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Old 03-23-2012, 01:43 PM   #41
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Originally Posted by arebelspy View Post
...<snip>...

Simply because I understand compounding, I think, that idea (3 years of double digit inflation) just floors me.

There's just a huge gap between understanding something and living it.
Yes, inflation is a nasty beast. As a kid, I lived through hyperinflation (not in US), something to the tune of 1000%+ per year.

From what I recall:
+ Wages, more of less, kept pace with inflation.
+ None of the merchandize had price tags.
+ Coins were not used.
+ New bills (with added zeros) were issued every few years.

If anyone had anything left over at the end of the month, there was no point in holding on to it "as is". Any savings had to be kept in foreign currency. Hanging on to real assets, such as real estate or gold, was safe as well. At the time/place, investing in markets was not an option, but I suspect stocks would have a chance of keeping up...
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Old 03-23-2012, 01:46 PM   #42
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Yes, inflation is a nasty beast. As a kid, I lived through hyperinflation (not in US), something to the tune of 1000%+ per year.

From what I recall:
+ Wages, more of less, kept pace with inflation.
+ None of the merchandize had price tags.
+ Coins were not used.
+ New bills (with added zeros) were issued every few years.
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Old 03-23-2012, 03:17 PM   #43
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With high inflation, the early retiree can get hit by taxes on phony gains. Yet, managing cap gains vs. dividends could be tough, as Congress has changed laws on a whim.

The common way is to stuff one's tax-deferred accounts while working, and then to do Roth conversion after retiring. Still, people have wondered if Congress might just change the law. That has plenty of precedents.

Dividends used to be taxed as ordinary income until 2003. Cap gain tax was as high as 49.88% in 1977. Where can one hide? Our retiree most likely owns his home, hence has no deductions, and little ways to reduce his taxes. It looks bleak to me, when a "millionaire" drawing a 3.5%WR may have to live on perhaps $20K or $25K after paying taxes on the total portfolio "gain", and still sees his portfolio dwindling down after 10 years.

Now, suppose he has saved $2M so he could live on twice the amount. Ah, his "income" is now $200K/yr if he could match the inflation rate of 10%. He is now considered "rich", and will face other special tax treatments!

Another thing that "high income" or assets can get you is the means testing on SS. To borrow a picture that Dawg52 has posted in another thread:

"No SS for you! Come back when you are 70."


PS. People who do not "get" this picture are referred to another thread here.
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Old 03-23-2012, 04:58 PM   #44
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With high inflation, the early retiree can get hit by taxes on phony gains. Yet, managing cap gains vs. dividends could be tough, as Congress has changed laws on a whim.

The common way is to stuff one's tax-deferred accounts while working, and then to do Roth conversion after retiring. Still, people have wondered if Congress might just change the law. That has plenty of precedents.

Dividends used to be taxed as ordinary income until 2003. Cap gain tax was as high as 49.88% in 1977. Where can one hide? Our retiree most likely owns his home, hence has no deductions, and little ways to reduce his taxes. It looks bleak to me, when a "millionaire" drawing a 3.5%WR may have to live on perhaps $20K or $25K after paying taxes on the total portfolio "gain", and still sees his portfolio dwindling down after 10 years.

Now, suppose he has saved $2M so he could live on twice the amount. Ah, his "income" is now $200K/yr if he could match the inflation rate of 10%. He is now considered "rich", and will face other special tax treatments!

Another thing that "high income" or assets can get you is the means testing on SS. To borrow a picture that Dawg52 has posted in another thread:

"No SS for you!".


PS. People who do not "get" this picture are referred to another thread here.
I agree with your assessment but would like to suggest that those with taxable accounts holding individual equities as opposed to many mutual funds have more wiggle room with respect to paying taxes on capital gains.
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Old 03-23-2012, 06:17 PM   #45
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Yes, I am looking at my Quicken screen right now. Only 29% of portfolio is in MFs, the rest is in individual stocks or ETFs. Of the above 29%, a majority of it is in tax-deferred accounts.

