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Inflation is inevitable?
Old 05-29-2009, 04:59 PM   #1
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Inflation is inevitable?

Krugman doesn't think so . . .

http://www.nytimes.com/2009/05/29/op....html?_r=1&hpw

(This isn't meant to be political, even though Krugman takes it there at the end.)
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Old 05-29-2009, 05:09 PM   #2
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As long as the velocity of money stays low because people and businesses are afraid to spend, printing trillions of dollars won't be inflationary. But once the economy recovers to the point where people are willing to start reopening the wallets they've glued shut, the velocity of money rises and THEN I don't see how it could NOT be inflationary.

I suppose if it's an "L-shaped recovery" -- that is, we don't rally much off the bottom and enter a prolonged period of slow growth -- inflation might not be a big bugaboo for a while. But there's no doubt that all the extra money being printed increases inflationary pressures.
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Old 05-29-2009, 05:17 PM   #3
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But there's no doubt that all the extra money being printed increases inflationary pressures.
Except it didn't in Japan. Japan's Central Bank Discount rate has been below 1% since 1995.

http://www.economagic.com/em-cgi/data.exe/bjap/ehdis01

I guess the question is, do our problems look more like those of Japan, those of the U.S. circa 1930 or those of the U.S. circa 1970?
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Old 05-29-2009, 05:51 PM   #4
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I tend to agree with Ziggy, but truly I have stopped pondering this question.

What is important is that I think the stock market has stabilized, hence I am increasing my AA on equities, not just US but also international. That's what I feel (feel, not know!) and am acting accordingly at the current time.

A year or two down the road, if and when inflation comes, I will see what my options are.
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Old 05-29-2009, 06:11 PM   #5
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The treasury literally cannot print money fast enough to replace the massive amount of deflation that is occuring. Every bond that doesn't get rolled over, every credit card/mortgage/student loan that defaults, every dollar taken out of the bank and put into someone's safe, every hedge fund that has to de-leverage their portfolio causes more and more deflation.

In this scenario stocks lose, bonds lose, commodities lose and cash wins simply because everything else loses its value relative to cash.
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Old 05-29-2009, 06:21 PM   #6
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And when all those $ sitting in safes come out to play?
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Old 05-29-2009, 06:50 PM   #7
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And when all those $ sitting in safes come out to play?
Those who have cash will hoard it because they will see the prices in everything collapsing, while those who have debt will sell everything they have to raise cash in order to pay off debt because they witness their debt obligations remain constant while the "assets" that were purchased by the debt plummet.
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Old 05-29-2009, 08:21 PM   #8
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And when all those $ sitting in safes come out to play?
Well, that is the big question. It's not only the supply of money, but the demand for money that is important. Banks have lots of reserves, but are unwilling to lend. If they decide to lend, someone on the other end has to borrow the money. But right now, the only entity that is increasing its borrowing is the federal government. Individuals are deleveraging, corporations are deleveraging . . . demand for money is falling off a cliff.

If the consumer does what he's supposed to do and get his balance sheet in order the demand for money may be anemic for a decade. So it's possible all those reserves just sit there and grow mold.
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Old 05-29-2009, 09:45 PM   #9
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Hmmm. Traditionally, the US economy doesn't start to have serious inflation problems until capacity utilization is north of 80%, closing in on 85%. I think we are at or below 70% right now. So the US itself is unlikely to generate significant inflation.

I suspect that what will happen is that the US will come out of recession late this year but then will stage a prolonged weak recovery for 2 or 3 years. In the meantime, I think China and India will come back quicker and stronger and this will ignite the economies of the commodity supply countries (principally Brazil and perhaps Russia, perhaps Australia and Canada to some extent as well). So we might see higher prices for certain things (oil, coal, metals, etc.) even though US growth remains weak and capacity utilization stays under 80%.

This is just a SWAG. But like always, I think it is a good idea to have some foreign bonds, commodities, foreign stocks and TIPS in addition to US equities and bonds.
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Old 05-30-2009, 12:32 AM   #10
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Krugman doesn't think so . . .

http://www.nytimes.com/2009/05/29/op....html?_r=1&hpw

(This isn't meant to be political, even though Krugman takes it there at the end.)
I've always liked Krugman, even now that he is not independent. In Japan, consumers retreated right after the bubble (85-91) ashamed of the American style binge they got temporarily into. Will US consumers do the same? My bet is they won't, and I'll keep looking for long term hedges against inflation.
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Old 05-30-2009, 04:28 PM   #11
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I respect Krugman's intelligence, even while I despise his nasty partisanship.

It seems to me Krugman is portraying one possible scenario, but I don't think it is a particularly likely one. I am still in the camp that sometime in the next few years we will see a significant uptick in inflation that likely will hit double digits. Personally, I don't think this is a bad thing, since I believe most of our problems would go away if we could magically raises prices on all assets by 20%.

