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Pray for Inflation

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In simple terms, price inflation decreases the value of the money in my bank account. Why in the world, then, would I be doing a rain dance hoping to bring back inflation?

First, I think we need to put the issue in perspective. We are currently mired in an economic pickle brought on by the over-leveraging of pretty much everyone from consumers, to corporations, to the government.

This overhang of debt is something that needs to be addressed before we can hope to have a fully functioning economy -- let alone a healthy stock market -- again. Unfortunately, we don't have too many choices when it comes to addressing this debt overhang, and those choices look about as appetizing as choosing between fricassee of roadkill squirrel and curried moldy liver at a remedial cooking expo.

The choices are clear
Although there are myriad ways to talk around the debt issue and the potential solutions, when we boil it all down, we get to two basic solutions: inflation and deflation.

With inflation, nominal prices rise, and the value of every dollar declines. Assuming that new debt growth doesn't mirror the rate of inflation, the debt burden becomes worth less. Just like magic, the big debt problem suddenly becomes a much more manageable debt problem.

I've obviously simplified that scenario for fear of turning this into some sort of quasi-economic exploration that leaves you begging for your bed, but full-baked or not, the end result is the same -- the currency is devalued, and therefore, the value of debt shrinks.

The second potential solution to our problem is deflation. In this scenario, we simply step back and allow consumers, businesses, and the government to become more financially responsible so that they can pay down their debts and start saving.

While this may sound great to the financially responsible (like me), this sudden jolt of financial sobriety would lead to deflation as money created through the banking system would disappear from the system and drag prices down. Combine deflation with recessionary conditions and poor consumer and business sentiment, and you have a recipe for economic disaster as consumers stop spending and businesses find ever more reasons to hand out pink slips.

But isn't deflation a red herring?
A recent commentary from Bloomberg columnist Matthew Lynn, titled "Deflation Theory Is Lemon We Have All Been Sold," argues exactly this. While I think the author raises some interesting issues with the fears about deflation, I think he also misses some salient points.

For instance, here he lays out his thoughts on the benefits of deflation:

On the other hand, deflation is good news for savers, who get richer just by hanging on to their cash. And it is beneficial for consumers, who get cheaper prices. It is usually good for workers as well, as they can generally hold the value of their wages, even while prices fall.

The benefit to savers is certainly true, but this ignores the trouble created for the rest of the economy. As savers benefit by hanging onto their money, they also are avoiding spending, and likewise avoiding investing -- after all, why invest in companies that are facing tight wallets and falling prices?

Plus, even if workers are able to hang on to their same salaries, companies facing deflationary pressures may have to look toward becoming increasingly "efficient." And as we all know, becoming more efficient typically means laying off workers. Those savers we visited above may feel smug when deflation first sets in, but if a rocky economy costs them their jobs, the "benefits" of deflation may not seem so clear.

Investing for any outcome
Whether you like it or not, the outcome of your equity investments is going to be impacted by the direction the recovery takes.

If the world's central banks pull off the ultimate coup and are able to create just the right amount of inflation, most stocks should do well. The much-maligned banks like Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and JPMorgan Chase (NYSE: JPM  ) should all get their footing back and start raking it in again. Consumer spending will kick back up above today's levels, and companies like Target and Nordstrom will no longer be on "avoid" lists.

If the inflationary actions push prices too far and we end up with uncomfortably high inflation, then companies that can increase prices in step with inflation will succeed. This means consumer staples like Coca-Cola (NYSE: KO  ) , health-care companies such as Merck (NYSE: MRK  ) , and commodity players (yes, folks, that includes gold) like ExxonMobil (NYSE: XOM  ) .

In the unlucky event that we end up with stubborn deflation, it's going to be a similar pricing-power crew that will do the best -- so we're talking companies like Coke and Altria (NYSE: MO  ) . Commodities are less likely to fare well in this scenario, though.

Holla back now
Now it's your turn to weigh in. Think I've hit the inflation nail on the head? Think I'm absolutely nuts? Chime in with your thoughts in the comments section below.

Further economic Foolishness:

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  • Report this Comment On August 20, 2009, at 10:30 AM, prginww wrote:

    The author is obviously under 40, and doesn't remember the pain caused by inflation in the 70s and early 80s.

    Inflation of 10-12%/year devalued savings, supressed the stock market, and perhaps worst, ruined the lives of people on fixed incomes - the elderly.

