entire history of human economics would show that economics is an evolving thing. Current policies are just a blip in the history of it. Basically I don't think there is a natural cyclical aspect to our economic shakeups.

As for your third point - how do you resolve rampant inflation (which you've stated you feel is happening) with the greatest deflationary force in history which is just over a decade old?

I don't think deflation is inherently evil. It does increase the buying power of cash, thereby making goods and services cheaper. You seem to be glossing over the negative aspects by only bringing up the positive side and not even addressing the negative. What would deflation do to our current capitalistic structure? And what longer affects would that have?

smedleyb

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Re: Relevance of Inflation
« Reply #28 on: April 10, 2013, 07:08:33 am »
The vast majority on this planet have no cash, investments, or debts to pay off.  Global central bank reflation efforts are putting intense upward pressure on commodities (as all the extra money piles into commodity speculation) which disproportionately harms the billions who eke out a living day to day.

Furthermore, deflation is a natural part of the business cycle, the inevitable effect of overcapacity and hence overproduction.

Quote
But if production slows down who gets the lions share of that now limited production? Those who are scraping by and are therefore less likely to get the goods and services from production or those who do have that cash and realize their opportunity. Would developing nations benefit as a whole in a deflationary period?

I was simply attempting to bring attention to some of positive aspects of deflation in the realm of commodity pricing such as food, heating oil, cheap consumer goods, etc.   

Quote
I'm sorry I'm stopping on the first sentence of your second paragraph but the remainder of your point hinges on this. You state that this is part of some natural cycle. The entire history of human economics would show that economics is an evolving thing. Current policies are just a blip in the history of it. Basically I don't think there is a natural cyclical aspect to our economic shakeups.

Then you stand alone.  The business cycle is as old as capitalism itself. 

Quote
As for your third point - how do you resolve rampant inflation (which you've stated you feel is happening) with the greatest deflationary force in history which is just over a decade old?

Never said inflation was rampant.  In fact, my first post explains away the apparent discrepancy (deflation in the things we want, like tvs you buy on Amazon, vs higher inflation in the things we need, like food, medicine, education, etc.)  Taken together the inflation picture looks tame, but under the surface many scrape by as they seek out the necessities of life.

Quote
I don't think deflation is inherently evil. It does increase the buying power of cash, thereby making goods and services cheaper. You seem to be glossing over the negative aspects by only bringing up the positive side and not even addressing the negative. What would deflation do to our current capitalistic structure? And what longer affects would that have?

Deflation is absolutely devastating to the investor class, the owners of real estate, and it's positively lethal to the over leveraged and over extended.  Forest fires are terrible, scary things too.  They destroy homes and take lives.  Nobody celebrates the destruction as it unfolds.  But after time, benefits do emerge.

I seek a more balanced approach to the question of inflation/deflation as each brings with it a necessary set of positives and negatives.

brewer12345

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Re: Relevance of Inflation
« Reply #29 on: April 10, 2013, 08:18:13 am »
Are you on crack?

Hah, one of my favorite replies to him yet.  And that's saying a lot, because grant has some good ones.

Feel free to ignore that poster.

You'll learn.  :)

It took me awhile too.

No "ignore poster" function on this forum, huh?
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arebelspy

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Re: Relevance of Inflation
« Reply #30 on: April 10, 2013, 08:29:54 am »
Maybe it can be turned on in the admin settings, but it isn't an available option that I can see.
A silent voice is as powerless as a silenced one.

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grantmeaname

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Re: Relevance of Inflation
« Reply #31 on: April 10, 2013, 03:27:24 pm »
Maybe it can be turned on in the admin settings, but it isn't an available option that I can see.
You can; there are a few people on my ignore list (not smedley or tooqk, though). It's the friend/foe list under "forum profile"

This is correct - banks take your balances and lend them out on a leveraged 8x basis.
Citation needed.

Quote
This increases the money supply and velocity and results in inflaiton.
No, inflation is not an increase in the money supply. Inflation is an increase in the price level.

Quote
Without inflation there are no investment returns.
No, without inflation investments still compensate investors for risk, for waiting, for illiquidity... if inflation drove investment returns, then how could real returns even exist?

Mr Mark

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Re: Relevance of Inflation
« Reply #32 on: April 10, 2013, 07:27:05 pm »
I do agree with Arebelspy. Inflation is the long term financial health risk for an Early FI moustashian. So there are a few things you can do.

1. Have diverse investments and income streams, some of which are 'hard wired' against inflation, like rental housing, land, small high cashflow businesses like pizza and bars,

2. Take the other side of the trade , which has the added benefit of being tax deductible and government subsidised: take a 30 year fixed rate mortgage and make minimum payments. Have excess real estate equity in rental units.