However, I think it is folly to use Japan as a model for what will happen. The differences between Japan and US are more important than the similarities. Yes both countries had a housing/real estate bubble. Beyond that they don't have much in common.
First the Yen while always an important currency, has never been the World reserve currency. The unique role of the US dollar makes comparison really hard. Of course if the US dollars gets replaced by the Euro or a barrel of Sweet Saudi crude than god knows what happen.

Second Japan and the US economy and society are pretty much polar opposites. At least for the last couple of generation, Japan is an insular place, with a huge saving rates, and heavily export oriented. The US is has large number of immigrants, almost no savings, and heavily dependent on imports (albeit a lot of exports also). I have heard other say that Japanese were ashamed of their consumer binge, where as in America even the most shameful behavior leads to a book and nationwide book tour.
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Old 05-30-2009, 04:43 PM   #12
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... Of course if the US dollars gets replaced by the Euro [f]or a barrel of Sweet Saudi crude than god knows what happen.
I remember reading that some oil deals were already priced in euros. This was even before the current recession started, when the euro was at $US 1.5.

Was this true?
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Old 05-30-2009, 04:53 PM   #13
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Besides real estate, what is falling in price?

Already oil is creeping up. If commodities go up in price while big assets remain depressed, what is the net overall effect on prices?

For daily expenses, higher energy and food costs will dampen any kind of recovery.
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Old 05-30-2009, 07:03 PM   #14
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I remember reading that some oil deals were already priced in euros. This was even before the current recession started, when the euro was at $US 1.5.

Was this true?
IIRC, Iran made some noise about wanting to have oil denominated in Eiros, but nobody besides Venezuela seemed to go along with them.

The USD's pervasiveness is really amazing. AFAIK, all dry bulk charters are dollar denominated. That means that a London-based trader who wants to move soybeans from Brazil to China will conduct the entire transaction in a currency that nobody involved in any way in the deal uses at home.
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Old 05-31-2009, 10:50 AM   #15
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This is just a SWAG. But like always, I think it is a good idea to have some foreign bonds, commodities, foreign stocks and TIPS in addition to US equities and bonds.
Based on a discussion here I added GIM for some foreign bond holdings, still under what I bought it at but like the dividends and the diversification in the 'portfolio'. I do not hold TIPS as I have a COLAd pension. I have a range of foreign stocks including VEU and VWO. Nothing is up from the time I purchased except for my one REIT VNQ. I have actually cut my total bond index fund holding recently. What I do not have is any commodity coverage. There is a continuing discussion on the VG Boglehead site which I can have trouble following.

So to the question: how does an index/ETF type person (DWs IRA is in VG Wellsley, my main fund is a target retirement type fund) hold commodities? Is there an ETF? While I am not particularly a timer there does seem to be some better or worse periods to buy assets, is this a time to add commodities? Haven't they had their run up already and its too late to add now? How would I know when to sell?
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Old 05-31-2009, 11:44 AM   #16
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So to the question: how does an index/ETF type person (DWs IRA is in VG Wellsley, my main fund is a target retirement type fund) hold commodities? Is there an ETF?
OIH for petroleum, GDX for gold, MOO for agricultural. They are all baskets of equities of companies in those respective industries.

There are also ETFs that hold collateralized commodity index futures, like DBC, and ETNs that do the same, like DJP.

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While I am not particularly a timer there does seem to be some better or worse periods to buy assets, is this a time to add commodities? Haven't they had their run up already and its too late to add now? How would I know when to sell?
I think the idea is to actively rebalance between commodity based equities and the rest of the portfolio. If you're not sure when to buy, just set an allocation target and then build it over a year or so. For example, if you want grow to 5% of total portfolio, then buy 1.25% each quarter.
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Old 05-31-2009, 11:45 AM   #17
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PCRIX/PCRDX are non-etf funds that offer commodity futures index exposure.
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Old 05-31-2009, 11:47 AM   #18
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I do have OIH and MOO myself, in addition to some individual leading stocks inside these ETFs.

I bought them not just for inflation protection down the road, but also in anticipation of the world-wide recovery.
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Old 05-31-2009, 11:55 AM   #19
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I a gadget/tech junkie. I look at the Fry's add every Friday. I see no spectacular decrease in prices. There are decreases, but they appear to be the normal things. Like a 1 gig memory card cost the same as a 256 Meg card a couple years ago. I hear about car companies going broke, but Edmunds has my car at about the same amount now as it was two years ago.
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Old 05-31-2009, 01:39 PM   #20
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Like you, I am an addict to the Fry's ad, although I try not to buy anything. I look at it mainly to see how prices are dropping. One can't look at dropping prices of electronics and houses and declare that we have deflation. One is the effect of massive-scale modern production, while the other is an over-correction from a bubble.

I just went to Costco to buy a 40-lb pail of chlorine tablets for my pool. It's $96 before the rebate! I thought the price was in the $70's not so long ago. With some motor oil for my car, fish oil tablets for myself and some sundry items, I walked out of there relieved of near $300. Good grief! With deflation like this, I will need to keep my part-time work a bit longer.
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