    We should not be looking at monetary policy to solve our political, financial problems; we must become more fiscally responsible. Government and individuals have to shred the credit cards, and live within their means.

    But I'll never run for office on that platform...

  • Report this Comment On August 20, 2009, at 11:02 AM, prginww wrote:


    The inflation of the 70's was actually something called, "stag-flation" which was a stagnant economy coupled with very high inflation. But you are correct, that is horrible for anyone dependent on a fixed income.

    Moderate inflation (not simply price stability) is one of the foundations of our modern economy and is one of the reasons many people don't worry too much about running up debt. Look at the mortgage your parents took out on their house decades ago. It was likely comparable to most mid-sized car loans today. In the mean time, their income likely continued to rise making that mortgage easier and easier to manage. However, it is easy to see what happens when that paradigm breaks down and prices actually fall instead of a slow steady rise. Pray for the return of slow, steady, mild inflation.

  • Report this Comment On August 20, 2009, at 12:07 PM, prginww wrote:

    The author's wish will certainly come true.

    I don't understand those who express concerns about deflation.

    The Fed is both authorized to print unlimited money out of thin air, and one that is clearly committed to doing so to forestall short term economic pain.

    It seems an inevitable cause and effect that monetary inflation leads to price inflation. That doesn't mean everything will go up in price, it could be that some assets (e.g. commodities) skyrocket, while some in which there is a huge excess of supply versus demand (e.g. real estate) may flounder.

    But, overall, there will be inflation. You can take that to the bank.

  • Report this Comment On August 20, 2009, at 12:10 PM, prginww wrote:

    "Pray for the return of slow, steady, mild inflation."

    I don't think that would do any good.

    The only options we have are a deflationary depression or a money printing binge that temporarily props up the economy and leads longer term to an inflationary depression.

    US politics, and probably that in most other countries of the world, dictates that THOU SHALT PROP UP THE NEAR TERM FUTURE EVEN AT THE EXPENSE OF THE LONG TERM FUTURE.

    No politician is going to advocate a depression now in order to prevent an even worse one later. OK, maybe a few on the fringe like Ron Paul, but they have no influence.

  • Report this Comment On August 20, 2009, at 12:16 PM, prginww wrote:

    "Inflation of 10-12%/year devalued savings, supressed the stock market, and perhaps worst, ruined the lives of people on fixed incomes - the elderly."

    I wasn't much aware of economics back then but for some of that time at least, you could earn interest rates that kept up with inflation, even got you a real return if I am not mistaken.

    The thing that concerns me about the coming bout of inflation is that we may see price inflation of 10-12% even in the face of bond yields of 3-4%, because the Fed will buy up as much government debt as needed in order to hold long term interest rates down, because high long term interest rates would deliver a death blow to the fragile real estate market, resulting in a huge new wave of foreclosures, etc.

  • Report this Comment On August 20, 2009, at 12:18 PM, prginww wrote:

    Forgot my concluding point, which is:

    If inflation runs 12% per year for several years while CD's pay perhaps 2-3%, then savers will lose about 30% of their money in about 3 years.

    Presumably equilibrium would eventually get re-established at some point, either inflation would go down or interest rates would go up.

    But, there could be a several year time window when savers and pensioners really get hammered.

  • Report this Comment On August 20, 2009, at 12:38 PM, prginww wrote:

    If you don't understand the problems caused by deflation, consider for a moment your house. In a deflationary time (such as we are in now with respect to housing prices) it becomes less advantageous and possibly even financially perilous to own anything - especially housing. Who would buy a house if we entered a period of intentional deflation? And if no-one is buying them, where would you live? After all, someone has to actually own the house you rent. Given this situation, surely most of you can see that the quality of housing would decline as there would be no reason to repair or replace it.

    A moderate rate of inflation is the only real path to a successful economy.

  • Report this Comment On August 20, 2009, at 12:52 PM, prginww wrote:

    We will almost certainly see inflation, but the real question is when. It seems to me the lesson Bernanke and Geithner learned from the Great Depression is don't take your foot off the gas too soon. Frankly, I think they will see some inflation as a positive sign of recovery. The danger comes if inflation comes too quickly. I'm young and I own diversified equities so I'm not terribly worried. However, if I were about to retire, I'd probably be a lot more concerned. It would be a tough balance between risking money in stocks if the market declines or risking not being in the market during a period of high inflation. I think I'd probably be holding bonds and stock in defensive income companies like P&G, Coke, Pepsi, Waste Management, etc. Actually, I have money in these kinds of stocks now, but instead of owning bonds in addition to these, I own other stocks with more risk attached. I think no matter what comes an intelligently diversified, including geographic diversification, individual will be just fine.