3. Have wicked skills that are by definition inflation proof. Being able to do things yourself means at worst you can hunker down and minimise cash requirements. Be able to grow food on your land, have things to barter.

Super long term the risk for all is being able to afford healthcare and being tax efficient. If we brag too loud about being able to retire at 35 they'll try to take it off you if they can!  So always have a good accountant...

tooqk4u22

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Re: Relevance of Inflation
« Reply #33 on: April 11, 2013, 10:40:39 am »
This is correct - banks take your balances and lend them out on a leveraged 8x basis.
Citation needed.

http://en.wikipedia.org/wiki/Capital_requirement

This is easily searchable and readily available how banks are leveraged, although the capital rules are still somewhat in flux with Dodd-Frank and Bassel. 

Your bank deposit is an asset for you, but for a bank it is a liability or said otherwise a loan to you.  Banks make money buy leveraging these up, which is why "bank runs" kill banks because your money is not actually in the bank...it is in other loans and investments...

From the movie Its a Wonderful Life
In one of the most famous scenes, there's a run on the Bailey Building and Loan, a small bank owned by George Bailey, the tortured character played by Jimmy Stewart. As depositors clamor to get their money back, Stewart tells them, "You're thinking of this place all wrong, as if I had the money back in the safe. The money's not here. Your money's in Joe's house, that's right next to yours. And in the Kennedy house and Mrs. Macklin's house and a hundred others. Why, you're lending them the money to build. … Give us 60 days."

http://en.wikipedia.org/wiki/Capital_requirement


Quote
Quote
This increases the money supply and velocity and results in inflaiton.
No, inflation is not an increase in the money supply. Inflation is an increase in the price level.

Please re-read my comment - I did not say that inflation increased money supply, I said the increase in money supply increases inflation - simple economics and precisely what the fed is encouraging with QE.

Quote
Quote
Without inflation there are no investment returns.
No, without inflation investments still compensate investors for risk, for waiting, for illiquidity... if inflation drove investment returns, then how could real returns even exist?

First of all expectations on inflation, or deflation, absolutely drive investment returns. And you are only compenstated for the risk after it happens....in a deflationary environment it is disatorous to hold equities, have debt, or for a company to invest in growing its business.  Bonds and cash, and paying off debt, are safe havens because the purchasing power increases.



tooqk4u22

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Re: Relevance of Inflation
« Reply #34 on: April 11, 2013, 10:52:45 am »
Smedleyb

On the surface your reasons for saying deflation is good seem logical and are even idealistic as it would be great for the world for everything to be even cheaper and more affordable. 

But practically speaking, your views are wrong.  With serious bouts of deflation there is no investment primarily because it makes no sense to spend $10 on a piece of equipment (or other investment) for it to be worth $9 tomorrow.  And because there won't be investment there won't be jobs and without jobs people won't have money to buy stuff and that stuff that was seemingly going to be more affordable is now not so affordable.

You comment on the business cycle is valid - at some point investment gets so low for so long that there is supply shortage for various goods and services and that will usually result in inflation as demand outstrips supply which then causes other players to invest because there is an apparent return expectation and on and on.

smedleyb

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Re: Relevance of Inflation
« Reply #35 on: April 11, 2013, 11:49:26 am »
Smedleyb

On the surface your reasons for saying deflation is good seem logical and are even idealistic as it would be great for the world for everything to be even cheaper and more affordable. 

Not saying it's good in an absolute sense.  What I said was:

I seek a more balanced approach to the question of inflation/deflation as each brings with it a necessary set of positives and negatives.

That said, it seems to be the universal consensus that inflation is the number one threat to FIRE.  Does it follow that deflation is its number one friend?   Or is price stability the optimal situation?  Is anyone here even using inflation/deflation in the same sense/context? 

I don't even know.  Perhaps another hit off this rock will show me the way...

smedleyb

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Re: Relevance of Inflation
« Reply #36 on: April 11, 2013, 12:10:52 pm »
Please re-read my comment - I did not say that inflation increased money supply, I said the increase in money supply increases inflation - simple economics and precisely what the fed is encouraging with QE.

And therefore we need to distinguish between price increases which are driven by savings that fund investments which lead to productivity gains and thus higher levels of income for society as a whole, as opposed to the complete fucking nonsense our government is engaged in which is simply attempting to generate demand out of thin air by increasing the aggregate money supply via substantial debt obligations.

In short, we need to distinguish between a healthy economy driven by organic growth and one that's strung out on that liquid meth known as QE.

