The Other Side of Inflation

There's something funny about inflation: how one-sided the criticism is.

Inflation, of course, raises prices, which is bad -- and that's usually where the criticism ends.

But there's another side of inflation: the impact it has on wages and assets. If prices go up 10%, but wages and net worth also rise 10% (or more), are you worse off?

Yale economist Robert Shiller wrote a paper in the 1990s asking people around the world why they feared inflation. While respondents were overwhelmingly fascinated with inflation and feared its wrath, most couldn't gather much more than an emotional response. Shiller wrote:

"When asked why they dislike inflation, people often protest that they are not experts, and they need to be prodded to respond. When they do respond, it is often with what seem to be incompletely thought-out ideas and vague associations about inflation, yet a conviction that inflation is important. Most people seemed to be vulnerable to fundamental confusions about inflation, and in spite of their convictions as to the importance of inflation, seemed not to have given really serious thought to it."

After his interviews, Shiller elaborated: "[T]he main issue for the public with regard to inflation is just that people do not see the connection between inflation and increases in income that might be associated with it."

Might may be the key word there. Over certain periods of time, inflation can, of course, outstrip rising wages. And once you get into a hyperinflationary spiral, like Zimbabwe faced in recent years, people are inarguably worse off.

But those tend to be the exceptions.

At a recent conference with Berkshire Hathaway (NYSE: BRK-B  ) Vice Chairman Charlie Munger, a questioner asked Munger about inflation's "devastation" over the past half-century. In 1950, a corned-beef sandwich at a local diner cost $0.55, the questioner noted. Today it's $10. How can a country be anything but a failure when its currency loses 95% of its value to inflation, he wondered.

Munger's response was characteristically curt: "If you think the past half-century was bad, you will have serious problems in life," he said. "Despite inflation, we've been a huge success. Real GDP has grown 2% per year per capita. That's fantastic. The period you describe as miserable was a tremendous time for the American economy. You've described success."

A few numbers illustrate his point.

A dollar may have lost 95% of its value since 1950 (at least in corned-beef sandwich terms), but that only applies to those who kept cash under their mattress. If the $0.55 it took to buy a sandwich in 1950 were put in a risk-free savings account earning 5%, it'd be worth $11 today. Put in a stock index fund, it'd be worth nearly $200. The real gift of companies like Coca-Cola (NYSE: KO  ) and Altria (NYSE: MO  ) is their ability to raise prices with inflation over time -- something their investors have benefited from handsomely. Only those who shunned all investment return saw their dollars depreciate 95%. And they deserve the outcome they received.

Beyond investments, incomes tend to follow the same path. Despite inflation, things have generally gotten better over time.

Real disposable income -- that's after-tax income adjusted for inflation-- has increased threefold since the early 1950s. Yes, a corned-beef sandwich may have cost $0.55 in 1950, but the average household income back then was $3,900. Today, the average household earns that much every three weeks. Inflation raced along between 10%-13% per year in the early 1980s. But what else grew at roughly the same rate? Incomes.

The Bureau of Labor Statistics has records detailing the percentage of income spent on various items going back to 1901. The improvement in some important areas is astounding. In 1901, 46% of an average income went to food and beverages. By 1950, that was down to 33%. By 1987, 19%. Today, it's 14%. The Consumer Price Index shows about the same: Disposable income has risen twice as fast as food prices over the past 50 years.

There are counterarguments here. Three areas in particular have been hit by genuine inflation over time: housing, education, and health care. Part of this is caused by quality -- homes are bigger, education buys a better income, and health care is more advanced -- but all three, apples-to-apples, are still more expensive today than in the past. Some of why households earn more today is because more women are working, creating two incomes where there used to be one. Inflation gives a general perception that something is wrong, creating uncertainty and fear. And if you're living off a fixed income, you can throw most of this out the window.     

But Shiller's point remains: There is another side of inflation that often goes ignored. One doesn't have to argue that inflation is good, but it might not be nearly as bad it looks.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns shares of Altria and Berkshire. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Berkshire Hathaway, Altria Group, and Coca-Cola. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 22, 2011, at 10:27 AM, whereaminow wrote:

    The price of goods goes up 50%, but do your wages magically rise 50%?....poof! Of course not. The money is injected into the economy at a specific point. The first users benefit, by spending while purchasing power is at its pre-injection level. As the money steps/ripples through the economy, it pushes up prices forcing everyone else to adjust to the new price level.

    So Shiller, Munger, and the author are ignoring the Cantillon Effect of inflation. It's redistribution effect.

    Inflation also creates the business cycle by channeling funds into activities that would not profitable without the lower interest rates that go hand in hand with an increased pool of available funds.

    Shiller and Munger are clearly ignorant of the vast work on the business cycle done by the Austrian cycle. This in spite of the fact that they are living in the bust phase of a credit fueled business cycle right now.

    But, neither one is a very good economist.

    David in Qatar

  • Report this Comment On July 22, 2011, at 10:28 AM, whereaminow wrote:

    "done by the Austrian cycle"

    hehe, done by the Austrian school

    But if they had their own cycle, that would be kewl too

    David in Qatar

  • Report this Comment On July 22, 2011, at 11:22 AM, dbtheonly wrote:

    Yep,

    Schiller & Munger are idiots because they don't follow the Austrian School.

    Now Mr. Housel,

    For even more fun go back to the "good old days" of the Gold Currency & notice that there is a deflationary panic once every 20 years or so. 1837, 1957, 1873, & 1893 come to mind immediately. So Dave, the Austrian school does have its' own cycle.

  • Report this Comment On July 22, 2011, at 11:35 AM, jpanspac wrote:

    In all this handwringing about inflation, I've never heard anyone mention the offsetting effect of a fixed-rate mortage. If you have a 30 year fixed-rate mortage, a large part of your expenses are immune to inflation. So if your mortgage payments make up 50% of your expenses, for you the inflation rate is effectively half the official rate.

  • Report this Comment On July 22, 2011, at 11:38 AM, TMFHousel wrote:

    ^ Shiller's survey also failed to produce a single respondent who mentioned inflation's gift to debtors.

  • Report this Comment On July 22, 2011, at 1:24 PM, whereaminow wrote:

    Ok, since I received no counter argument, but only sarcasm I will assume that the follow up commentors do not know about Cantillon Effects or Austrian Business Cycle Theory. Therefore, their objections hold no water.

    But I want to focus on one particularly logical fallacy in the article that I am very disappointed that Morgan did not spot (or at least retort):

    Munger's response was characteristically curt: "If you think the past half-century was bad, you will have serious problems in life," he said. "Despite inflation, we've been a huge success. Real GDP has grown 2% per year per capita. That's fantastic. The period you describe as miserable was a tremendous time for the American economy. You've described success."

    Sadly, instead of noting the logical fallacy, Morgan then went out to find vague justification that only further imprints the fallacy into the weak minded.

    It's the fallacy of causation also known as Post Hoc Ergo Propter Hoc

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

    Menger is basically saying, and Morgan agrees, that inflation has not been a problem because after all this inflation, we still have a prosperous nation.

    Yet, we can refute this fallacy very easily. Here is one way. America, up until 1971, was typically the least inflationary (or very nearly the least inflationary) country on the planet. In fact, depending on how we define inflation (this article defines it in the boneheaded modern price rising method), we can say definitely that America has had lower inflation than most nations.

    That means, by Menger's reasoning and Housel's supporting statistics, if inflation is actually the cause of America's success, America should be the poorest nation on the planet.

    Of course, if you are truly a student of economic history you soon find out that inflation, far from being a blessing, is one of the most cursed evils ever visited upon the average citizen. It's a wonderful thing, however, for big government and big business.