  • Report this Comment On August 20, 2009, at 1:05 PM, prginww wrote:

    Deflation is liberty.

    The author makes no mention of the Cantillon effects of money creation. Interesting.

  • Report this Comment On August 20, 2009, at 1:08 PM, prginww wrote:

    theHedgehog - I think the idea of deflation as a good thing is sort of like a drug addict doing something teh makes him really hit bottom and realize he needs to clean up his act. The thing he did to realize that is bad, but it leads to something good. Of course, deflation can only be helpful if it's temporary.

  • Report this Comment On August 20, 2009, at 1:10 PM, prginww wrote:

    Balance. We've all heard it. A balanced portfolio with the proper assett allocation, periodic rebalancing, and continous installments will perform well over time regardless of the markets short or mid-term performance. Think in terms of decades. Put yourself in a balanced personal finance position as well. For example: I have no consumer debt (good). I do have three mortgages (good debt): 1 home and 2 investments. Inflation? Pay down (good) debt. Deflation? Invest (dollar cost average into the beaten down prices). Lose my job? Get another. Move, if necessary. My grandparents were in German forced labor camps before moving to America. Ten years in America they lost everything to a sleazy business man. Today they are 85 years old and retired financially comfortable in their 60's through hard work and thoughtful investing. An example for all of us.

  • Report this Comment On August 20, 2009, at 1:13 PM, prginww wrote:

    The lowering of the debt to a manageable level through inflation ignores the real issue: the fact that we have such a debt.

    Inflation will make it even more advantageous to spend - that $1000 TV that I can't afford today maybe $1300 by next summer when I can, so why not buy it now. The biggest reason that we are in this mess is because we have lived beyond our means, so how does it make sense to perpetuate that?

    Those that love inflation should read "When Money Dies: The Nightmare of the Weimar Collapse" ( That inflationary period started very benignly as well.

    By the way, an interesting thing about inflation is that it creates jobs. Buying that TV instead of saving the money increases demand which leads to an increase in production and a lowering of the unemployment. In that way inflation is like a drug - it feels great but then you become completely dependent upon it and when it stops, life is quite miserable.

  • Report this Comment On August 20, 2009, at 1:16 PM, prginww wrote:

    with obama thowing money away faster than it can be printed we will have more inflation than ever before...

  • Report this Comment On August 20, 2009, at 1:21 PM, prginww wrote:


    Runaway inflation is just as dangerous as deflation. I don't think anyone would argue with that. But, of the two, given a choice between 3% inflation or 3% deflation, I think the choice is obvious.


  • Report this Comment On August 20, 2009, at 1:27 PM, prginww wrote:


    I agree, but can we keep it to 3%?

    It is politically expedient to print our way out of this mess so I'm not sure how you put the brakes on to keep the inflation rate low.


  • Report this Comment On August 20, 2009, at 1:31 PM, prginww wrote:

    I am betting on inflation as well and have converted a portion of my cash reserve into Gold, Silver and Land. If we are going to have inflation I hope to hold things that will hold value when the dollar doesn't.

    I think the risk of deflation is contrary to most historical precedent. Is there any recent examples of rampant deflation?

  • Report this Comment On August 20, 2009, at 1:40 PM, prginww wrote:

    Don't worry you will get what you pray for. On the other hand you may not like what you get.

    48% of the S&P 500 sales come from exports.

    The weak $ policy is a deliberate attempt to inflate. That allows the debt to be paid back more easily.

    But the weak $ can use exports as an engine for climbing out of the recession.

    However, the side effects can be brutal.

    1. Savers get the shaft (always happens with Keynesian approaches).

    2. Unemployment will stay high for a long time.

    3. Interest rates will rise which will choke of the growth in the long run.

    4. China will be stronger and America will be weaker.

    5. Taxes will rise substantially. Lowering them will not be much of an option given the massive deficits that will cause the weak $.

    6. Some sectors will have deflationary pressures while other inflate rapidly.

    7. Wages will not inflate. This will act like a major defacto tax on the middle class.

  • Report this Comment On August 20, 2009, at 1:49 PM, prginww wrote:

    JTShideler, how recent? Check out the Great Depression.

