How it will end.

[CitricAcid]

I have a long-winded question/explanation for the people who say that inflation will simply erode cash:


How come inflationary problems are only brought up when people hold cash or cash instruments? If you hold stocks earning 10% or cash earning 2% and inflation is at 3%... the inflation at 3% IS corroding the cash and the stock. So, when you compare who did better in a time period (stocks down 14% versus cash up 3% or whatever), why does anyone ever mention that inflation hurt the cash when any stocks held in the USD is also hurt by inflation.

Yes, I understand that stocks eventually beat out cash, but that should be the argument/point... not that inflation eats away cash. It eats away at ANYTHING that is held in fiat currency.

 

[ziggy29]

How come inflationary problems are only brought up when people hold cash or cash instruments? If you hold stocks earning 10% or cash earning 2% and inflation is at 3%... the inflation at 3% IS corroding the cash and the stock. So, when you compare who did better in a time period (stocks down 14% versus cash up 3% or whatever), why does anyone ever mention that inflation hurt the cash when any stocks held in the USD is also hurt by inflation.

I'd say that's partially true, but stocks are more resilient to inflation than cash because they should be able to (more or less) increase their pricing to correspond to their own increased costs, and if their margin remains the same their earnings should come close to keeping up with inflation. Cash rarely does in a high-inflation environment, and especially not after taxes.

 

[CitricAcid]

Ziggy, I agree, and that is one of the major reasons WHY stocks perform better than cash over time. But, that is tied into the fact that you can tell people who hold cash that STOCKS beat CASH over time. The point shouldn't be that inflation kills CASH over time, as if it doesn't affect stocks at all.

 

[Pete]

maybe the old timers will remind us, but i remember reading somewhere that the 1970's were also a time of high inflation and tight credit partly brought on by a housing bubble that ended in the late 1960's that also involved subprime mortgages

As I remember, to solve the problems of the 70's the US gov't went on a spending spree and inflated us into a new prosperity. I can't prove anything, but I read plenty of articles which say the gov't is now the biggest employer and biggest customer in the US. I agree intuitively.

Now that we have eaten from that trough, it's hard to break away. Can the gov't continue this spree and continue to grow? What will happen if they try to tighten their belts?

 

[Nords]

The point shouldn't be that inflation kills CASH over time, as if it doesn't affect stocks at all.

People are far more concerned about short-term volatility than long-term inflation.

But by the time inflation has made its effect clear, those same people are also old enough that they insist they'd rather be in MMs & CDs than in those nasty stocks. They'll just cut back their lifestyle...

I think we spend more time tinkering with fractions of a basis point in bonds & CDs than we do choosing stock funds that are going to vary by hundreds of basis points.

 

[Independent]

maybe the old timers will remind us, but i remember reading somewhere that the 1970's were also a time of high inflation and tight credit partly brought on by a housing bubble that ended in the late 1960's that also involved subprime mortgages

I don't remember any special "subprime mortgage" thing in the 1960's. I think the story goes like this:

In the 60's we were trying to fight a war while maintaining social programs at home. This generated inflation pressure.

Then in 1973 we had the Arab oil embargo. This made Americans poorer in real terms because it meant we had to send more US made goods abroad to pay for the same amount of oil. The Fed was concerned that the real drop in wealth would be compounded by a recession (people who feel poorer get conservative with spending, businesses cut production and employment, people cut back more, etc.) so they pumped up the money supply to offset that psychology.

Economic orthodoxy at the time held there was a long term trade-off between inflation and unemployment - pushing one down meant letting the other go up. The Fed accepted higher inflation to avoid higher unemployment.

The inflation developed a life of its own. We got into a wage-price spiral. Nobody was willing to bite the bullet and say "I guess we're just poorer." Everyone tried to stay ahead of the game. The Fed discovered that it took higher and higher rates of inflation to maintain a given unemployment rate. We drifted into a no-growth economy with high inflation.

Then the Iranians overthrew the Shah and the price of oil shot up again.

Eventually, the moneterists at the Fed (Volcker) stopped growing the US money supply. This sent the economy into our worst post-war recession. Unemployment went over 10%. People decided it was better to be working for lower wages than not working at all. The wage-price cycle slowed.

The slow US economy was partially responsible (as well as conservation actions) for reducing the demand for oil, which broke OPEC's solidarity. The price of oil fell, real incomes went up, good times followed (well, it's really more complicated than that).

Needless to say, I don't think we'll see exactly the same sequence this time. But, ... substitute "increasing demand for oil in China and India" for "Arab oil embargo", and you can see some pretty obvious parallels. The good news is that everyone at the Fed knows what worked and what didn't in the 70's and 80's. The bad news (my opinion only) is that our fundamentals are worse - more debt, the psychological effect of the housing collapse, and the fact that the high price of oil is driven more by fundamentals and less by a cartel.

So I figure I've seen much worse economies than this one. I don't think we'll ever return to the good old days of really cheap oil. But I don't think we're going to slip into a permanent depression, either.

 

[al_bundy]

last year i read somewhere that there was some kind of housing program in the late 1960's for subprime borrowers that gave them ARM type loans with the hope of increasing home ownership

 

[haha]

I'd say that's partially true, but stocks are more resilient to inflation than cash because they should be able to (more or less) increase their pricing to correspond to their own increased costs, and if their margin remains the same their earnings should come close to keeping up with inflation. Cash rarely does in a high-inflation environment, and especially not after taxes.

Great theory, but look around and find how much pricing power is out there now.

Ha

 

[Enuf]

I recall the turbulence of the 60's and 70's as a long haired protester myself. And my only good feeling about what all the inflation, riots, recession and joblessness accomplished was it made us aware of how hopelessly incompetent our government was.