    We can forgive Menger. He's not an economist. He's a stock picker and a businessman. I don't ask my plumber to fix my hard drive and I don't take economic theory from a stock picker.

    But Shiller, well Shiller is a behavorial economist, which is a whole nother can o' worms that I shall leave untouched for now.

    David in Qatar

  • Report this Comment On July 22, 2011, at 3:10 PM, buddylee59 wrote:

    I always enjoy reading Morgan's articles, especially when David from Qatar responds, because it's like getting two or three articles for the price of one.

    BL

  • Report this Comment On July 22, 2011, at 3:24 PM, mclaugph wrote:

    @whereaminow:

    I read the article a little differently.

    From the article:

    "There's something funny about inflation: how one-sided the criticism is.

    Inflation, of course, raises prices, which is bad -- and that's usually where the criticism ends."

    ...

    "Despite inflation, things have generally gotten better over time."

    I don't think Morgan is suggesting inflation is not a problem. i do agree with you that inflation is a problem regardless of whether the nation is prosperous.

  • Report this Comment On July 22, 2011, at 5:14 PM, Ravi786 wrote:

    The author clearly does not have in-depth knowledge of why people are clamoring about inflation.

    Inflation benefits at the point of injection of new money.

    Currently the point of injection is in the too big to fail banks which in turn end up in the pockets of executives.

    The new money is not injected to create new jobs and expand economy as a whole.

    Hence the inflation that is being created will not lead to an increase in incomes of ordinary people.

    Putting the above aside.....

    who gave the right for fed and govt to create money and reduce the purchasing power of diligent savers ?

    If the govt does want to stimulate the economy by inflation, then why not inject money into the community banks who did their work properly by investing their resources in american growth rather than playing in derivatives market.

    Shiller does not have basic knowledge of economics. He supports propping up the housing market with additional stimulus to prevent prices from falling instead of letting the market adjust the prices.

    The govt and fed can create fiat money, prop up stock market through their "bank" friends but one thing they cannot do is create commodities out of thin air.

    In this scenario, the only rational investment for a common investor is SHORT stocks and LONG commodities. You cannot go wrong with that.

  • Report this Comment On July 22, 2011, at 6:39 PM, xetn wrote:

    This article also overlooks the fact that many people are not getting raises, but are actually losing their jobs or at the very least taking pay cuts.

    The government loves inflation because they get to repay debt with cheaper dollars. That is the theory anyway. (When was the last time they repaid any debt?) Seems to me they just keep rolling it over and the average length of government debt keeps getting shorter.

    By the way, what is wrong with deflation (paying less for stuff you want or need to buy)? Oh yeah, everyone likes to pay higher prices. Its good for the economy right? right?

  • Report this Comment On July 22, 2011, at 6:50 PM, bornboring wrote:

    If inflation is seen as a rising tide, and production costs and wages are done on the same boat, it only becomes a math exercise, and so does not matter. In reality these are done on different boats, so riding higher tide, and at different times. Now the one that goes up first will reap real benefit, wages in general population lags. That is masses suffer. If inflation rate is less than 2%, people don´t feel too bad, they just try to find a way to earn more, probably by increasing efficiency. Those income tied to a long term bond or mortgage will watch their benefits evaporate in time.

    This is the unfairness of inflation. The slow movers lose. The other bit of unfair play is insider trading. The insiders set the course, then position their own portfolio accordingly. If you take the congressmen as directors of USA Inc., that should send chills down your spine.

    On the injection of cash to the populace, I think the food stamps is such a program, but this is not run by the fed. Perhaps the Fed should do something here. The cost is a lot lower than bank bailouts.

  • Report this Comment On July 22, 2011, at 8:29 PM, dbtheonly wrote:

    xetn,

    A look at American history will show you what's wrong with deflation. Anything will be less expensive later. So why make an investment? Any investment? It'll be available later cheaper.

    Farmers planted crops, only to find that the price of the commodities had dropped below the price where the Farmer could make a profit. farmers couldn't pay their mortgages, or taxes, or living expenses. People lost their farms.

    Businesses had trouble selling goods, like say, for example cars, because consumers held off for lower prices. So inventories piled up. Workers were laid off. Unemployment rose.

    Merchants found prices dropping, so they discounted their goods to sell them. Which dropped prices further so the merchants made no profit, or maybe didn't even re-coup the price of the goods if they borrowed to get the inventory. So merchants lost their businesses.

    Essentially the price of money (gold) became so prohibitive; that the country faced economic ruin. There simply wasn't enough gold to provide the money that the rapidly growing American Economy requires for stability.

    "Thou shall NOT crucify mankind upon your cross of Gold"

  • Report this Comment On July 22, 2011, at 8:46 PM, martinitrader wrote:

    All this talk about economics and playing with the numbers. The bottom line to regular folks like myself is that we are loosing our jobs, taking paycuts or not getting a raise. Yet my expenses keep rising, that to me is inflation and is in no way good for the "economy"!!! I keep hearing that we have low or no inflation, yet every bill I get in the mail or every piece of food I buy costs me more. I know some of you will say I know nothing about economics or know what inflation is, but the bottom line is people are loosing jobs and prices are rising. The is, as far as I am concerned, "Economics for Dummies".

  • Report this Comment On July 22, 2011, at 8:51 PM, notgoing2argue wrote:

    There is one HUGE factor you are missing regarding income. You said that "household" income has tripled, well what do you expect when you go from country of single income households to a country of two income households? Out of necessity, due to inflation and women's lib, families put the second parent into the workforce.

    The reason everyone is concerned is they have been feeling the pinch of inflation; however, there are no more people to send out of the house to earn more income when REAL wages aren't going up to keep up with the at least 2% guaranteed inflation a year created by the FRB. The added bonus of sending the second parent into the workforce is the added expenses of needing more transportation, schooling, childcare, etc...all services that only go up in price because they require labor (not machine created economies of scale). There are no substitutes for the rising cost services that everyone notices are going up 10% a year, unless you consider not having them as an equal substitute.

    Let's face it, up until the last decade or so, the second income has helped hide how pinched the middle class has become due to inflation and lack of real wage increases, but those chickens are coming home to roost for the lower middle class. The middle-middle, and upper-middle should be alright as long as they can keep that second income and stay healthy, but any family crisis can bankrupt you these days.

  • Report this Comment On July 22, 2011, at 8:53 PM, TMFHousel wrote:

    <<There is one HUGE factor you are missing regarding income. You said that "household" income has tripled, well what do you expect when you go from country of single income households to a country of two income households?>>

    From the article:

    "Some of why households earn more today is because more women are working, creating two incomes where there used to be one."

  • Report this Comment On July 22, 2011, at 8:54 PM, TMFHousel wrote:

    Further, real incomes per capita have risen over time as well. It's just not a multi-earner household effect.

  • Report this Comment On July 22, 2011, at 9:25 PM, ynotc wrote:

    Morgan,

    I think you have it. Let's inflate ourselves out of this mess. You are brilliant. Why didn't anyone think of this before.

  • Report this Comment On July 22, 2011, at 9:29 PM, whereaminow wrote:

    dbtheonly said:

    "A look at American history will show you what's wrong with deflation. Anything will be less expensive later. So why make an investment? Any investment? It'll be available later cheaper. "

    Incorrect on both arguments made in this sentence. Prices fell nearly half from 1865-1900 and yet America experienced some of its largest growth rates in its history.

    The second argument, that entrepreneurs will not adjust to falling prices, is also incorrect. How do they adjust to rising prices? By correctly anticipating that future costs for their complimentary factors of production will rise. And now, how do they adjust to falling prices? Wait for it...