Some MF portfolios are churned more than others, and may have greater than 100% turnover in a year. Wellesley and Wellington have turnover rates of around 45%, I think. I don't know how MF holder's tax liabilities were during the decade of 1970-1980. I was too young to have any money to know.

About the one hundred trillion note from Zimbabwe posted by Ziggy, what is the significance of the stack of rocks, I wonder.

Is it supposed to mean that its citizens are caught between a rock and a hard place another rock?
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Old 03-23-2012, 08:22 PM   #46
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Annual inflation exceeded 10% in 10 of the last 100 years The last year that inflation exceeded 10% was 1981. Our 31 year run of relatively low inflation is unusually long. No question why there would be a generation gap in the perception of inflation.
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Old 03-23-2012, 10:57 PM   #47
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There has been very little in the news about hyperinflation in Zimbabwe, although we all know it has been bad. But how bad is it? I had to look up to find out.

In August 2006, they first did a "reverse split" to exchange an old $1,000 note for a new $1. Then, in 2008, they did the second time, but this time exchanged $10B (ten billion!) old bill for the new $1. Then, in 2009, they did it the 3rd time, and exchanged $1T (one trillion!) bill for the new $1.

Observe how the time intervals got shorter, and the ratio got larger! How absurd is that? Yes, it is happening.

In all, the exchange ratio was 10^3 * 10^10 * 10^12 = 10^25. That's "ten trillion trillion" or "ten septillion".

By comparison, the Weimar mark depreciated a mere one trillion in 3 years!
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Old 03-25-2012, 12:50 AM   #48
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I think the concerns that people express about inflation are excessively backward-looking in the manner of generals fighting the last war. For one thing, we can just forget about Weimar or Zimbabwe style hyperinflation. It is never going to happen in the US. It is hard to envision even high inflation for the next few years since where would the wage-price spiral come from?

The problem with the inflationistas is two-fold:
1. They adhere to the monetarist, always and everywhere, model of inflation. The great appeal of this model is its simplicity that indeed anyone can grasp. The defect is that it is wrong. Japan proved that in 2001/2002 when they increased their money supply by one third only to have it sit in vaults while deflation returned again and again. The high inflation that the monetarists were certain was imminent in the US after 2008 has not materialized.

2. a lack of imagination. It's true that inflation has been present during almost all of our lives and a serious problem during the 70's for those of us old enough to remember. But there are periods of persistent low-inflation/deflation in US history and around the world also. I don't think the general certainty about future inflation is justified.

I see again and again that the anecdotes are always about food and gas. Food is 8% of the average American houshold's budget. So, a little increase there doesn't actually impact the bottom line very much. No one ever mentions rent. Rent is much more important in a household budget, but people make more food-buying decisions in month than housing decisions, so they overweight food. In the years before I left the US my rent was going down.

Rises in gas prices alone do not necessarily constitute inflation, but could be a different problem of competition for resources.

Since 2005 when Robert Shiller identified the US housing bubble my default expectation has been that the US = Japan. So, far that has worked well enough. I think persistent low or negative inflation is very possible for a long time.
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Old 03-25-2012, 06:26 AM   #49
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Hyperinflation, Zimbabwe and Weimar style, is worth mentioning as a history lesson that the most ridiculous, absurd, and unbelievable things did happen.

I do not see anyone here suggesting that hyperinflation would happen in the US. Our imagination does not run that wild. As the US is still the #1 economy in the world, that would bring a collapse of the world economy perhaps on a par with a massive asteroid striking earth.

Double-digit inflation has happened in the US. The most recent episode was in 1979 (11.3%), 1980 (13.5%), and 1981 (10.3%). My first mortgage was in 1980, and I paid 14%. Pundits back then said we would never have single-digit mortgage rates again. Obviously, they were wrong.

Where are we going from here? When will inflation get to double digit? Perhaps never, as Bernanke keeps promising that his hand is always on the "knob" and ready to crank it to the right. The economy seems to pick up, as many of us felt and expressed so in another thread. It is simply prudent to plan for inflation or at least interest rates to go up, particularly when we see data like the following. For comparison, the average inflation in the US has been 3.16%.

