Fear of Soaring (Bond) Rates are Overblown?

[haha]

If that is true, then my inflation is higher, because I refuse to substitute my hamburger for chicken gizzards!

Listen up my friend, chicken gizzards are a step up from most hamburger. And livers and hearts? Unbeatable!

You can get enough chicken livers to give you a heart attack for $2.50.

 

[Mulligan]

Listen up my friend, chicken gizzards are a step up from most hamburger. And livers and hearts? Unbeatable!

You can get enough chicken livers to give you a heart attack for $2.50.

Ha, you may be correct, but I will never know, because I cant get over what they are and look like to know what they taste like!

 

[haha]

Ha, you may be correct, but I will never know, because I cant get over what they are and look like to know what they taste like!

Mulligan, this shows how different some places are from other places. When I was in high school there was a German beer garden where we went during the warm months. One of the specialties of the place was fried chicken livers with onions and garlic. We'd sit out there and eat chicken livers and drink beer on warm nights.

The place is still there, and they still serve fried chicken livers. But the beer garden has given way to an expansion of indoor seating.

Ha

 

[HFWR]

The speculation in commodities - gold, oil, etc. - has likely made inflation look worse than it really is.

 

[FinanceDude]

The inflation crowd has been dead wrong for years now and they will continue to be wrong for years to come. They are generals fighting the last war. With Europe headed into a recession and possibly the USl, too, it's hard to see a wage/price spiral getting started. Labor market participation has continued to decline in the US even with slow GDP growth. Inflation is not going to happen. At least not soon.

Can quote you on that?

 

[Midpack]

The inflation crowd has been dead wrong for years now and they will continue to be wrong for years to come. They are generals fighting the last war. With Europe headed into a recession and possibly the USl, too, it's hard to see a wage/price spiral getting started. Labor market participation has continued to decline in the US even with slow GDP growth. Inflation is not going to happen. At least not soon.

I can agree with not soon, but I think it's inevitable longer term given the economic actions of the past few years. You can't just print money indefinitely without some corresponding increase in GDP, but you can stall the impact for years at least. We're not Japan (yet).

 

[youbet]

There are a couple of things going on here. The inflation rate for retirees is expected to be higher than that of the general population largely because retirees use more health services which have a higher inflation rate as we all know. But the other effect is that people overestimate their own inflation rate because of the "availability bias" of some data, such as food. The average US household spends only about 8% of its income for food. So, even if food prices do go up somewhat faster than other costs it is not likely to affect the whole household budget that much. However, people make a lot more food spending transactions in a month than they do health care or housing. So, they recall the food transactions more readily and overweight them in estimating their total inflation rate.

The US cumulative inflation rate for the last three years has been about 4.5% or 1.5% per year. Not high.

Bottom line, you're ageeing....... We can have inflation while wages and interest rates paid on bonds and CD's stagnate. And I agree with you, inflation these past three years has been relatively modest, and so have wage increases and opportunities to earn interest.

 

[youbet]

The speculation in commodities - gold, oil, etc. - has likely made inflation look worse than it really is.

Even modest levels of inflation compound to significant levels over time. Would you be nervous of the prospect of your income being constant for the next decade vs. whatever inflation levels will be? Personally, I'm assuming that a decade from now that the prices I'll have to pay for life's essentials will be signigicantly higher than they are today. Between now and then we may not have any spikes in inflation, but it will add up. Hey 2% here, 3% there, maybe a 4% year thrown in and before ya know it, with compounding, you better be able to pay a third more for the stuff you need to live........

The cries of "deflation is coming" are highly overstated and for most ER types, inflation is much more of a threat. Folks not preparing for this may experience some interesting times.......

 

[HFWR]

Even modest levels of inflation compound to significant levels over time. Would you be nervous of the prospect of your income being constant for the next decade vs. whatever inflation levels will be? Personally, I'm assuming that a decade from now that the prices I'll have to pay for life's essentials will be signigicantly higher than they are today. Between now and then we may not have any spikes in inflation, but it will add up. Hey 2% here, 3% there, maybe a 4% year thrown in and before ya know it, with compounding, you better be able to pay a third more for the stuff you need to live........

The cries of "deflation is coming" are highly overstated and for most ER types, inflation is much more of a threat. Folks not preparing for this may experience some interesting times.......

Personal inflation is certainly not the CPI, though it's a good fudge number, I suppose... My property taxes have been flat for 11 years, a gallon of milk is $2.38, gas here is back below $3/gal. I don't track as closely as some, but I don't see too much in the way of personal inflation. Doesn't mean there's none, of course.

Deflation is more a macro issue. If the economy is shrinking, that might put my j*b in jeopardy, affect my portfolio, and reduce my home equity. So death by one cut, or a thousand...