    In strictly economic terms, if money were to be injected or removed from the economy equally among all people at the same time, society would see no net benefit or detriment from inflation or deflation. But the Cantillon Effects of inflation create advantages for big business and big government, while those effects reverse under deflation, causing big government and big business to suffer worse than main street. That's why they spend all that time convincing you that deflation is the most terrible evil .

    I suppose it has worked.

    David in Qatar

  • Report this Comment On July 23, 2011, at 6:52 AM, dbtheonly wrote:

    Dave,

    You & your Austrian friends have it exactly backwards. Growth didn't occur because of prices falling. Prices fell because of growth and a strictly limited supply of money. i.e the Gold Standard. Without the ability to grow the money supply (i.e. the free coinage of silver, but that's an argument for another day, which it is in Qatar come to speak of it) prices will of necessity drop an the balance between goods and services and money to purchase then gets out of balance.

    You had 3 deflationary panics between 1850 & 1900. 1857, 1873, & 1893. I guess schools just don't teach them any more. Pity.

    I remember reading of the Austrian School of economics back in 1974. They were considered crackpots back then too.

  • Report this Comment On July 23, 2011, at 10:14 AM, whereaminow wrote:

    dbtheonly said:

    "Growth didn't occur because of prices falling. "

    Please point out the specific sentence where I said it did occur because of falling prices.

    In fact I said that deflation, in and of itself - where it to be magically spread out evenly across the economy - is neither a net benefit nor a net gain.

    I simply refuted your point that entrepreneurs cannot adjust during a deflationary period.

    Your response contains conjecture, such as:

    "You had 3 deflationary panics between 1850 & 1900. 1857, 1873, & 1893. I guess schools just don't teach them any more. Pity."

    I know those episodes very well, and they pail in comparison in magnitude and duration to the panics created by the Federal Reserve system.

    And your response contains insult, such as:

    "I remember reading of the Austrian School of economics back in 1974. They were considered crackpots back then too."

    That is your way of saying you have no argument left, now that your original premise has been shown faulty.. So I thank you for your time and will move on.

    David in Qatar

  • Report this Comment On July 23, 2011, at 10:21 AM, whereaminow wrote:

    dbtheonly,

    This:

    "They were considered crackpots back then too."

    .....is a logical fallacy

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

    Now if you actually have criticisms of Austrian School theory based on your study of the Austrian School - criticisms that do not include insults, conjecture, or logical fallacies - I would be happy to look them over.

    David in Qatar

  • Report this Comment On July 23, 2011, at 1:34 PM, dbtheonly wrote:

    David,

    My memories are almost 30 years old, and details have long gone, but I remember they were tied into far right-wing politics, Ayn Rand's "Anarcho-selfishism", and the gold standard currency. I decided then that they were wackos, and joined the mainstream economists who felt the same.

    They made no sense to me then & I have neither the time nor the wish to re-open the issue.

    David, there's a reason that the "Austrian School" constantly refers to their "persecution", by "big government", "Know-nothing Economists", and the "Liberal Media".

  • Report this Comment On July 23, 2011, at 4:06 PM, FutureMonkey wrote:

    Low, stable, predicatable inflation is generally a good thing in macro-economic terms. Certainly vastly prefered to hyperinflation or deflation and manging low, stable, predictable inflation is indeed the primary purpose for the Federal Reserve.

    For individuals the situation varies quite a bit depending on their ability to earn a stable, predicatable income that grows at least as fast, if not faster than inflation.

    For folks between 18-65 the anticipation is that we will earn more in the future as our careers, ability, experience grow. Ideally this wage growth is faster than inflation, so that we can afford to pay for changing life events and needs. When I was 18 earned $485/month in a minimum wage job and paid $85 a month to rent a 120sqft room with a shared bathroom. But it was clean, safe, and walking distance to the beach. At 42 I have a family, 2 kids, 2 dogs, 2 cats, 2 rabbits, and 6 chickens. I can no longer live in a 120sqft room with a group bathroom. Good thing my education, skills, abilities have grown with my career resulting in my rise from minimum wage beach dude faster than inflation.

    Morgan's point is that we as a society are fearful of all inflation, but that stable, predictable low rate of inflation is beneficial to growth on a large scale over long periods of time. People that equate the damages and risk of "hyperinflation" to any inflation are not being realistic. No inflation would have a devestating effect if sustained for a long period. Deflation would be worse....much much worse.

  • Report this Comment On July 23, 2011, at 4:22 PM, whereaminow wrote:

    dbtheonly,

    Thanks for letting me know that you have no idea what you are talking about.

    FutureMonkey,

    Read comment section, as you have been refuted in advance.

    David in Qatar

  • Report this Comment On July 23, 2011, at 5:52 PM, ershler wrote:

    David in Qatar,

    I don't see the fallacy of causation in Munger's statement. He said "Despite inflation"; that to me says he thinks inflation is a bad thing that was overcome by economic growth. Unless he said or implied inflation caused economic growth your argument doesn't hold water. If he went out of his way to list countries that experienced high inflation and higher economic growth (while ignoring the countries that experienced hyperinflation and economic collapse) I could see your point.

    Also, you take cheap shots at Munger and Schiller without providing evidence then throw a hissy-fit when someone does the same to you.

  • Report this Comment On July 24, 2011, at 9:50 AM, TigerPack1 wrote:

    LOL

    I wouldn't know where to start!

    The last 50 years WERE a great run for Munger, as he became a billionaire riding the wave of inflation you describe in this wonderful spin of reality. That does not mean the other 250 million people "benefited" in the same way, from inflation. In fact the poverty rate in America is officially higher than several decades ago, and the inequality of wealth and income is at records for the nation's 200+ year history BECAUSE of the same inflation that destroys savings and encourages risk taking.

    Second, his and your "real" GDP calculation are a fiction, as inflation has been understated for decades. If you adjust inflation for reality, real GDP has been NEGATIVE since the early 1970s.

    I will not go further.

    -TP

  • Report this Comment On July 24, 2011, at 10:44 AM, FGump1971 wrote:

    Dear Mr. Housel,

    You posed a question in your article "The Other Side of Inflation," asking whether a 10% rise in prices is balanced by a 10% rise in wages. I think the math is pretty obvious here.

    A person who begins the equation with a little disposable income is a little better off, he will have ten percent more disposable income. But a person with negative disposable income will be a little worse-off, having a ten percent greater deficit.

    This is a time of great financial turmoil (inaccurate valuations, fraud, etc) that has unexpectedly situated middle class investors in a precarious circumstance. There are a lot of people who were struggling before introducing inflation. And now all the more with inflation, their deficits are increasing.

    Let us look a step further. For we fortunate pinchers (of pennies) who enter the equation with a modest surplus, we are rewarded with a positive bump in the range of our comfort zone. The greater our zone, the greater our bump.

    So the rich get richer and the poor get poorer, and the very rich get much richer. That's the problem with inflation.

    And as I touched on earlier in this letter, because of the high degree of leverage (reminiscent of '29 perhaps) among the middle class, the poor didn't know they were poor until the artificially inflated valuations collapsed under the pressure of the markets. So a lot of lifelong, hardworking, middle class doers are going to be (or perhaps already are) sucked under in this wave of inflation.

    To extend the metaphor, they weren't out of their depth until the sands shifted. Even at that, they may have swam to shore, but the shifting sands have created a growing wave that threatens to take them under and keep them there.

    That's the view of inflation from down here at the shoreline, Morg. Hope you are faring well. - Tim

  • Report this Comment On July 24, 2011, at 11:07 AM, jpdal09 wrote:

    Sure, inflation isn't harmful in theory, same with Communism. What I find ridiculously mind blowing is that if you compare the values of the dollar between now and when the FED was established, you'll find that today's dollar was worth 4 cents back in 1913. 4 cents!!!

