Economist suggests that inflation may be low for a while

[RenoJay]

Anyone else doubting the “wisdom” of Keynesian economics? Central banks were installed, at least partly, to supposedly moderate the business cycle by loosening in bad times and tightening in good times. At least in the past 25 years I’ve seen lots of loosening, but barely any tightening and the ups and downs of the business cycle seem as alive as ever. So to my way of thinking, this leaves asset prices far above their natural equilibrium so of course there’s deflationary pressure. I understand how hazardous deflation can be, but had Greenspan allowed a natural reset (as opposed to inflating the housing bubble) in the early 2000’s I don’t think we’d have huge societal issues now like massive wealth inequality. I think we would have had a very slow recovery but eventually would have found a natural level for asset prices. But the game continues with central bankers simply using more and more credit creation to fight the ill effects of the last round of credit creation. So the question becomes: At what point do we take our economic medicine for sins of the past, stop money printing, rate lowering and otherwise manipulating the natural desires of market participants, and allow a painful and slow reset so that future generations don’t have to deal with the mess we’ve made?

 

[stepford]

Anyone else doubting the “wisdom” of Keynesian economics?

Perhaps the problem isn't with Keynesian economics but with the "wisdom" of allowing politics rather than just economic data to influence monetary policy.

 

[audreyh1]

Anyone else doubting the “wisdom” of Keynesian economics? Central banks were installed, at least partly, to supposedly moderate the business cycle by loosening in bad times and tightening in good times. At least in the past 25 years I’ve seen lots of loosening, but barely any tightening and the ups and downs of the business cycle seem as alive as ever. So to my way of thinking, this leaves asset prices far above their natural equilibrium so of course there’s deflationary pressure.

Yep!

Even though my investments are way up there, asset inflation caused by endless QE bugs me because it seems inevitably unstable.

So I keep taking my full annual withdrawal and rebalancing, because you never know when we’re going to hit a big air pocket.

 

[bolt]

I've always recalled one thought.

"A country is only as valuable as its currency".
I concur wholeheartedly.
Remember the 1851 civil war single gold dollars on EBay over 100.00.

STRANGE ; a $1.00 gold piece(1850s) attracts (its smaller than a dime 1.6gm of 9.99 24k GLD over $ 100+ on EBay!
Good luck & Best wishes....

 

[Amethyst]

I have seen the greatest inflation in the cost of services. This cost is now being influenced by all the COVID-19 preparations, cleaning, scarcity of spare parts, etc. so I'm not sure how much is genuine "inflation," and how much is simply that it costs businesses more to run because of COVID.

No idea if inflation will be low or rage a la 70's/80s. I just know I no longer trust the inflation numbers that are published. I see what I see and inflation is much higher (here) than the numbers would suggest. It's been that way for several years. YMMV

 

[jkern]

Even though the CPI may be low, my Medical Insurance Premium has increased by 30% this year and 175% over the last four years. Medical Insurance represents over 20% of my total cost for Essentials.

Official CPI rates have little to do with my actual inflation rate.

 

[Car-Guy]

From my POV, with the exception of gasoline, just about everything has gone up... Insurance, cars, food, etc.... I just switched insurance companies after being with them for more than 25 years because the bill went up so much this year. The DW and I went to McDonalds the other day and had a bit of a laugh when the bill was just over $20.

 

[Tadpole]

Maybe all you need to do to produce the inflation of the 70s is to delink interest rates and true inflation. If the diesel price goes down but the merchandize in the haul doesn't, lower diesel price has only aided the shareholders of the shippers, not the buyers of the haul.

 

[sengsational]

Look on the bright side of inflation....that pallet of 100's the war lord has or drug lord has is getting less valuable, whereas legit money can be moved to things that keep up better.

My deflation market segment is eBay stuff from the far east. So much cool stuff for so cheap! I got an Arduino that runs an amazingly huge TV tuning free over the air signals with multiple digital tuners, scheduled to record my choices....a low, one-time cost, and now I have on-demand movie theater like experience whenever I want. Free.