  • Report this Comment On August 20, 2009, at 2:10 PM, prginww wrote:


    "It is politically expedient to print our way out of this mess so I'm not sure how you put the brakes on to keep the inflation rate low."

    It's more than just politically expedient - it's crucial. We are in worse shape than a lot of people can imagine, much less realize. The choices seemed to be collapse and deflation or monetization. For now, the collapse has been fended off. As long as we can keep the right wingers and their mythical "free market" ideology out of monetary policy, we have a chance. (I say mythical, because we do not have a free market, so free market principles cannot apply.)

    The time to worry will be when treasury auctions start failing. Some say that will happen when (not if) China stops buying. I say that China has no choice, because they must do something with the hundreds of $billions they get from our consumers every year.

    OTOH, they could decide to invest more directly in America - using purchases of Commercial Real Estate and Corporations as a means of directly disposing of those USD. If so, the question will be whether a higher interest rate would benefit the new owners of US companies. I'm betting it won't, so China will continue to buy enough treasuries to hold interest rates down. And there's also the fact that they won't make those purchases if they make no long-term economic sense - i.e. if they feel that America is in a downward spiral.

    Short answer: nothing changes for quite some time other than China complains about our inflating away the money we send them.

  • Report this Comment On August 20, 2009, at 2:16 PM, prginww wrote:

    StopLaughing wrote variously:

    "But the weak $ can use exports as an engine for climbing out of the recession.

    However, the side effects can be brutal."

    "1. Savers get the shaft (always happens with Keynesian approaches)."

    Considering that we are an investment oriented economy, why would this be a surprise regardless of economic outlook?

    "2. Unemployment will stay high for a long time."

    I'm having trouble buying this one during a time of increased exports, but I agree that pay might stagnate.

    "3. Interest rates will rise which will choke of the growth in the long run."

    I'm also having trouble buying this one, too; unless you're saying that our domestic production increases to the point that we import less from China. In that case, I don't see it happening either, so...?

    "4. China will be stronger and America will be weaker."

    I think you have this one backward. China's power has increased inline with the number of USD our consumers have sent them. If we start taking USD away from them, how does China get stronger?

    "5. Taxes will rise substantially. Lowering them will not be much of an option given the massive deficits that will cause the weak $."

    I don't see the necessity for this happening during an era of increased exports.

    "6. Some sectors will have deflationary pressures while other inflate rapidly."

    Umm. So? That's the natural fate in a capitalist environment.

    "7. Wages will not inflate. This will act like a major defacto tax on the middle class."

    I'm not so sure about this one either; considering that the underlying thesis of yours is increased exports. Why would wages stagnate during a time of increased production?


  • Report this Comment On August 20, 2009, at 2:29 PM, prginww wrote:

    I don't think we need to's COMING...History has always shown this. In six months the "Hopey/Changey" crowd printed more money out of thin air than Bush did in four years. Wait till the health care debacle comes down the pike!

  • Report this Comment On August 20, 2009, at 3:01 PM, prginww wrote:

    There is a solution that is not inflationary. It will need a new web portal that has several aspects:

    1st asks everyone how they would spend a $150,000 salary

    2nd distill from the answers what we should align our productive capacity to produce

    3rd have a design section where CAD/CAM wizzards can design the robotics to produce what we want

    4th have a job training section so those of us who are unemployed or underemployed can learn the new technology to create and support the new robotics

    5th have a next generation "" on steroids that is inexpensive and matches the newly trained people to the newly determined jobs to produce the newly realigned production

    Currently we wait for companies to supply what they think we want, based on market research that looks at what people can afford right now. What's missing in this line of thought is that when people lose their jobs or take lower paying jobs, their desires and wants did not decrease, and their needs did not disappear. They still have to pay for basics, and would happily enjoy more as they could afford it.

    The problem is how to achieve an ascending spiral of production instead of a constricting spiral of successively smaller retrenchments. If we don't spend, the economy has no indication what to produce and so will produce less. If less is produced, there is less income from which to pay fewer workers and less money to do R&D or invest in new capital. As things collapse we continue to see our dreams fade further and further into the distance. We need a new system that can fill our sails with hope.