  • Report this Comment On July 24, 2011, at 1:40 PM, FutureMonkey wrote:

    The basic human desire of most individuals in a career or hourly wage track is to make progress measured by a "raise." Who wants to work for 20 years and find themselves making the same amount of money? Even if there is no change in what that money buys (inflation is zero), their is a perception of stagnation. The human brain enjoys change, transition, new experiences, and acheiving goals. Productivity drives inflation. Inflation drives productivity. It is hard for me to motivate my employees to produce without an expectation that their efforts will be rewarded by a merit raise or bonus. It is hard for me to reward them if I am not actively seeking to expand my market, increase efficiency, or raise prices on the goods/services provided. My vendors raise the cost of goods, so I must raise the price I offer those goods retail or my margins shrink and I have less to share with my employees. In essensce, inflation is the natural consequence of doing business in an environment where growth is an expectation. Does the business cycle drive inflation or does inflation drive the business cycle? My guess is that it is a little of both, but I'd hate it if I was making the same income in 20 years as I am now and I'm guessing my employees wouldn't be sticking around with me during those 20 years without some sort of increased wage.

  • Report this Comment On July 24, 2011, at 3:57 PM, dbtheonly wrote:

    Future Monkey,

    I can remember, as a small child, my Father going on about how everything was much less expensive when he was a boy. This went on for a while (obviously to the annoyance of the other adults) until my Grandfather asked what he was making back then.

    You've got it. Prices and wages,need to be in a fairly predictable balance. I'll toss in the need for a balance of goods, services, money, and population. In 1941 there were 130 million Americans & we're almost triple that now? Clearly we nee a lot more "money" for 300 million plus.

    Dave I have no wish to re-open debate on ther heliocentric universe either.Make of it what you will. Enjoy your Glenn Beck TV. You lost me when you called Mr. Munger an idiot.

  • Report this Comment On July 24, 2011, at 5:32 PM, whereaminow wrote:

    dbtheonly said:

    "Prices and wages,need to be in a fairly predictable balance. I'll toss in the need for a balance of goods, services, money, and population. In 1941 there were 130 million Americans & we're almost triple that now? Clearly we nee a lot more "money" for 300 million plus."

    This is such a horrible economic fallacy and rejects not only the Austrian School but simply put, there is no economic theory which holds this myth to be some self evident truth.

    Any amount of money is perfectly fine for a society of any size, so long as it is divisible, fungible, durable, and free from manipulation.

    If a population rises, while output and money remain constant, all that does is shift the demand curve for money upward, thus moving prices downward until a new equilibrium price of money is reached.

    It should be obvious that a population growth that occurs rapidly will cause hardship because the real resources, food, and capital goods are the same they were before the population exploded. Playing fancy tricks with the money supply accomplishes absolutely nothing, except to redistribute wealth to the politically connected through the aforementioned Cantillon Effects, and to exacerbate the business cycle through the unnecessary expansion of bank notes.

    dbtheonly said:

    "Enjoy your Glenn Beck TV. You lost me when you called Mr. Munger an idiot."

    I don't even watch TV, let alone Glenn Beck. Mr. Munger is smart in circles, but economics is not his circle.

    Each of my criticism stands unrefuted. As they always are in these dicsussions. Instead the commentors repeat the same fallacies and the same tired insults without ever actually studying the theories or ideas being proposed.

    It's bad enough that random commentors repeat mindless banking propaganda and know nothing of the rich history of debate between hard money and soft money economists.

    But this really lands on the feet of the article's author, who invites this nonsense without himself ever studying the rich history of hard money scholarship (or for that matter, the soft money critiques).

    Anyone can write about economics. I just wish they'd actually study it first.

    David in Qatar

  • Report this Comment On July 24, 2011, at 5:55 PM, DorsalMorsel wrote:

    Why is Inflation bad?

    Um...... Because it wipes out life savings and destroys anyone living off of said life savings?

    This is not the type of socialism I expect on fool.com

  • Report this Comment On July 24, 2011, at 5:58 PM, TMFHousel wrote:

    ^ Did you read the article?

  • Report this Comment On July 24, 2011, at 6:23 PM, muddlinthrough wrote:

    @dbtheonly,

    I've only followed the 'Dave in Qatar' VS 'Housel' theme in two articles, but I have to agree with BuddyLee that it's great when he does comment, as you get two articles or more for the price of a 'click.'

    Also, chiming in where I wasn't invited on your thinking mechanisms, Sr. whereaminow does have a good sticking point for your arguing techniques. A first-year high school debate student could tear them apart.

    Obviously, your biases have worked for you well enough to get you to the point you are today, so I suggest you not change them: growth by an ossified organism that flips over to using "quotes," followed by "enjoy your Glenn Beck" pop-reference-pseudo-putdown shows the skills of an arrested-development that would probably not survive the puncture of its protective self-reinforcing ideals or criticisms.

    What I'm finding is 'The Fool' has its own polarized religious schools of thought. And, like all other religions, it depends on where the formative thoughts solidified as to the belief. Housel seems to offer stalking horses that aren't consistent with a sound worldview, much in the same way a Socratic teacher might stake out a contrarian position to see what students take the bait. Or, it could be I'm crediting him with more style and technique and there is no hidden depth or agenda.

    Likewise, there's then the black-and-white troll comments of 'you're wrong!' 'no, you don't understand (your example is flawed/your prophet you cite is an idiot/not qualified/wrong gender/wrong decade/wrong theorem/posit/whatever)' with all the vehemence and thrill of pubescent locker room trash talk.

    Which brings us to the final point observed by Mr. Beckett regarding Godot's arrival. The time would have passed, anyway.

    Is inflation good or bad? I'd vote with Daveman from Qatar...I'm astonished that the government will cite 'low inflation' when a college degree that cost me under $20K now goes for around $120K...so I had no student loans but today's kiddos get a lifetime of indentured servitude to their loan servicers. Mr. Munger made good with inflation--I think the 'common man' more rightly represented by the term 'average investor' is not so much well-served.

    You may have had something that the Austrian School didn't fit your worldview in the 60's/70's and threw it out then...but since times have changed, and presumably you might have, a bit, as well, maybe it's time to go examine your blindspots? And if you do reply back, try not to lambast me with a label before finding out if I do actually watch TV, vote for a particular religious candidate or follow and carry a card for a specific political or donor affiliation?

  • Report this Comment On July 24, 2011, at 7:41 PM, dbtheonly wrote:

    Muddlin,

    In the 70s the Austrian School of Economics was the favorite of those who espoused the "wacko" theories that are now promoted by Glenn Beck. "The Secret Masters of the FED" & such. Your pointing out that the following of one does not of necessity imply the following of the other is warranted. On the other hand if one lies down with...

    I will admit that I have trouble taking seriously those who note with alarm that I, "reject not only the Austrian School..." as if the Austrian School is the be all and end all of all economic knowledge, rather than the musings of what has been at best a fringe group.

    I also have trouble taking seriously the debates of the hard money/soft money schools of economics. Our Great grandfathers rejected the "gold standard" for currency for good reasons. The absolute shortest version is that a "gold currency" proved totally incapable of providing for a national emergency on the level of World War One. I see no reason to reopen that discussion. Again the hard money advocates represent little more than a historical anachronism, when the reasons they were rejected originally are all but forgotten.

    I also do not accept Dave's insistence that the only alternative to a "gold currency" is unbridled inflation. I (and several others) have argued for a balanced, predictable approach. You will please note that Dave consistently ignores the fact that his suggested "gold currency" has led to deflationary panics on about a 20 year cycle. If you are going to suggest that I examine my blind spots, you might also request Dave to study a more mainstream economic system.