 

[Koolau]

I have seen the greatest inflation in the cost of services. This cost is now being influenced by all the COVID-19 preparations, cleaning, scarcity of spare parts, etc. so I'm not sure how much is genuine "inflation," and how much is simply that it costs businesses more to run because of COVID.

Yep, I noticed at local restaurant that the menu items have been curtailed and the prices have increased (guessing 20%). Sad, really. I understand it, but it's counter productive if things don't improve fairly soon. Paying more to get less and risk Covid is not a good business model. YMMV

 

[Spanky]

Yep, I noticed at local restaurant that the menu items have been curtailed and the prices have increased (guessing 20%). Sad, really. I understand it, but it's counter productive if things don't improve fairly soon. Paying more to get less and risk Covid is not a good business model. YMMV

We do mostly takeout food and have not noticed any significant increases - keeping our fingers crossed.

 

[VFK57]

I do not see signs of deflation while bit coins / Gold prices indicate the fear of inflation.

 

[GenXguy]

This is clearly not an issue of inflation, but an issue of Taxation.

I have to disagree. The 7% increase in my homeowner's insurance has nothing to do with taxation. And when you are figuring your drawdown using the 4% rule, you MUST include taxes. You can't separate that out as if it doesn't exist as a real expense. That's ridiculous. Property taxes are a real expense and must be calculated in. That's part of my personal inflation that is figured as part of the 4% rule. The paid off house does NOT affect my drawdown related to the 4% rule at all and would work against me if I was to sell because in most areas that I would consider moving to, home values have actually gone up. So it's a negative all the way around which would require me to increase my spending.

I wasn't thinking about it earlier, but someone else mentioned health care insurance premiums. My insurance premiums through work went up 60% in July, along with higher deductibles and coinsurance! Grocery bills are up, electric bill is up. I don't drive much, so gas prices don't affect me much, but the gubment decided to raise taxes on that to offset some of the price drop along with increasing many other fees like car registrations by 50%.

As many experts are predicting, inflation is expected to soar, and is already higher than the government figures in terms of real inflation.

 

[pb4uski]

I dunno about inflation because we don't have much that we can compare apples-to-apples... but I do know that our spending is way below a year ago.

For those that I can compare apples-to-apples.... electric rate per KW is 8.8% higher. Insurance (home, auto, umbrella, et al) is the same as last year. Property tax rate is actually a hair lower than 2019, but property tax is higher due to town-wide reappraisal hitting lakefront property more than total.

 

[VFK57]

I dunno about inflation because we don't have much that we can compare apples-to-apples... but I do know that our spending is way below a year ago.

For those that I can compare apples-to-apples.... electric rate per KW is 8.8% higher. Insurance (home, auto, umbrella, et al) is the same as last year. Property tax rate is actually a hair lower than 2019, but property tax is higher due to town-wide reappraisal hitting lakefront property more than total.

Our property Taxes went up, despite the rental market had slowed down. It is on the top of "special assessments" what every year adds new bonds, "approved by majority" voters who hardly pay any Taxes. Gas with $40 p barrel is $3.50. Once again, the best indicator of inflation or rather expectation of high inflation are "alternative money": Bitcoins and Gold. They clearly indicate that even if we do not see high inflation, many investors and Central Banks are designing cryptocurrency and purchasing Gold in expectation of high inflation at some point IMO.

 

[RobLJ]

The simplest explanation is that we are in a persistent deflationary environment due to....aging of the population and no immigration (it's the Japan & Europe syndrome). Cheap energy also factors in.

Low demand and low investment (corps are putting their profits into stock buybacks, not productivity, so the cycle resumes; this is good for stock owners like me and most of you, not the overall economy).
I'm sorry but high inflation and >3% growth was so 1970s in the US. Both parties will deficit spend: the GOP by cutting taxes every chance they get and the Dems by spending. Take your choice, but there is not much of a difference, and surrprisingly to the classicists it will have very little influence on overall inflation and growth.