    The deficit raging (and further ballooning the debt). Unemployment is at 60 year high. Economic growth stalled. Google's managament says it's time to think of how to live with less. People in the heartland are stocking food for an expected collapse. The trade deficit with Chine is storing an abominable tsunami just waiting to be unleashed on us in an unexpected, broadside, wholesale purchase of our assets beyond our wildest nightmares.

    The writing on the wall is large and obvious. It's time we pull our heads out of the sand and read it. We are supposed to be intelligent, rational beings. There's no reason we can't think ourselves out of this mess. To "Pray for Inflation" is to admit and accept defeat. I for one am not in that camp.

  • Report this Comment On August 20, 2009, at 3:13 PM, prginww wrote:

    "4th have a job training section so those of us who are unemployed or underemployed can learn the new technology to create and support the new robotics"

    No offense, gfbjohn, but this one makes me laugh every time I see it. It is perhaps the biggest hoax that the politicians have ever tried to sell. As a matter of fact, this one has been floating around since the 70s when the popular thing for state unemployment offices to do was to train unemployed housewives to be "data entry clerks". Never mind that there weren't really jobs available for most of the "graduates" of these courses.

    It is not simply a matter of training people in <insert favorite training subject here>. If you think it is, then ask your state college what percentage of their engineering students actually get jobs in their major. Be sure to divide this by the sexes so you get a real flavor of what's wrong with the "just train them" mantra.


  • Report this Comment On August 20, 2009, at 4:07 PM, prginww wrote:

    Isn't deflation better than inflation? Why would you want your $1 to be worth less? Money should be more rare so deflation is where its at!

  • Report this Comment On August 20, 2009, at 4:17 PM, prginww wrote:

    Inflation acts to transfer wealth from those least able to pay to those who already have too much.

    Inflation favors capital over labor.

    Inflation robs the poor to feed the outrageous appetites of the rich.

    Current society makes all sorts of decisions based primarily on profits for those who own the means of production. That, in short, is why we have wars, poverty, crime, and economic crises.

    A socialist reorganization of society would make decisions based primarily on providing food, shelter, clothing, education, and culture for society at large, more specifically, for those who produce the wealth through their labor.

  • Report this Comment On August 20, 2009, at 8:31 PM, prginww wrote:


    "Inflation robs the poor to feed the outrageous appetites of the rich"

    Interestingly enough that isn't necessarily true. In the 20's in Germany it was the middle class that got hammered - the working class was more or less able to keep their wages in step with their rising currency due to the power of the unions. Of course, when it all came crashing down at the end, everyone suffered greatly.

    The unemployed were the ones that really were hammered, but then rising inflation brought on a rampant consumer economy which kept unemployment quite low.


    I guess we both agree that inflation is coming, but I still am not convinced that it is good. It does nothing to extinquish the desire to over-extend on credit, which is something that I feel is at the root of this fiasco.

    Time will tell and maybe I'll wind up owing you a bottle of scotch over this one. :-)

  • Report this Comment On August 20, 2009, at 8:42 PM, prginww wrote:

    Why invest and hold if we are going to be beaten up with inflation and also likely increase in capital gains tax?

  • Report this Comment On August 20, 2009, at 10:16 PM, prginww wrote:

    Rich says: "I guess we both agree that inflation is coming, but I still am not convinced that it is good. It does nothing to extinquish the desire to over-extend on credit, which is something that I feel is at the root of this fiasco."

    It all comes down to how much inflation we're hit with. A little is good, a lot is not.

    I do agree with you on the subject of easy credit. But, let's not forget where this started. The congress put pressure on Fanny Mae and Freddy Mac to make housing available to everyone. They did this by loosening both creditworthiness requirements and equity.

    Congress was also complicit in the wild inflation of housing prices by installing a $250,000/$500,000 tax-free clause on the sale of primary housing. House ceased to be just a place to live and became an investment to exchange. People sitting on houses that had increased in value were prompted to trade up. As they traded up, other houses increased in value as a natural result until housing became a public ponzi scheme and eventually prices collapsed.

    Sure, it all started with the great sounding idea of home-ownership for all. Unfortunately, the simple fact is that not everyone is financially responsible enough to own a house. Nor is it within everyone's financial means. The question will be whether congress can grasp and accept that simple fact. If yes, then we get out of this. If no, then more misery is yet to come.

    A bottle of Glenlivet will be fine. :)


  • Report this Comment On August 21, 2009, at 4:52 AM, prginww wrote:

    Interesting article....and comments.