  • Report this Comment On July 24, 2011, at 7:59 PM, whereaminow wrote:

    dbtheonly,

    "In the 70s the Austrian School of Economics was the favorite of those who espoused the "wacko" theories that are now promoted by Glenn Beck"

    I don't know or care what theories Glenn Beck promotes.

    "The Secret Masters of the FED"

    The Fed's secrecy over the last 100 years lends itself to conspiracy theorists. On the other hand, the truths that have been revealed about the Fed (take for example the recent finding that the Fed loaned $16 trillion - twice the size of M1 - from 2007-2009, with no accountability at all) show that the Fed does promote the centralization of power in the hands of the few. Who, at this point, can deny that self evident truth?

    "rather than the musings of what has been at best a fringe group. "

    Another repeat of the fallacy of argumentation from popularity. I show this not to bring you over to "our side", but instead to give example to other commentors on the weakness of your position.

    "The absolute shortest version is that a "gold currency" proved totally incapable of providing for a national emergency on the level of World War One. "

    This is actually correct, but I suppose you and I have opposing viewpoints on World War I's raison d'etre.

    The saddest part of that horrible destruction of lives and property is that it set the stage (via massive inflation) for the Great Depression and subsequent second act in 1939-1945. It was the apex/climax of fanatical statism, collectivism, and inflationary monetary policy which combined to murder millions of people and destroy the property and liberty of everyone else in its path.

    Ralph Raico's book "Great Wars and Great Leaders" has a few wonderful chapters on the fools that walked us into perpetual war, perpetual inflation, corporate fascism, and the perpetual curtailing of our civil liberties. I cannot recommend it enough.

    "You will please note that Dave consistently ignores the fact that his suggested "gold currency" has led to deflationary panics on about a 20 year cycle. "

    This is ignorance of my position. I advocate money determined by the market, whether it chooses gold or space rocks. The market tends to choose gold and silver.

    It is actually impossible for gold and silver alone to cause deflationary panics. You cannot contract the supply of gold and silver money below the exissting level of specie. Those deflationary panics of which you speak were all caused by a previous expansion of paper bank notes pyramided on top of hard money. And in each case, the banks' favorable position with the state led to a suspension of specie redemption that served to further aggravate the crises.

    "you might also request Dave to study a more mainstream economic system."

    And I have. For example I learned that in the foreward to Keynes' General Theory he speaks favorably of Nazi economic policy since it provides the total authoritarian control necessary to implement his ideas. I learned that Keynesian math wizard Paul Samuelson put forward economics textbooks from 1973-1989 that predicted the Soviet Union would out produce the United States because of its phenomenal GDP numbers.

    I have learned quite a bit from mainstream economic theory. Most often, I learned that they are horribly misguided shills.

    David in Qatar

  • Report this Comment On July 24, 2011, at 9:37 PM, georgop wrote:

    Like Milton Friedman said: inflation is taxation without representation, caused by government running the printing press and spending.

  • Report this Comment On July 24, 2011, at 9:40 PM, spoonieluv wrote:

    All this economics talk aside...

    The falling prices of food, as a % of family income, is directly related to the explosion of the factory farm system...the protected system of animal abuse to create more protein than ever before at the cheapest prices in history.

    Educating myself on the food system in America has been one of the best things I've done. Try reading, "Eating Animals," "Food, Inc.," "Omnivore's Dilemma," or watching "King Corn" or "Food, Inc."

    Great article. Thank you.

    -Jon

  • Report this Comment On July 24, 2011, at 9:54 PM, muddlinthrough wrote:

    "... I see no reason to reopen that discussion. Again the hard money advocates represent little more than a historical anachronism, when the reasons they were rejected originally are all but forgotten. "

    And *this* is my gripe/complaint/whatever that you're missing--you refuse to open an argument into your thinking *because you think your thinking is the only way.*

    As Dave said about the market choosing gold or space rocks--EXACTLY. Bretton-Woods worked for 2 (admittedly oversimplified) reasons: 1) as you point out, the 'hard currency' method had failed. And failed again. And again. And there was no system that could replace it until you had a universally-accepted fiat system. Enter the 'unbacked greenback' in the 1970's...which had had 30 years in the making to give it the leverage to become 'unleveraged.'

    And, 2) who was to argue? After WWII, Europe was a wreck, Central America had never developed past a papist-strongman caste system of patronage, Asia was yet to develop in areas that hadn't been industrialized, and those that had been were no longer much more than crater-holes.

    What you just *might* consider letting crack a bit of light into your skullspace is that a system only works until it completely shatters from cracks at the edges. The American dollar was a great money system, and will still continue to be. But in the time of warlords and thieves and petty crooks, which pretty much sums up most of human history when you don't have Ghenghis or Caesar or Napoleon or Victoria making people toe the line, a cash system rarely works.

    That's why the Islamic cultures still have an economic system of funds that can move money around the world with a web of mutual trust and indebtedness. That system, and our economic system works, as Bush I found out, because people believe it works, not from any fundamental goodness or intrinsic rightness. Impair or impinge on their ability to believe--and it is going to hit the water, it's just a matter of time and good foresight to try to avoid the splash.

    Nowadays, most 'money' is just electronic placeholders in accounting software. You can argue that 'it can't fail,' because of redundancy copies, hardcopy printouts, additional institutions. I find it amusingly funny that the ones making the most 'markers,' lets not even call it money, because that has a charge to the word. The winners so far are folks like Mr. Munger, Mr. Gates, Mr. Greenspan, Mr. Wolfowitz, Mr. Gore, Mr. Clinton, Mr. Jobs.

    Notice a grouping, here? Those 'in the know' remain in the know. Gore was part of the group that whitewashed Jobs' options backdating. Was it 'against the rules?' Not necessarily. Was it ethical, either the whitewash findings or or the original rule-changing? Paulson goes from GS to head of the Treasury and gets a $500M tax-free gift for taking the job. And two years later, he's writing the rules to turn loose $1T to his former cronies, ahem, friends, ahem, colleagues.

    Turns out only half of it was needed? The current 'schmuck in the chair' in the Oval Office claims it's needed for economic stimulus.

    QE1, QE2, and the situation isn't improving for 'Joe Average.' 'There's no inflation.' Of course not, the Federal Reserve is buying its own assets and loaning money at 0%. Wait. Can I as a consumer get a bank loan at...say, 5%? Sure. Can I get a 'cash advance' from a credit card company? Sure...for 30%. Because of losses they're sure to be incurring against write-offs for bankruptcy. Oh, wait. That dodge is no longer available. But the rate is still that high. Could it be that they want the 30% to cover those that will NEVER be able to afford to pay off the debt?

    So, the bottom 1/5 of the country, 60-80 million people, can only get a loan at loan-shark rates.

    But there's no inflation, and it's good for the economy, the consumer, and the Austrian School guys are quacks for wanting a hard currency that retains a constant value.

    Yep, I'm crazy.

  • Report this Comment On July 24, 2011, at 10:30 PM, TMFHousel wrote:

    <<The falling prices of food, as a % of family income, is directly related to the explosion of the factory farm system...the protected system of animal abuse to create more protein than ever before at the cheapest prices in history.>>

    Fruits, vegetables, and grains have declined in real terms along with meat.

  • Report this Comment On July 24, 2011, at 10:46 PM, muddlinthrough wrote:

    Disclaimer: I'd never read anything other than passing references to or blurbs about the 'Austrian Economics' school of thought.

    Skimming it, though, from Wikipedia, it does align with my biases. Natural sciences, yes, you can get group repeatability from the statistics. And, yes, it's an admirable but misguided hope to shoot for the same in monetary policy.

    But...and here's the big "but" on why I'm continually amused and appalled anyone can follow Paul Krugman with more than a car-wreck fascination.