And yes if you are older, groceries and some other costs will go up. If you have a paid-for house and vehicle and Medicare, you are not going to experience the inflation younger citizens will experience. Inflation is an aggregate measure. DW and I are in significant deflation, exacerbated by no travel.
Most of us on the blawg suffer extreme 1st world 10%er problems, but you all know that, to some extent. I never anticipated living this life, but that's just me. The market did very well by me and DW.
I've ignored healthcare costs, but I'm covered until Medicare; sorry. Some/many of you possibly may be facing huge inflation there if ACA gets thrown out, which is quite possible, but that's the way the ball bounces politically. I'm relatively immune as a RedState State employee, which is unfair, but it is what it is. If I get COVID or cancer, I'll get huge health inflation also, but I'll probably be dead.

 

[RobLJ]

To clarify slightly, for the last 20-30 years, the .1% and profitable corporations have sat on their gains, probably rationally.
This is deflationary, in the extreme. There is not much money outside of these gains for the lower 95% to spend to inflate.

One way to look at this is the posters here who spend less than 2% of their stash (this is not a critique of them, just an observation about this "paradox of thrift" and the effects on the macroeconomy.) We here have probably little effect on the macroeconomy but I think it is a microcosm of how corporate and 1% wealth is .... not spent or spent unproductively to not inflate the economy.

Despite my inner thrift (I was born of Depression children), I really enjoy the blow the dough thread, although I almost have to put a gun to my head to blow dough, so I'm mostly criticizing myself here.

A change in our tax regimen might perhaps make a difference against the demographics or perhaps not. But I see little likelihood of a significant change in this, but I could be surprised--likely will be by events I don't foresee.

 

[Koolau]

I dunno about inflation because we don't have much that we can compare apples-to-apples... but I do know that our spending is way below a year ago.

For those that I can compare apples-to-apples.... electric rate per KW is 8.8% higher. Insurance (home, auto, umbrella, et al) is the same as last year. Property tax rate is actually a hair lower than 2019, but property tax is higher due to town-wide reappraisal hitting lakefront property more than total.

You are correct that much of the apples to apples comparisons are difficult to make when we quit spending money! About all we buy is health insurance (up significantly), electricity (up a bit), food primarily at Costco (up about 15% this year on OUR "market basket".) Phones - no change. Oh, taxes ARE down due to the tax cut.

No, we don't buy fuel (2 fill ups in 9 months). We no longer eat out (once a month now instead of almost once a day - AND the prices are up significantly WITH poorer selection.) No we haven't traveled though our last "jaunt" to the Big Island in January was DOUBLE for airfare what we paid last Sept.

I'm not panicked by inflation at this point, but I simply don't believe the numbers I see describing the official rate. Maybe the fairest way to say it "It bears no relationship to our experience." As always, YMMV.

 

[Gumby]

I guess the wise move is to use your own experience in your model. For example, we have no children so I don't really need to adjust my model for inflation in educational expenses. My house is paid for, so housing inflation likewise has little effect on us. Knock wood, we have retiree health insurance from my last employer, which will morph into a fully paid Medicare advantage plan when the time comes, so even healthcare inflation is, at this point, moot for us. We don't buy clothes anymore, so that is irrelevant to us too, as are the cost of autos, as we have two quite new low mileage ones and I don't see buying any more. We also have no need for more consumer electronics.

Indeed, virtually the only areas where inflation would affect us are food, fuel and utilities. Does that match the CPI? I don't know, but I assume for my purposes that it does. You might make your own inflation measure based on how you spend your money and use that instead.

 

[VFK57]

I am not an economist and neither major portion of ERed on this forum. However many retirees are worried what is the future of US$/ inflation. The reason is simple: Currently world reserve currency, what most countries keep are 60% in US$. However the EU and China are getting close to our GDP numbers and if we are talking about durable goods, we cannot compete with China. What would happen to inflation if our 60%of the world reserve currency would drop let say to 50% or lower? How it could affect the inflation?