    I certainly remember the inflation of the 1980s. But what people seem to "forget" is that the inflation of the 1980s was preceded by the inflation of the 1970s. I worked in banks (low level, teller and head teller) and in 1973, the banks were paying interest rates of 5 to 5.5% on ordinary passbook account. (What is a passbook, you ask? LOL)

    In 1975 you could get a 4 year CD for 7.5%, and I am sure many people did even better than that. By the time I moved to FL (because I couldn't afford to live in New York!) by 1981 or 1982, people could get "money market accounts" paying 18%! No joke!

    The "pain" of inflation depends on where you live, how old you are, what your position in life is, and what are your goals. My parents lived "high on the hog" with their CD ladder, and my dad put them in the longest term he could. After all.....getting 12 to 18% on your savings was great! Meanwhile my young family was suffering, because we couldn't sell our house because no one could afford to take a 15% mortgage. The only people who COULD afford the house, were retirees who were paying CASH.

    Now that I am "retirement age" would definitely welcome inflation. Sorry about that folks! This is my story, and I'm sticking to it!

  • Report this Comment On August 21, 2009, at 11:58 AM, prginww wrote:

    There is a common baseline, Inflation will be relevant to peoples ability to pay .... If there is a given amount of wealth

    in a society ... and that wealth dissappears ...through a collasp or catastrophic event , and the officials of that society decide to REPLACE a portion of the wealth that is GONE by printing money ... this in itself is not inflationary.. mere insurance .... the distribution of this new money is the key .. who ultimately receives it .. .

  • Report this Comment On August 21, 2009, at 2:33 PM, prginww wrote:

    AlexisMachine wrote: a lot of good stuff. Plus one for you.

  • Report this Comment On August 22, 2009, at 1:16 AM, prginww wrote:

    There is no capitalism without capital .. I am amazed at people who still believe capitalism exist . . Go to the bank borrow against your house ... open a shoe store .. hhaa hhaa ..wweeww weee the american dream ... come on people

  • Report this Comment On August 22, 2009, at 1:25 AM, prginww wrote:

    Capitalism ... open a business ... lie about the profits .. go public ... sell the shares ... keep lying about the profits ...steal 5 billion ..... that's the new capitalism .. by the way scream ...goverment regulation is bad .. don't forget to hire your own accounting regulators .... to make sure your accountants are on the up and up ..hhaa hhaa

  • Report this Comment On August 23, 2009, at 11:25 AM, prginww wrote:

    Edelgreg nailed it. This author is still buying the debt deflation fairy tale his professors sold him. Who would seriously wager that the author could pass a quiz on who Arthur Burns was without googling it?

    You can have inflation and decreasing relative GDP. Burns convinced Nixon inflation would lead to full employment and help him with re-election. As an added bonus, the plan would reduce the relative value of the debt from the war. Unemployment increased, relative tax revenue decreased, and the US was forced to pay extreme interest on its debt.

    Investors will flee from Stagflation America Part II. Try selling a McMansion at 17% interest.

  • Report this Comment On August 23, 2009, at 12:12 PM, prginww wrote:

    upupaepops wrote:

    > A socialist reorganization of society would make decisions based primarily on providing food, shelter, clothing, education, and culture for society at large, more specifically, for those who produce the wealth through their labor.<

    Muhhhhhhaahhaha, yea, this sure did it for the Soviet Union? If you believe that the proud, free Americans that live today should agree, then we have another civil war to fight.

  • Report this Comment On August 23, 2009, at 12:13 PM, prginww wrote:

    Out of curiosity what percentage of Americans have variable rate mortgages? When Spain upped their interest rates the 95% or so of Spaniards with variable rate mortgages got destroyed, and Spain is now at around 16-18% unemployment.

  • Report this Comment On August 24, 2009, at 12:04 PM, prginww wrote:

    Here's a rather interesting article that we may be stuck with Deflation:

  • Report this Comment On August 24, 2009, at 6:55 PM, prginww wrote:

    You might want to consider this history lesson when trying to justify inflation as a policy:

  • Report this Comment On August 24, 2009, at 7:46 PM, prginww wrote:

    I have read all the posts.

    The comments range from insightful to dreadful.

    For my money the best post comes from AlexisMachine.