    A fellow comes up to you and says he's got a SURE-FIRE method of picking stocks. You promptly ask him why he's not retired and living it up on the beach somewhere. He makes noises and disappears.

    But, for some reason, folks like Friedman, Bernanke, Krugman all call for the same level of 'believe me, I've got this covered.'

    We have a current Sec of Treasurer who couldn't be bothered to get his taxes right. But he was 'the only man for the job.'

    Either there's some arcane mystical super-secret knowledge floating around those halls, or these guys are Wizard of Oz.

    $200 on red, please, Monsieur Croupier.

    In theory, we're on this site to better educate ourselves on 'investing.' I gotta dig up the interview with Bogle that Dave or Tom did in early 2008, where he rightly pointed out that we're not investors, we're all gamblers.

    Only those in on the rigging of the game, such as Mr. Munger, who get nice deals like a share of the founder stock, or can get 20% 'management fees' for taking companies private a la Srs. Peterson & Schwarzman, or Feinberg are going to truly 'invest' in a company. And they don't do it out of a 'hard or soft' money argument. They do so because regardless of the economy, they will manage to come out on top. Is it ethical to raid a corporate pension and put it in your own pocket? If you're a union boss, no, and it's illegal.

    If you're a hedge fund and there's no state statute that it belongs to the employees, it's still unethical, but no longer illegal. However, enough such robberies and folks will start demanding a monetary unit they can count on as 'unstealable.' Gold can still be stolen, but it's a lot harder to transfer. Maybe we can start having our shares include a specific amount of widgets--say, 1 share of Chrysler equates to 15 Jeep bumpers.

    As for learning something new out of this, that last bullet on Wikipedia how Austrian Economics predicts consumption goes up in a downturn? Welllll, wait. Krugman said that can't happen. Hm. Gas dropped to $1.90 from $4.00. People bought more gas, started driving trucks and other low-MPG vehicles. In a good recovery, by now, there'd be more jobs, more prosperity, and even more consumption.

    Instead, we've had fiat dollar propping up corporate profits and banks cranking out record quarters. Wait. They were insolvent 2 years ago. Their balance sheets are still the same 'junk' of over-priced mortgages, tranches they can't untwine, and dead-beat account holders who can't find a job because the unemployment still stinks.

    "Austrian economist David Gordon has argued that prices on consumption goods may go up as a result of the investment bust, which could mean that the amount spent on consumption could increase even though the quantity of goods consumed has not.["

    So, my choices are Keynesian, which we know is giving us the current system. Or this 'wacko, Glenn-Beck-favorite' system that eschews 'complicated statistics' and looks at human choices for its driving economic indicator.

    Wow. Is there a third way? Probably. But in the binary world of pick A or B, Keynesians seem to have washed out in favor of 'if we only had a REALLY BIG stimulus,' which is what Krugman's been pushing for 4 years now. Yah. Let's add $100T to our debt and see if we don't look like Weimar in 1932. "Oh, America is too big, the dollar too popular, there's no replacement for it in the world economic scheme."

    Print Monopoly Money long enough (we started 5 years ago, with the multi-colored bills, proving that the USD is NOT big enough to absorb infinite counterfeiting; our coins are no longer precious metals BECAUSE the face value is worth less than the melt cost), and it will come to visit.

    But, I'm lying down with dogs and getting up with fleas. Ayep.

  • Report this Comment On July 24, 2011, at 10:48 PM, AvianFlu wrote:

    The government loves inflation because, in part, as your wages are adjusted for inflation you gradually work your way into higher tax brackets due to our progressive income tax. So they can enact a tax increase without actually having to vote for it.

    So take that tax increase, along with the ones already scheduled to take effect over the next couple of years. Add in the tax increases that certain parties are insisting on instituting in the debt limit fight. I'm thinking I'll just retire.

    Funny thing is, I remember in the last presidential election a certain candidate emphatically denying that he would raise taxes. I won't name names.

  • Report this Comment On July 25, 2011, at 9:26 AM, TigerPack1 wrote:

    Simple stats:

    200 years of gold standard in America = 5% real GDP growth.

    40 years since leaving gold standard in 1971 = 2% real GDP growth (which is severely overstated).

    Case closed.

  • Report this Comment On July 25, 2011, at 9:47 AM, TMFHousel wrote:

    ^ Real per-capita GDP figures going back to 1790 can be found on this site. I don't think you'll find anything close to the numbers you describe.

    http://www.measuringworth.com/usgdp/

  • Report this Comment On July 25, 2011, at 9:54 AM, TMFHousel wrote:

    To elaborate:

    Real GDP per capita growth, 1800-1971 = 1.79%

    Real GDP per capita growth, 1971-2010 = 1.81%

  • Report this Comment On July 25, 2011, at 11:04 AM, whereaminow wrote:

    Morgan,

    That should be enough to show you how flawed GDP can be. In fact, if the structure of production lengthens without a money supply increase, GDP will actually fall despite the increase in wealth.

    There are many many ways we can measure growth rates that make it laughable to think 1971-2010 had higher growth rates than the 1800s.

    David in Qatar

  • Report this Comment On July 25, 2011, at 1:26 PM, TMFAleph1 wrote:

    "There are many many ways we can measure growth rates that make it laughable to think 1971-2010 had higher growth rates than the 1800s."

    Not sure I follow you there.

  • Report this Comment On July 25, 2011, at 2:47 PM, whereaminow wrote:

    Alex,

    It's not that hard. Real GDP is not some impenetrable econometric without flaw. Real GDP convinced Samuelson that the Soviet Union was growing at 3 times the rate of the United States. Real GDP shows the war years 1941-1945 as spectacular periods of growth and 1946-1947 as a Great Depression. The opposite is actually true.

    I can think of two dozen ways to measure economic growth that do a better job than Real GDP. With a mind as bright as yours, I'm sure you could as well if you actually tried.

    David in Qatar

  • Report this Comment On July 25, 2011, at 3:54 PM, DJDynamicNC wrote:

    :lol: David In Qatar is in full form today I see.

    "Yes, there are answers to your questions that are SO SIMPLE that you could easily figure them out, but not so simple that I am willing to take the 10 seconds to post them directly here."

    Classic trolling. If I didn't already know you were a "student" of the Austrian "school" of economics, I'd be able to tell from that response alone.

    Educate me, sir. Let's see your formulations and the facts to back them up.

    I'd actually really enjoy seeing all two dozen of the formulae you cited.

  • Report this Comment On July 25, 2011, at 3:56 PM, slpmn wrote:

    I'm wondering if we can attribute some of the growth that occured in the 1800's to the settling and exploitation of a continent massivly rich in natural resources taking place simultaneous with advances in technology that took us from the cotton gin to electric lights and gas powered engines. Is it possible this would have occured regardless of the standard of money, and acknowledge the growth was tremendous regardless of the metric used to measure it?

    You guys are too smart for your own good.

  • Report this Comment On July 25, 2011, at 4:28 PM, TMFDaddyO wrote:

    Just want to second BuddyLee's comment:

    "I always enjoy reading Morgan's articles, especially when David from Qatar responds, because it's like getting two or three articles for the price of one.

    BL"

    Nice job, Fools :)

  • Report this Comment On July 25, 2011, at 4:45 PM, DJDynamicNC wrote:

    @ slpmn:

    +1

  • Report this Comment On July 25, 2011, at 9:01 PM, muddlinthrough wrote:

    Since we're chiming in with links:

    http://www.cnbc.com/id/43392962

    Assuming I can 'fair use' a couple of quotes here--

    "We noted in this column some weeks previously that genuine risk-free assets are dwindling, and the paradox is that as the yield spread on them falls to not much more than zero, investors look to other sovereign assets that they feel are not really default risks but still pay a healthy spread."

