Which 'flation' lies ahead?

[REWahoo]

My admittedly biased observations:

When the economy exploded in 07/08 I saw a lot of concerns about the dangers of both inflation and deflation. For several months during the darkest days of 2008, pundits were saying deflation was upon us. Then the economy began to gradually improve and talk of looming high inflation began to reemerge.

Fast forward to the events of the past few weeks, and here come the deflationists again, predicting the US will look like Japan for the next decade.


With that background, I was surprised to get the following email invitation from a former co-worker today:

I would like to invite you to join the Hyperinflation Congregation: the Xxxxxxxx group dedicated to helping you manage your personal, family and business lives during US dollar hyperinflation.

Few of us have lived through hyperinflation. As a result, we may have become conditioned to regard discussion about hyperinflation as alarmist “crazy talk”. However, many rationale group members have come to believe otherwise. Their view is that the authorities dictating government monetary policies have already set us up to experience the destructive power of hyperinflation. Some believe that hyperinflation will manifest itself within a matter of months, not years..

That said, you don’t have to be a “believer” to join the congregation. In fact, a wide range of opinions about this subject will help make this group more effective. The only requirement for membership is that you have an interest in this topic.

My take on this is no one really has a clue what lies ahead for our economy but a lot of people are convinced it will be extreme.

...and no, I'm not joining the "Congregation".

 

[TromboneAl]

When I was thinking about what deflation would be like, I realized that we have been experiencing it for a few years already -- in the housing market. Correct?

 

[REWahoo]

When I was thinking about what deflation would be like, I realized that we have been experiencing it for a few years already -- in the housing market. Correct?

I keep hearing it's only a paper loss unless you sell...

 

[W2R]

Inflation is an easy way for politicians to raise our taxes passively, so I wouldn't be especially surprised it occurred at some point.

However, I have no idea of whether we will get inflation first, or if it will be preceded by an indeterminate period of deflation, stagflation, or what.

Life is full of surprises!

 

[Gone4Good]

My take on this is no one really has a clue what lies ahead for our economy but a lot of people are convinced it will be extreme.

I think there are models of the economy that have forecast our current situation pretty well despite their counterintuitive predictions: low inflation despite massive monetary easing and falling interest rates in the face of massive government borrowing.

Fears of deflation weren't entirely overblown. CPI did turn negative for a short time. That really could have turned into an ugly negative feedback loop - particularly in light of the leverage in the system. But the Fed acted far quicker than the BOJ did, firing all of their conventional ammo and some unconventional rounds too, preventing a Japan style long-deflation. It's worth remembering how much heat they took along the way, and continue to take.

Given the nature of the problem, hyperinflation never really was a credible concern. It still isn't.

 

[MichaelB]

We don’t know what policies will be enacted by the Federal and State gov’ts or govt’s of other countries. We do know what will happen if the US economy and others continue along the trend they are currently on.

Inflation without credit growth is not usual. It also would do little to “solve” the fiscal imbalances we have.

When I was thinking about what deflation would be like, I realized that we have been experiencing it for a few years already -- in the housing market. Correct?

Equity prices as well – they are still below their nominal levels of 2007 and 2000.

 

[Nords]

"However, many rationale group members have come to believe otherwise."

I wonder what a member of a rationale group does-- practice being rational or just practice rationalizing? Or is it some logic version of a chorale group?

My take on this is no one really has a clue what lies ahead for our economy but a lot of people are convinced it will be extreme.

I predict stagflation: 0% change in prices. Plus or minus 3%...

 

[GregLee]

I wonder what a member of a rationale group does-- practice being rational or just practice rationalizing?

The latter, since a rationale is the result of rationalizing and is not necessarily rational. (And I suppose that was your point.)

 

[MasterBlaster]

Biflation describes the current malaise. Everything that you need to buy is going up. Everything you own is going down. yet the net CPI rate is modest.

Biflation (sometimes mixflation) is a state of the economy where the processes of inflation and deflation occur simultaneously.[1] The term was first introduced by Dr. F. Osborne Brown, a Senior Financial Analyst for the Phoenix Investment Group.[2] During Biflation, there's a rise in the price of commodity/earnings-based assets (inflation) and a simultaneous fall in the price of debt-based assets (deflation).[3]

 

[clifp]

Biflation describes the current malaise. Everything that you need to buy is going up. Everything you own is going down. yet the net CPI rate is modest.

Thank you I knew there was a term for this Biflation is perfect. It really helps with my book title.

My previous title, How to retire in a deflationary environment when you fear inflation is just around the corner. Was much too long. Biflation: A survival guide is much pithier.

Unfortunately I am struggling to get past chapter 1.
Stock up on guns, ammo, and MREs.

 

[calmloki]

I wonder what a member of a rationale group does-- practice being rational or just practice rationalizing? Or is it some logic version of a chorale group?

...

Beat me to it. Rationale group. "I would have made money in the market but was too busy posting to the ER group".

 

[Chuckanut]

CPI for the last 12 months has gone up 3.6%. So much for deflation.

The reality is that inflating our way out of the HUGE Federal debt has got to be on the minds of our politicians. That would be much easier than actually cutting expenses and making some hard decisions and setting priorities for Federal spending. Enough said.

 

[MichaelB]

CPI for the last 12 months has gone up 3.6%. So much for deflation.

Housing prices are down 12% and real average wages are flat. So much for inflation.