Still, I think speculation and/or paranoia has lead to commodity pricing being a temporary artifact of the Great Recession, and people's/government's/central bank's reaction to it, so it's hard to find the "real" value of stuff these days. Oil was "skyrocketing" even as demand was dropping. Supply and demand has become disconnected.

So, all the liquidity sloshing around will likely someday lead to inflation, but then, I'm one who has been expecting bond yields to go back up for a few years now... I'll be right eventually!

 

[Chuckanut]

The current inflation rate is over 3% and MM funds and 1 year T-bills yield almost nothing. IMHO, we are already seeing high inflation relative to what we can earn on conservative investments.

 

[Khufu]

I can agree with not soon, but I think it's inevitable longer term given the economic actions of the past few years. You can't just print money indefinitely without some corresponding increase in GDP, but you can stall the impact for years at least. We're not Japan (yet).

I know you deeply believe that, but where is your evidence? Do you believe that economic effects in the US differ fundamentally from those in Japan?

Here's a graph of the relationship between money supply and inflation. What you apparently don't understand is that if the Fed can increase reserves it can also decrease them.

 

[Khufu]

The current inflation rate is over 3% and MM funds and 1 year T-bills yield almost nothing. IMHO, we are already seeing high inflation relative to what we can earn on conservative investments.

You are referencing the one-year inflation rate. The shorter time period the more noise. Here's Krugman's graph of the three-year and four-year rates.

 

[Khufu]

Can quote you on that?

Quote on what? Labor market participation rate? Decline of industrialized economies?

 

[Khufu]

Even modest levels of inflation compound to significant levels over time. Would you be nervous of the prospect of your income being constant for the next decade vs. whatever inflation levels will be? Personally, I'm assuming that a decade from now that the prices I'll have to pay for life's essentials will be signigicantly higher than they are today. Between now and then we may not have any spikes in inflation, but it will add up. Hey 2% here, 3% there, maybe a 4% year thrown in and before ya know it, with compounding, you better be able to pay a third more for the stuff you need to live........

The cries of "deflation is coming" are highly overstated and for most ER types, inflation is much more of a threat. Folks not preparing for this may experience some interesting times.......

For the last three years that I lived in Manhattan before moving away, my rent went down each year to a total of 13% less. That meant that several budget items like food and entertainment were effectively free.

Actual inflation did not last it's true. At a first approximation expect the economy to be like Japan, which also had a credit bubble, property bubble and stock bubble. That means periods of low deflation and low inflation. For longer than people expect. I don't known how long, but it could be very long.

All of us have lived our adult lives in an economy where inflation was persistent and sometimes very high. So, everyone here seems to believe it will go on forever. But the history of US inflation doesn't look like that. Inflation may return at some point, but not during the long recovery from a major financial crisis. Or the future may be quite different. The late nineteenth century showed persistent deflation.

 

[Midpack]

I know you deeply believe that, but where is your evidence? Do you believe that economic effects in the US differ fundamentally from those in Japan?

Here's a graph of the relationship between money supply and inflation. What you apparently don't understand is that if the Fed can increase reserves it can also decrease them.

Let's agree to disagree. You can find endless current articles, papers, books showing the correlation between money supply and inflation - though there are other factors certainly. I acknowledged it's not a foregone conclusion short term, we agree on that. In the long term, are you saying we can print money indefinitely and never be concerned about deficits and debt? That sure makes things easy, not only for us but the ECB. From the start, I referenced QE...

It is not clear to me that our deficit issues will be resolved soon or substantially, which may force us to print money when we can't "sell" debt. China has already told Europe 'no thanks.' Time will tell...

Quantitative easing may cause higher inflation than desired if the amount of easing required is overestimated, and too much money is created. On the other hand, it can fail if banks remain reluctant to lend money to small business and households in order to spur demand. Quantitative easing can effectively ease the process of deleveraging as it lowers yields. But in the context of a global economy, lower interest rates may contribute to asset bubbles in other economies.

An increase in money supply has an inflationary effect (as indicated by an increase in the annual rate of inflation). There is a time lag between money growth and inflation, inflationary pressures associated with money growth from QE could build before the central bank acts to counter them. Inflationary risks are mitigated if the system's economy outgrows the pace of the increase of the money supply from the easing. If production in an economy increases because of the increased money supply, the value of a unit of currency may also increase, even though there is more currency available. For example, if a nation's economy were to spur a significant increase in output at a rate at least as high as the amount of debt monetized, the inflationary pressures would be equalized. This can only happen if member banks actually lend the excess money out instead of hoarding the extra cash. During times of high economic output, the central bank always has the option of restoring the reserves back to higher levels through raising of interest rates or other means, effectively reversing the easing steps taken.

Quantitative easing - Wikipedia, the free encyclopedia there are countless other links/sources as well.