 

tooqk4u22

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Re: Relevance of Inflation
« Reply #37 on: April 11, 2013, 02:27:37 pm »
Smedleyb

On the surface your reasons for saying deflation is good seem logical and are even idealistic as it would be great for the world for everything to be even cheaper and more affordable. 

Not saying it's good in an absolute sense.  What I said was:

I seek a more balanced approach to the question of inflation/deflation as each brings with it a necessary set of positives and negatives.

That said, it seems to be the universal consensus that inflation is the number one threat to FIRE.  Does it follow that deflation is its number one friend?   Or is price stability the optimal situation?  Is anyone here even using inflation/deflation in the same sense/context? 

I don't even know.  Perhaps another hit off this rock will show me the way...

Balance is the best way to approach it.   I agree with you that deflation would be the #1 friend provided that a substantial portion of assets are held in cash/bonds and no debt, but the problem is that you won't have the current return to fund your FIRE and will have to deplete principal to do so. 

Just like anything else in life too much of anything is bad, but a little either way could be good.

tooqk4u22

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Re: Relevance of Inflation
« Reply #38 on: April 11, 2013, 02:30:53 pm »
Please re-read my comment - I did not say that inflation increased money supply, I said the increase in money supply increases inflation - simple economics and precisely what the fed is encouraging with QE.

And therefore we need to distinguish between price increases which are driven by savings that fund investments which lead to productivity gains and thus higher levels of income for society as a whole, as opposed to the complete fucking nonsense our government is engaged in which is simply attempting to generate demand out of thin air by increasing the aggregate money supply via substantial debt obligations.

In short, we need to distinguish between a healthy economy driven by organic growth and one that's strung out on that liquid meth known as QE.

 

Agreed - the Fed is f'ing us right now and it still isn't creating any new economic or job demand.  All it is doing is making risk free assets be high risk assets and risk assets being even higher risk.  The only saving grace is that we are now being supported by the replacement cycle (which is healthy). 

smedleyb

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Re: Relevance of Inflation
« Reply #39 on: April 15, 2013, 12:30:56 pm »
With gold down $200 in just a couple of days, I would think the market has possibly just cast its vote on the inflation/deflation debate.


tooqk4u22

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Re: Relevance of Inflation
« Reply #40 on: April 15, 2013, 01:09:19 pm »
With gold down $200 in just a couple of days, I would think the market has possibly just cast its vote on the inflation/deflation debate.

Gold was so overbought relative to the inflation story (or any other story for that matter) and equities have been running - the capital rotation has to come from somewhere because it hasn't come from bonds.

But your point is valid but with a bit more infor - gold and other commodities are signaling deflation or low demand, bonds even with the fed magic is signaling deflation, and equities would appear to be signaling growth but they are not on historical metrics and are only running because of the relative return thesis (i.e. chasing yield) and if GDP growth expectations wer in the 4-7% range for the foreseeable future then stocks would be attractively valued but with growth of 1-2% they are highly/over-valued (but not on a relative basis).

Overall a bit concerning. 

Mr Mark

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Re: Relevance of Inflation
« Reply #41 on: April 15, 2013, 03:38:33 pm »
Still, all this cash has to end up somewhere, doesn't it. You can't destroy a dollar.

tooqk4u22

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Re: Relevance of Inflation
« Reply #42 on: April 15, 2013, 04:27:40 pm »
Still, all this cash has to end up somewhere, doesn't it. You can't destroy a dollar.

The fed would argue differently.

Mr Mark

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Re: Relevance of Inflation
« Reply #43 on: April 15, 2013, 05:10:37 pm »
I guess the Fed can issue long term bonds and literally destroy the cash.  When do they do that?

Mr Mark

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Re: Relevance of Inflation
« Reply #44 on: April 16, 2013, 04:01:30 pm »
With gold down $200 in just a couple of days, I would think the market has possibly just cast its vote on the inflation/deflation debate.

That's what some are saying, a mass change in sentiment, triggered by Cyprus and India. Problem is gold is not that good at protecting from inflation long term. Great upon collapse of a fiat currency and general anarchy, perhaps. Fleeing a country, storing untaxed income, .... but not a good long term investment really. Perhaps amongst central banks, who hedge it away via leverage anyhow, it has a use.

And it is very pretty!




kyleaaa

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Re: Relevance of Inflation
« Reply #45 on: April 29, 2013, 08:14:49 pm »
I see no reason to assume inflation doesn't impact the extremely frugal any less than everybody else. The price of used goods is not immune because manufacturing costs are not immune.