    It appears that many posters are too young to remember the last bout of major inflation we endured as a nation. That was in the 1970's. I remember all too well. I suggest you research Milton Friedman articles showing the correlation between money supply and inflation rate. Another variable that affects inflation is output. It is very clear to me that we are in store for some hellacious inflation. It is difficult to predict when it might start, but I would guess by fall of 2010. Hold on to your hats!...and prepare!

  • Report this Comment On August 25, 2009, at 1:18 AM, prginww wrote:

    In addition, you can read this very in-depth history of the failure of the FED and its inflationary fiat money:

  • Report this Comment On August 25, 2009, at 10:14 AM, prginww wrote:

    We can neither inflate nor deflate our way out of this mess, so why pray for either?

    True, inflation favors debtors, especially those with large balances and fixed interest rate loans -- PROVIDED that they keep their jobs. But inflation screws both the richest and the poorest: those on fixed incomes, and those who are creditors.

    Deflation, on the other hand, has just the opposite effect. If you HAVE money, it's worth more; if you OWE money, that debt becomes a greater drag on you.

    What's important isn't so much what we Fools "pray for" in this devil-or-the-deep-blue-sea scenario, as that we PREPARE for both contingencies. To date, this has been a Deflationary depression (a la the US during the Thirties), but it could easily become an Inflationary one (a la Germany during the same time period.)

    But the odds that an all-seeing, all-knowing Fed will be able to sop up all that excess liquidity before it gets into the pockets of those who will actually spend it, bidding up the prices of everything and thus igniting the fires of inflation are about -- ZERO.

  • Report this Comment On August 25, 2009, at 10:26 AM, prginww wrote:

    When the chips are REALLY down, Governments will always favor policies that keep voters employed, over those that keep their campaign contributors wealthy.

    My bet is therefore on the inflationary scenario, no matter on who is in power -- Democrat Tweedledumbs or Republican Tweedle-dee-dees.

    People who are working have no time to organize, to protest, and take the other actions needed to throw the bums out & restore the health of our democracy.

    Our politicians know that "Bread and circuses" is as true today as it was in ancient Rome!

  • Report this Comment On August 25, 2009, at 2:26 PM, prginww wrote:

    Interesting to see all the comments about the 1970's. I've been thinking it felt like the late 70's for the past couple of years. Similar story, increasing commodity prices driving inflation, though this time it's caused by increased demand and not supply restrictions.

    I do think we'll get moderate inflation, though I doubt we see the levels we saw in the early 80's. I anticipate a 2.5 to 3.5% average for the medium term (5 yrs) with an upside of 8% which is much different from the 80's (prime reached 22% and savings accounts paid up to 14%).

    Another difference is the leverage the large banks created and the increase in money supply that they created in the last 5 years. Milton Freedman's main influence on monetary policy suggested that all monetary changes worked through the fed. With the continuing leverage increases we allowed banks, the banking system created a large monetary infusion. With the financial collapse, much of that leverage evaporated and the money supply shrank dramatically.

    That said, the 1+ trillion of new paper we printed in the last 9 months won't necessarily trigger the inflation everyone is worried about because it is just replacing the monetary supply that the banks had created.

    If it's not enough (and right now that's my bet), we'll continue to get deflationary pressures. So, I imagine we'll see the fed continuing to increase the money supply.

    For those of you concerned about fiscal conservatism, the value you should be looking at is the difference between deficits (amount we borrow) and the amount the fed buys (amount we print).

    The story still isn't pretty, but it's not nearly as bad as the Washington critic's expound.

  • Report this Comment On August 25, 2009, at 5:12 PM, prginww wrote:

    with the disaster obama has created with his mindless spending inflation will be unbelievable but still only a small problems as the depression in the US turns worse this winter......

  • Report this Comment On August 26, 2009, at 11:33 AM, prginww wrote:

    Weren't we in a deflationary period until the governments of the world led by the US decided to pump billions and then trillions into the banks leading to this incredible yet unjustifiable rise in the stock market?. So we go into inflationary period.

    Didn't we get into this bloody mess by spending more than we should?. People buying things on debt with no real productivity. What the heck is the government doing today by getting more into debt?.

  • Report this Comment On August 26, 2009, at 12:58 PM, prginww wrote:

    Can someone please answer me a question. If inflation takes place and out dollars are woth less, doesn't this mean that the prices of stocks will go up. It would take more dollars to by a share meaing the share price goes up correct?

  • Report this Comment On August 27, 2009, at 3:20 PM, prginww wrote:

    Yes, the prices go up, but the net affect to your wealth (total buying power) is likely to be zero.