 

[Khufu]

Let's agree to disagree. You can find endless current articles, papers, books showing the correlation between money supply and inflation - though there are other factors certainly. I acknowledged it's not a foregone conclusion short term, we agree on that. In the long term, are you saying we can print money indefinitely and never be concerned about deficits and debt? That sure makes things easy, not only for us but the ECB. From the start, I referenced QE...

The people who predicted high inflation like Peter Schiff and others predicted that it would appear in 2010. He and they were flat wrong. You can keep moving the goal posts and say that it doesn't matter that inflation hasn't appeared yet, it certainly will sometime in the future. The inflationists had a theory, that the Fed expansion would create inflation, and it didn't happen. Doesn't that make you consider for just a moment that maybe that theory is wrong? Or do you not realize that what seems self-evident to you is just a theory?

In the long term yes, sure the central bank can create reserves without inflation. Look at Japan! The BOJ increased reserves by 30% of the money supply in 2001. No inflation resulted. Nada, zero, zip. Japan is back in deflation now.

The graph I posted shows not no relation between M1 and inflation. So, what is the basis for your theory that the Fed's "printing" of money will result in inflation? Why do you think that? Merely because you have heard it repeated endlessly by the likes of Peter Schiff.

 

[Midpack]

We disagree, end of story...

 

[brewer12345]

I love these sort of threads. The dogmatic approach I see put forth on ultimately unknowable macroeconomic cause and effect relationships reminds me of my boyhood indoctrination in the Catholic Church.

 

[Mulligan]

The fear of inflation coming was a main reason I didnt lock up all my money on 5% CD's a couple of years ago because I just knew I would get a lot better rate by waiting! It seems if inflation really occurs to a level it jumps the bond market, then it will happen when its least expected. Then knowing my investment skills, the long bond will go to 10% then I will wait because I know it will then go to 15%, but it never does and drops shortly after and I will be kicking myself for not getting in when I should have. I finally realized a couple years ago that I am not a good prognosticator. I threw in the towel and became a boglehead asset allocator.

 

[W2R]

The fear of inflation coming was a main reason I didnt lock up all my money on 5% CD's a couple of years ago because I just knew I would get a lot better rate by waiting! It seems if inflation really occurs to a level it jumps the bond market, then it will happen when its least expected. Then knowing my investment skills, the long bond will go to 10% then I will wait because I know it will then go to 15%, but it never does and drops shortly after and I will be kicking myself for not getting in when I should have. I finally realized a couple years ago that I am not a good prognosticator. I threw in the towel and became a boglehead asset allocator.

+1 The best investing moves I have made are when I am sure I am wrong, but still force myself to conform to my planned asset allocation.

 

[Running_Man]

Whether there will be a large increase in inflation in the near future, intermediate term or deflation instead is incredibly hard to predict. That the government long term cannot long term continue with present monetary policies is undeniable.

The headwind force to inflation though is the aging population of the US. Already many individuals in their '50's are consuming their retirement savings from being laid off and reduced their demand for products. At the same time pension plans are being forced to reduce their payouts as returns are not sufficient to maintain payouts.

The industrial trends of the digital age also by it's very nature reduces the overall need for physical goods, their production and transportation (books, nagazines, newspapers, catalogues, movies, business meetings, the improved efficiencies of electricity usage as well as automotive mileage gains and teh availability of solar product all tend to reduce overall demands on production.

When you throw a growing percentage of individuals reaching their 60's with limited resources not as impacted by a need to own the latest products, the amount of consumption needed to maintain lifestyles will trend towards the shrinking of overall demand. And you need demand for inflation. This is why despite the cost of financing housing falling to all time lows there is not an offseting demand for the available housing stock. When governments are forced to begin to reduce their deficits to a reasonable percentage of GDP that will additionally be an incredible deflationary force.

And in a quirk I believe the exceptionally low interest rates are having the opposite effect overall intended as those with funds realize they must save more than they have if they are to have any chance of retiring. In June of 2007 before this mess the savings rate in the US was 2 percent and now is nearly 5 percent.

The structural design of the age curve of the population, with reduced amounts of currency available to the older and growing portion of the curve, as well as a reduction by the old geezer mentality to not need to own the latest and greatest goods are very strong reduction agents in the inflationary soup. Deflation over the long term is still very possible.

 

[jayc]

I am confident that most people on this forum will survive OK regardless of what the economy does or what the inflation rate is because of their financial knowledge and savy approach to life. They have the financial experience and education to adjust based on the current economic conditions, Fed policy, or market up and downs.

We are ones that funded the 401k, ira, and roths. We are the ones that change credit cards immediately when rewards go away. We are the ones that know where to put the next dollar based on current and future tax rates.

In others words we will do something vs the other 99% that will do nothing because of apathy or they just have no idea how to react. I predict most people on this forum will land on their feet and prosper relative to the other 99% no matter what the predicted or current inflation rate is.