The US demographics and culture are not like Japan's, I am also suggesting.


YrJanFebMarAprMayJunJulAugSepOctNovDec
20084.34.04.03.94.25.05.65.44.93.71.10.1
20090.00.2-0.4-0.7-1.3-1.4-2.1-1.5-1.3-0.21.82.7
20102.62.12.32.22.01.11.21.11.11.21.11.5
20111.62.12.73.23.63.63.63.83.93.53.43.0
20122.92.9          
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Old 03-25-2012, 08:21 AM   #50
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I can tell you how we did. We ended up with mortgage payments that came close to exceeding any takehome pay that he had ever made. While the house was in escrow, he got a great new job at more than twice the pay so we could afford it. Pretty high risk behavior.
Funny - we had the same situation back in early '79 when we purchased our last home.

The way it worked out with our budget, we had $20/month left over after all necessities were paid for. However, I was extremely lucky to get another j*b that paid well and had a lot of overtime which also put me in the 2x's pay increase.

I remember making two note (old/new home) payments, along with interest on a bridge loan I took out to cover the down payment on the new place, until the old place was sold, just on the income from my new j*b without losing any sleep. Of course, that quickly changed when the downturn in the economy in the early 80's (along with massive layoff's where I work*d). It's always something...

However, sometimes risks do work out ...
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Old 03-25-2012, 09:41 AM   #51
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I think part of the problem now is that so much inflation is tied to oil prices -- it affects the cost to produce almost everything -- and every time the economy improves the oil markets spike, which (a) creates more inflationary pressures in the pipeline and (b) threatens to derail the attempt at recovery. IMO, cheap oil circa 2009 did more to revive the economy than government stimulus ever could. And no amount of "policy" will overcome spiking oil prices in a world economy dangerously dependent on it.

So we're in a situation where I think it will be really hard to really break an inflationary tendency in a decent economy because oil market speculators and others who increase industrial demand will see to it that oil prices get really high. It takes very little incremental change in supply or demand to move prices a LOT right now.

I just don't see any sustained improvements in consumer confidence or business climate as long as we have a situation where any economic improvement is met with the bucket of cold water in the energy markets.
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Old 03-25-2012, 10:50 AM   #52
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I think persistent low or negative inflation is very possible for a long time.
I think prolonged moderate inflation (3% - 5%) is likely for a long time. People who believe they won't have to cope with moderate but persistant rising prices on energy, food, consumer goods and taxes will be surprised a decade from now.
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Old 03-25-2012, 11:00 AM   #53
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So we're in a situation where I think it will be really hard to really break an inflationary tendency in a decent economy because oil market speculators and others who increase industrial demand will see to it that oil prices get really high. It takes very little incremental change in supply or demand to move prices a LOT right now.
The situation can be viewed with simpler concepts than "speculators" or other market manipulators. Commodities and natural resources in general are becoming increasingly scarce in relation to the population sharing them. Prices are going to increase unless new technology bears fruit and we're able to significantly increase the earth's output of crops, fuel, building materials, commodities and all the natural resources that seem relatively plentiful today. Supply and demand will drive up prices in an attempt to ration what we have until demand lowers, likely manifested in an abrupt drop in the world population.

It's going to be an "interesting" world for the grandkids!
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Old 03-25-2012, 11:14 AM   #54
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I think prolonged moderate inflation (3% - 5%) is likely for a long time. People who believe they won't have to cope with moderate but persistant rising prices on energy, food, consumer goods and taxes will be surprised a decade from now.
No disagreement, just a comment, that 3%-5% is a lot of inflation over a long period. It is moderate when it's around for only a few years. Someone living on a fixed income will really suffer after such a decade.
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Old 03-25-2012, 11:53 AM   #55
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The situation can be viewed with simpler concepts than "speculators" or other market manipulators. Commodities and natural resources in general are becoming increasingly scarce in relation to the population sharing them.
This is certainly true. but I do think the "players" in the financial markets tend to exacerbate the swings as they all try to get on the bandwagon at the first sign of a tighter supply/demand curve expected in the future. If it were *only* supply and demand, oil would not rise $10 a barrel because of some event in the Middle East that *might* reduce supply in the future, or rise $5 a barrel because a stronger than expected economic report suggests demand *might* rise slightly in the future.