  • Report this Comment On August 27, 2009, at 7:50 PM, prginww wrote:

    I think it's somewhat amusing that there is such a raging debate about inflation now - after we just went through one of the biggest inflationary periods in our economic history. Real estate prices soared along with commodity prices - and not just because the world economy was expanding. We were on an inflationary borrow-to-spend binge that saw the price of gold more go from less than $300 an ounce to the $945 it is at today. Coupled with complete fiscal irresponsibility from the Fed, Congress and the White House, today we are in a mess in which we are attempting to solve our problems by employing an even bigger dose of the idiotic borrowing and zero-interest government loans that got us into this mess.

    A couple other things: Inflation at about 3 percent a year is generally considered OK in part because this is how fast the economy typically has expanded . . .

    Also, there is this great falacy that "investing" directly helps individual companies. Companies rarely benefit from the massive buying and selling of their stock unless they do a secondary offering, etc. Otherwise, it's all about speculation - and we should call it speculation instead of investing. Basically buying stock in a public U.S. company is the same as trading oil futures - or whatever - because you are not going to take delivery of the oil and you're not going to have someone send you the part of a corporation that you supposedly own via its common stock. Yes, you might get dividends and you might make money when you sell your stock. But as far as "investing" in that particular company - that's a smoke screen.

  • Report this Comment On August 27, 2009, at 8:01 PM, prginww wrote:

    I am somewhat amused that everyone seems to be worried about inflation now - after one of the biggest inflationary periods in our history. An ounce of gold in January 2000 sold for less than $300 - today it is about $945. The dollar slowly eroded from 2000-2008 as our country borrowed and spent and the great Greenspan kept interest rates at near-zero in a despicable display of financial stupidity.

    Now, we are attempting to bail our way out of a sinking ship by taking on more ballast. The very policies that led to our economic collapse have been recreated x 1,000 and the result should be fairly obvious.

    As a point of reference, a 2-3 percent rate of inflation is considered OK because, in general, our economy has grown at that rate - meaning the $$ supply has kept pace with economic growth. That, obviously, will not be happening again anytime soon.

    A final point: saying that individuals "investing" in a company by buying stock is completely misleading and is one of those fallacies repeated so often everyone takes it as true.

    People rarely invest in a public company in the United States - they, instead, are engaging in "speculation" - betting whether a company's stock is going to go up or down. Yes, absolutely the same thing oil and other traders are lambasted for is the very thing investors do every day in this country by the millions. A company might benefit from a liquid market for its stock when it wants to do a secondary offering and company officials love their stock options - but as far as my stock purchase benefiting the company whose stock I am buying, that is just a joke.

  • Report this Comment On August 27, 2009, at 8:02 PM, prginww wrote:

    Sorry about the multiple posts. My Internet access blows.

  • Report this Comment On September 05, 2009, at 12:47 PM, prginww wrote:

    I don't need to pray for inflation. I see it constantly when I buy food, pay my utility bill, pay my insurance bill, pay my taxes and pay for health care. With the exception of the oil bubble popping in late 2008 into early 2009, none of these things are getting cheaper -- just the opposite, in fact.

  • Report this Comment On September 06, 2009, at 2:03 PM, prginww wrote:

    Let me see if I get this right.

    A whole bunch of people, including most governments of the free world have been perfect idiots and acted as if money grew on trees. When it became evident that it does not, they were in a big pickle and broke. Now let's reward the perfect idiots by inflating money values so the tree money they harvested as debt will rot a little and they won't be so bad off. That way the perfect idiots can start looking for a new money tree to harvest until the next mess comes along.

    Great strategy. The only ones that lose on that deal are those who were not perfect debt idiots and kept a good balance sheet in the first place. Since the idiots seem to outnumber the non-idiots anyway I guess it makes perfect sense. I just wonder when the perfect idiots will crash and burn once and for all. Not too far down the road I would imagine.

  • Report this Comment On September 08, 2009, at 7:35 PM, prginww wrote:

    I agree with Ziggy29 - I already see the inflation happening. It's either in things being the same price, but significantly smaller in quantity or by blatant raising of prices. Yes there is more unemployment and some prices - mostly in construction or home improvements - have gone down, but that's because of lack of demand. With groceries, we need to eat, and those prices are rising! Though we may have a deflationary period, inflation will return.

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