The reality is that inflating our way out of the HUGE Federal debt has got to be on the minds of our politicians. That would be much easier than actually cutting expenses and making some hard decisions and setting priorities for Federal spending. Enough said.

Capitalizing it does make it look bigger. Nonetheless, the cost of future liabilities is the real financial issue, and these will not lose relative value due to inflation. Social Security is indexed and Medicare costs rise faster than inflation. if anything, inflation worsens that problem. Additionally, taxes brackets adjust for inflation, so real future tax income does not inflate upwards. Inflation does lower the future value of public liabilities in economies with soft currencies, but that does not characterize the US.

Notwithstanding the Hyperinflation Congregation, it is not a high probability outcome.

 

[Chuckanut]

The cost of buying a house may be down, but the cost of owning one certainly is not. And the CPI is still up 3.6% for the year. That sounds like inflation to me. One must take into account the entire basket of goods, not just a few select items.

 

[Gone4Good]

The cost of buying a house may be down, but the cost of owning one certainly is not. And the CPI is still up 3.6% for the year. That sounds like inflation to me. One must take into account the entire basket of goods, not just a few select items.

Agreed. Inflation ticked up recently on higher commodity prices. You might have noticed something recently, though: prices at the pump going down.

Expect that headline inflation number to fall.

 

[Nords]

CPI for the last 12 months has gone up 3.6%. So much for deflation.

Housing prices are down 12% and real average wages are flat. So much for inflation.

The cost of buying a house may be down, but the cost of owning one certainly is not. And the CPI is still up 3.6% for the year. That sounds like inflation to me. One must take into account the entire basket of goods, not just a few select items.

C'mon, guys, this sounds like a schoolyard case of "My... 'index' is bigger than yours!"

 

[MasterBlaster]

I'm sure you all know, that home prices are not included in CPI measurements. rents and imputed rents are what's tracked (for housing) in the CPI.

So if your house is now worth half of what it was, that's just not deflationary per the rules of CPI logic. And vice versa.

 

[audreyh1]

When I was thinking about what deflation would be like, I realized that we have been experiencing it for a few years already -- in the housing market. Correct?

Así es. (That's right)

 

[audreyh1]

I wonder what a member of a rationale group does-- practice being rational or just practice rationalizing? Or is it some logic version of a chorale group?

I picked up on that too. Was that your buddy's actual spelling?

I decided that it was really a group needing to work together to come up with a rationale for their gut feelings that hyperinflation is going to happen soon.

Audrey

 

[audreyh1]

Thank you I knew there was a term for this Biflation is perfect. It really helps with my book title.

My previous title, How to retire in a deflationary environment when you fear inflation is just around the corner. Was much too long. Biflation: A survival guide is much pithier.

Unfortunately I am struggling to get past chapter 1.
Stock up on guns, ammo, and MREs.

Great one clifp! LOL!

 

[devans0]

I don't think that the Fed has control. Consumer confidence is down, people are paying down debt and saving to make up for their house/retirement fund, or trying to make up for a down economy. Spending is down, except for staples. As money gets pumped into the economy, it is getting sucked up and held. Banks have been burned by EZ credit policies and won't do that ever again, (until next time). The spenders aren't getting the loans, and the savers don't need them. Note that money velocity is a big component of inflation and money isn't moving. Result is stagflation.

Someday, (my guess is when enough Boomers retire) confidence will return, and all that money that was soaked up, will start to flow, then inflation, in a one step / two step whipsaw.

People in or near retirement will get hit twice, once with low returns for excess savings, then with high inflation as their incomes are fixed.

or so says my magic eight crystal ball.

 

[ItDontMeanAThing]

I've seen over the decades that economists are great at predictions that fit their world view and semi-good at explaining after the fact why their predictions were wrong. I know I don't know what's coming so I own more gold, REITS, stock in companies with substantial tangible assets, government and private bonds than I did before the debt bubble burst. Also have two years of living expenses in Thai Baht because I have no idea what's going to happen to the exchange rate. I do know I sleep better because I'm dim enough to think that these might be hedges against most possible futures. I sleep a lot better knowing it would take me a year to update my software development skills to where I could return to the states and get a j*b in a competitive market if it comes to that.

 

[REWahoo]

I picked up on that too. Was that your buddy's actual spelling?

Yes, I did a copy & paste of his email.

 

[Gone4Good]

the cost of future liabilities is the real financial issue, and these will not lose relative value due to inflation. . . .

Agreed, on the Federal budget. But I think we have two 'real' financial issues. One is long-run federal fiscal imbalances, which you mention. The other is an economy stuck in a high-unemployment equilibrium. These are two separate problems and causation runs somewhat opposite from current conventional wisdom.

Those who advocate higher inflation don't do so because they think it will fix the Federal fisc. They do so because they believe it will help overleveraged consumers. If you believe, as I do, that we're in a 'balance sheet recession' where key agents are constrained by excess debt, resolving that excess debt situation is fundamental to recovery. Inflation is one very crude way to do that. Not the only way, or even the best, but a way that should work.

I'd say that achieving full employment is a necessary, but not sufficient, step in achieving fiscal balance too. So while inflation may not devalue our government's biggest liabilities, it should disproportionately raise revenues (regardless of indexed tax brackets) by returning currently underutilized capacity to work.

 

[TromboneAl]

Biflation describes the current malaise. Everything that you need to buy is going up. Everything you own is going down. yet the net CPI rate is modest.

Bicurious inflation is an increase in the cost of sex toys.