These bear no relation to current supply and demand. It's all about the futures markets there, and while there are some "legitimate" players in the futures market who have a business need to lock in cost certainty -- transport companies, delivery companies such as UPS and FedEx, the airlines -- there are many just hoping to get in before prices rise, which cause them to rise even more.
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Old 03-25-2012, 11:55 AM   #56
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No disagreement, just a comment, that 3%-5% is a lot of inflation over a long period. It is moderate when it's around for only a few years. Someone living on a fixed income will really suffer after such a decade.
And "moderate" inflation not so bad if wages are generally keeping up with them. With wage growth stuck near zero for the last several years, *any* inflation over a prolonged amount of time has significant erosive effect on purchasing power. Most folks can deal with 2-3% inflation and no raises or COLAs for a couple of years -- but over 5-10 years you have lost a *lot* of ground.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

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Old 03-25-2012, 12:33 PM   #57
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No disagreement, just a comment, that 3%-5% is a lot of inflation over a long period. It is moderate when it's around for only a few years. Someone living on a fixed income will really suffer after such a decade.
Yep.

I suppose I'm disproportionally influenced by local friends and acquaintances from my MegaCorp days and our personal situations. I meet with several different groups (Friday morning "breakfast with the boys," monthly retiree club meetings, ad hoc get-togethers at the pub, etc.). Many of us are close in age and were booted by MegaCorp during downsizings over the past decade. Typically, we have budgets funded approximately by 50% non-cola'd pensions and 50% FIRE portfolio withdrawals.

The guys who started their pensions immediately upon forced ER (typically mid to late 50's) and who are very conservative investors are doing a lot of talking about incomes not keeping up with their personal cost of living situations and seem surprised.

On one hand, the conversation is about low inflation rates, even deflation fears, and on the other constant comments about higher energy, food, utilities, entertainment (the restaurant we have breakfast at just bumped the "breakfast special" price up $1.00) and other costs of living a nice retirement lifestyle.

My take-away from this local and strictly anecdotal hearsay is that there are folks on primarily fixed incomes who are being surprised by the erosion of their buying power from 6 - 8 years ago until now. This despite the media talk being focused more on deflationary fears than inflation during that timeframe. It's as though they assumed inflation would have to kick up to double digits and be drawing headlines before they'd have an issue.
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Old 03-25-2012, 12:47 PM   #58
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And "moderate" inflation not so bad if wages are generally keeping up with them.
Inflation redistributes wealth. Depending on your personal situation (working or not, debtor or not, type of investor, perhaps a cola'd pension) you'll have different personal results.

I'm surprised when retired buddies shake in fear over the prospect of a 50% drop in portfolio value (and a 50% drop in portfolio generated income) but yawn at the prospect of moderate inflation causing the purchasing power of their non-COLA'd pension to drop by 50% over the next decade.

I just have a "feeling" that lots of folks are going to be surprised sometime out in the future. They're very, very willing to go conservative and protect their portfolios from future market crashes but don't seem concerned if their low growth portfolio is losing to inflation.
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Old 03-25-2012, 01:24 PM   #59
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Annual inflation exceeded 10% in 10 of the last 100 years The last year that inflation exceeded 10% was 1981. Our 31 year run of relatively low inflation is unusually long. No question why there would be a generation gap in the perception of inflation.
+1

Since I'm able to remember the '70s, to try to keep pace with expected inflation my non-bond assets are heavily weighted toward tangibles like energy, mining, real estate, etc.
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Old 03-25-2012, 01:47 PM   #60
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In an earlier post, I said that the average inflation in the US is 3.16%. I thought I saw that on a Web site, but could not find it again.

Just now, saw a Web site saying that it is 3.24%. So, I used another Web site that said the cumulative inflation from 1914 till now is 2176%. That number over 98 years indeed works out to 3.24%/yr (geometric mean, not arithmetic mean).
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