    ...

    "But is anyone suggesting that the current muddle-through is any form of solution? As adherents of the Chicago school this column believes strongly that the fair value of an asset is what a buyer and seller agree to trade that asset at."

    Okay, I didn't pull the quotes just for the 'muddle through' reference.

    As I understand the argument, 'inflation' is any devaluation of equivalent goods that for a fixed unit, the new measurement comes out with a bigger number. No matter how you slice it, it comes up peanuts. But depending on how you grind the peanuts with filler, your % of peanuts drops.

    The original argument was that over the last 60 years or so, 'inflation' within the US economy has been a good thing. 'Cept when it isn't.

    What I've learned from all of these comments is there's a religious war (belief A & its supporters line up on the ramparts and throw effluevium at belief B and its supporters) going on. Like all religious wars, either divine intervention sends lightning to wipe out the infidel side, or both sides, or nothing happens except a lot of screaming and potential but not likely soul-and-life-changing events.

    Somehow, there's a 'mainstream' group that claims value in worshipping models that have value to them. When these fail, they pull the 'oh, it was a black swan, no one could have seen it coming' argument (deux achey machinegun)--a beautiful argument butchered by brutal facts.

    This side sneers at the other side that 'you don't use good models, you can't predict beans because you don't HAVE models.'

    What I keep seeing getting lost is we ARE inflating our economy--printing money IS an agreed-upon 'grinding of peanuts.' Eventually, historically, goods go up (takes more peanuts to satisfy) in price/cost/barter, economic faith goes down in 'the system.'

    This happens in country after country, time after time. And somehow, 'its okay because the government knows what it's doing and it's good for us' butts up against 'they have no idea and they're just throwing things against the wall to see if it sticks' logic.

    Anyone on this forum want to buy land and go farming in Zimbabwe at the moment? History only repeats itself because there are only so many patterns.

    Refusing to look at this cycle we're in (ineffectual monetary policy, lack of leadership in executive and legislative branches throwing any and all major decisions to the courts, debt-ridden institutions held afloat through bailouts, individual debtor protections removed to victimize the voiceless) is just willful blindness.

  • Report this Comment On July 25, 2011, at 10:57 PM, TigerPack1 wrote:

    I am not going to give away all my data collected over the past 25 years, but here is a taste using numbers at Wikipedia...

    http://en.wikipedia.org/wiki/File:US_GDP_per_capita.PNG

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

    Real per capita, GDP chart for last 82 years.

    41 years from 1929 to 1970 = +156% gain.

    41 years since 1970, and end of gold standard = +104% gain over same 41-year period.

    Food for thought, the first period of strong GDP growth per person, included the worst Depression years in the nation's 230-year history, and the latter period includes gross understatements of acutal inflation....

    If you factor in these two adjustments, the gold standard years SMOKED the Nixon/Greenspan doctrine of funny money for all!

  • Report this Comment On July 26, 2011, at 8:28 AM, TigerPack1 wrote:

    Income inequality exploding, with 1% of society controlling 50% of assets. Middle class will be gone in 3-5 years after FED's PONZI scheme implodes, or generates HYPERINFLATION destruction of American democracy. 1% of society will likely control 70% of assets soon...

    http://news.yahoo.com/wealth-gap-widens-between-whites-minor...

  • Report this Comment On July 26, 2011, at 6:48 PM, ershler wrote:

    David,

    You don't seem to like to reply to my post, how about this:

    THE US WOULD BE A BETTER PLACE IF THEY TOOK THE MONEY AWAY FROM EVIL RICH PEOPLE AND GAVE IT TO EVERYONE

  • Report this Comment On July 28, 2011, at 3:19 AM, muddlinthrough wrote:

    @ershler,

    They're doing that...but 'evil' is mostly defined as 'them's that's got it but don't have a friend in Congress or a really good accountant.'

    re:

    <"Unless he said or implied inflation caused economic growth your argument doesn't hold water. If he went out of his way to list countries that experienced high inflation and higher economic growth (while ignoring the countries that experienced hyperinflation and economic collapse) ">

    " "Despite inflation, we've been a huge success. Real GDP has grown 2% per year per capita. That's fantastic. The period you describe as miserable was a tremendous time for the American economy. You've described success."

    'Despite inflation' means that he's discounting the USD going from having Value X(t0) to X(t1) of 1/20.

    Using the rule-of-72, it'd take 36 years at 2% to double your money, right? So, 'real GDP' in equivalent units of roast-beefs (aka 'The McDonald's Big Mac index', what does it take locally to buy one burger, no matter what city/country) we'd have expected that 50-cent sandwich to cost only 12-cents today after 72 years...25cents, then 12-cents at the 2nd 36 years. Yes, I'm rounding to move 2022 to 2012.

    Equivalently, you'd expect *maybe* a cost to be $2.00. Invert the dollars/per sandwich to sandwiches/dollar, from the 50-cent baseline.

    That would be if inflation and GDP tracked 1:1 in growth/devaluation of dollars.

    Since we see that the $10/$2 gives a ratio of 5:1, I'd argue that in terms of roast-beef or dollars, Munger is oblivious to the inflation we have experienced and its effect on wealth, because his own is so disproportional to the baseline average wealth. My own experience is watching my college education cost be compared with what financial analysts say I should put away PER KID. My total cost for 4 years was 50% of my first year's starting salary. I'm being told to put one kid through college in 15 years from now, it's going to cost me $250K. So, unless that kid is going to make $500K his first year, uhm...yes, Virginia, there IS inflation, it's escalating exponentially, and it's NOT good for economic growth.

    Pick any hard-value item; Morgan's comment that food costs are dropping is clearly erroneous. Food 20 years ago was 1/10-1/4-per-pound what it is today (fruit, meat, eggs, packaged cereals). Have salaries gone up by 4x - 10x? The only lower-percentage cost ones are bread and starchy foods. That's the result of mega-farming consolidation, which has devastated the employment industry such that the Midwest is now only populated with illegal immigration workers, not the family farmers of yore. As such, I'm not sure the net cost to the country for that 'gain' is positive.

    But, much like the much-lauded 'hybrid' that takes huge amounts of energy to refine the lithium for the battery, then burns the coal and LNG out-of-sight, out-of-mind for a dubious 20% increase in mileage over the best equivalent-powered and sized gasoline and diesel engines, and still requires a state or federal subsidy to be competitive, it's just methodical self-deception and willful blindness to the total cost that allows the argument for a bad choice to exist at all.

  • Report this Comment On July 28, 2011, at 4:51 PM, no12call wrote:

    And the reality is that with high inflation no one would even think of buying Bonds at a measley 3% or put it in their bank for savings at a .01%. So in other words no one invests in their future. And with no savings and a loss if you invest in your government, you pretty much have... well the US today. Thank your local Keynsian Fed boss for that brilliant idea that throwing money out of helicopters is worth the risk of high inflation. Borrow till your broke and the bankers run off with 16 Trillion of your money.

    Makes perfect sense.

  • Report this Comment On July 29, 2011, at 11:53 AM, ChrisBern wrote:

    Inflation...good for the debtor, bad for the lender, bad (generally) for the investor, generally distortive to economic pricing. Oh and inflation tends to raise interest rates--the cost of capital.

    What more needs to be said?

  • Report this Comment On July 29, 2011, at 6:35 PM, NeedALittle wrote:

    I have often said before that we "need a little inflation". I'm fully aware how controversial this is. We don't really "need inflation". But what we really need is less "deficit spending". In my economic theory (how arrogant is that? Sorry), all government spending must be matched by an offsetting tax. No exceptions. Inflation is one such tax, and it is certainly my least favorite. But our geniuses in government have found something worse than inflation - debt. If there's anything worse than the "tax and spend" Democrats, it has to be the "borrow and spend" Republicans. Debt is inflation deferred. Trouble is, this inflation hits in fits and starts at the most inconvenient times. That's why people dislike it so much, and I don't really blame them. I agree with the basic premise of the article. When wages and prices go up together, the pure mathematician in me says there is no net gain or loss. Of course, the "tax" has been paid out of peoples' savings - cash and cash equivalents. Charlie Munger holds stocks, and the stocks tend to go up with prices. So he does ok in this case. But pity the poor guy that saved in a savings account or bought low interest bonds (the most conservative kind). He has paid the tax. All government spending must be taxed - no exceptions. What happens next is passing the buck - nobody wants to pay. So we borrow and make our children pay. Or we raise taxes and make the wealthy pay. Of course, the wealthy find loopholes and offshore accounts, so the middle class pays. But the middle class rebels or stops spending and we have a recession so the unemployed pay - orphans and widows. But all government spending must be taxed - no exceptions. Actually, I have thought of one exception - just one little exception, and that is when worker productivity improves dramatically as it did during Greenspan's "virtuous cycle", and prices are held low by this productivity increase. Of course, this is difficult to maintain, and bubbles ensue, and the economic turmoil will eventually break up this party. The buildup of debt was a one-time thing. We cannot afford more debt. Oh, back to needing a little inflation - it makes the debt insignificant. Actually, this applies to personal debt as well as government debt. So it's one way to deal with debt. Also, the irrational fear of inflation would have some think that deflation must be better. Actually, the Great Depression was characterized by deflation. Deflation is when the money supply deflates or "evaporates". This can happen when people panic and take money out of banks and put it under a mattress. It's hard on the banks, but it's especially hard on the money supply because of a little thing called multiplier effect. For every dollar that somebody puts under a mattress, the economy must find something like ten to cover it. So really the answer is inflation is bad, deflation is especially bad, and debt is worst of all - just tax deferred to our children.

  • Report this Comment On July 29, 2011, at 7:25 PM, hbofbyu wrote:

    Morgan,

    That is probably the worst, most misleading and ill-conceived article you have ever written. You usually write good stuff.

    And by the way, I am tired of Warren B. and Charlie M. being quoted or referrenced in almost every Fool article written these days. They can't be the only people in the investing world worth worshiping.. oops, I mean quoting. I think there is some survivorship bias there that people forget. And can they be more flippant and smug to their minions?

  • Report this Comment On July 29, 2011, at 8:00 PM, plowhandle wrote:

    Morgan, Enjoyed your article and the commentaries following. As I am a rather unschooled person, I have no grand theories to expound per David in Qatar. Nor do I have any arguments for the morality or ethics of taxation. I pretty much know only what I read in the newspapers.

    My economic/political observations are as follows;

    1.I belong to the "Squirrel group" of economics. As we know, the lowly squirrel stores and buries nuts during times of plenty to be eaten during the lean times to follow (could our warring factions within the USA find a way to do the same?),

    2.inflation is probably a good thing --other than abberations such as "stagflation" --because generally it happens due to prosperity,

    3.deflation hurts debt-holders much worse than inflation hurts them, but it presents wonderful opportunity for the squirrels amongst us.( My younger brother bought a commercial bldg with acreage and 2 residential properties for 400k in Apr 2009. He was offered 1.5 million for it last month after only 10k improvements),

    4.seems many economists say that increased productivity by workers will lead to higher wages to said workers. Since worker productivity has seen hugh increase in last 10 yrs with little increase in wages, are economists always right?

    Help me out Fools. I am very confused.

    plowhandle

  • Report this Comment On July 29, 2011, at 8:03 PM, TMFHousel wrote:

    Writing "that is probably the worst, most misleading and ill-conceived article you have ever written" isn't terribly convincing if you don't cite a single reason why you disagree.

  • Report this Comment On July 29, 2011, at 8:10 PM, sidehiller wrote:

    The reason people don't associate inflation with getting better wages is...they don't get the better wages when inflation hits! The data are writ large over the last 50 years: wages do not keep up with inflation.

    Employers plead poverty if the workplace is unionized; the workers are asked to forego COLAs or take a much lower percentage than annual inflation when their employers are squeezed by inflation. Inflation hits businesses even harder than workers, because businesses have the repeated need to negotiate serial short-term loans. In contrast, workers can forego a new car for a few years until interest rates slow down, and can seek to lock-in lower interest rates on home mortgages at some point over the long course of those mortgages).

    For workers not unionized, they typically don't get offered raises that keep pace with inflation and don't have a chance to negotiate them for the whole workforce. Individuals who ask for a raise even risk getting the boot for daring to ask. During most high inflation periods, it's a "buyer's market" for workers (certain hot sectors of the economy being an exception), and employers are looking to trim down their expensed (= the number of employees).

  • Report this Comment On July 29, 2011, at 9:01 PM, plowhandle wrote:

    Sidehiller, Your explanation of wages/inflation was so depressingly accurate that I'm going to go read a fairy tale written by GW Bush about how supply-side economics will lead our nation to prosperity for all.

  • Report this Comment On August 06, 2011, at 9:35 PM, 1022ThirdAvenue wrote:

    The commentaries to this article seem like a debate rather than a meaningful deliberation about prudent investment strategies. Towards deliberation, I offer the following observation and analysis.

    If I remember correctly, the last of the "Jimmy Carter" era 30-year Treasuries matured in 2007. Whilst studying these particular Treasuries, I noticed some had a coupon rate of 17.5%. That rate was neither particularly high nor particularly low for the particular type of treasuries. Now, if you were a farmer and had to take out a $100,000 loan in 1977, or 1978, with a 17.5% interest rate, you probably fell victim to the farm crisis that gripped the country in 1985. In fact, many farmers did lose their farms precisely because of the crushing interest rates. The interest rates were driven because of out of control inflation, a petroleum crisis initiated and controlled by OPEC, and a president more interested in micromanaging the day-to-day affairs of the White House than in managing the economy.

    Recall, further, that within a few years after Ronald Reagan defeated Carter, inflation was brought under control and the coupon rate on the 30-year treasuries.

    Nevertheless, suppose that you were a prudent investor and bought, say, $100,000 of the 30-year treasuries in 1977 that were yielding 17.5%. Also, say that you were sensible enough to invest the dividend in instruments that were yielding reasonable returns, say 10% per year, and you did so for 30 years. You would have received a total of $525,000 in interest payments from the treasuries and you would have received the $100,000 face-value of the treasury at the end of the 30 years. Much of that $525,000 would have been received in years in which inflation was relatively modest. Returning to our computations, investment of the annual $17,500 divident at 10% would yield a portfolio worth $2,878,645.40, not accounting for taxes and not accounting the initial $100,000 paid for the treasury, at the end of the 30th year.

    Even with the years of high an and low inflation between 1977, or 1978, I cannot imagine anyone today complaining that $2,878,645 is a paltry amount of money, particularly when that amount arose out of an investment of $100,000.

    I am currently hoping for a few years of extremely high inflation. I will purchase as many high coupon rate, 30-year treasuries as I can afford. Then, see a secure long-term financial situation based upon reinvesting the interest.

  • Report this Comment On August 06, 2011, at 9:52 PM, 1022ThirdAvenue wrote:

    1022ThirdAvenue here again.

    I forgot a critical piece of my analysis. Say that, in stead of purchasing $100,000 worth of 30-year treasuries in 1977, or 1978, you put that $100,000 under your mattress. Given that the long-term average rate of inflation is 3.74%, that money would now be worth $28,696 in 1977 dollars.

    I have yet to see a long-term downside to inflation.

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