 

[Starsky]

Inflation is the lodestar upon which many investment decisions will hinge. TLDR: Inflation is not possible as long as Banks don't lend.

The money printing part is irrelevant if the money lending part breaks down, which is what seems to be happening. Banks are rightly tightening up a lot on lending because of the poor economy and people's ability to repay. And savings are going up and debt is being paid off as people save the money they have in fear they will need it to survive an uncertain future. Both of those activities are highly deflationary.

Right now, the cost for some goods is going up; but wages are not, and consumer credit is dropping a lot. Under current conditions, inflation will not be an issue, even if the Fed wants it. On the other hand, if the Fed bypasses the banking system and provides enough direct stimulus, inflation could become real. The Fed wants more inflation to lower their cost of debt.

Here's a great article that discusses this topic in excellent detail: The Federal Reserve’s Bazooka is Broken – Will Direct Lending Be Next?

We are at such low interest rates, that stimulus via interest rates is now impossible. If interest rates were to become negative it would force a run on the banks. That is one reason the Fed wants a digital dollar, and maybe even to get rid of paper currently entirely. As mentioned at the recent IMF meeting, paper currency is literally the only thing standing between us and negative interest rates. Read the IMF blog here: Cashing In: How to Make Negative Interest Rates Work

The fed thus has two tools at its disposal to stimulate consumption and create inflation. They can get rid of cash and lower interest rates to negative rates; or they can make the Fed its own bank and allow them to lend directly and distribute digital credits to the needy and unemployed - and perhaps even as direct UBI payments. (Or they could do both.) Either solution is nothing but extreme.

I've been spending an inordinate amount of time reading and listening to economists and investors discuss this topic because it is fundamental to how we deploy our assets. I believe there is no doubt that we are headed into a deflationary spiral as bankruptcies and foreclosures start to roil the commercial market and things trickle down from there. Investment-wise, for now this means holding more bonds and cash than I've ever held before. We also have a lot of very good rental real estate. I did sell one house, but we're going to hold onto the rest as our hedge on the inflation side. If prices go up, we make money; if they go down, our ROI goes up. :shrug:

 

[Koolau]

<SNIP>

We are at such low interest rates, that stimulus via interest rates is now impossible. If interest rates were to become negative it would force a run on the banks. That is one reason the Fed wants a digital dollar, and maybe even to get rid of paper currently entirely. As mentioned at the recent IMF meeting, paper currency is literally the only thing standing between us and negative interest rates. Read the IMF blog here: Cashing In: How to Make Negative Interest Rates Work

DW hates it when I buy something with "money." She thinks we're losing money (the cash back thing) which is, of course true in the short run. If "money" disappears, we would be much more vulnerable to coercion IMHO. YMMV

 

[cyber888]

I have to disagree. The 7% increase in my homeowner's insurance has nothing to do with taxation. And when you are figuring your drawdown using the 4% rule, you MUST include taxes. You can't separate that out as if it doesn't exist as a real expense. That's ridiculous. Property taxes are a real expense and must be calculated in. That's part of my personal inflation that is figured as part of the 4% rule. The paid off house does NOT affect my drawdown related to the 4% rule at all and would work against me if I was to sell because in most areas that I would consider moving to, home values have actually gone up. So it's a negative all the way around which would require me to increase my spending.

I wasn't thinking about it earlier, but someone else mentioned health care insurance premiums. My insurance premiums through work went up 60% in July, along with higher deductibles and coinsurance! Grocery bills are up, electric bill is up. I don't drive much, so gas prices don't affect me much, but the gubment decided to raise taxes on that to offset some of the price drop along with increasing many other fees like car registrations by 50%.

As many experts are predicting, inflation is expected to soar, and is already higher than the government figures in terms of real inflation.

I’m pretty sure you live in a high cost area is your healthcare went up 60% and taxes up 7%.. My cousin pays $10,000 in realty tax and I pay $2,700. My premiums have not gone up nor my taxes. My cousin blames their state tax, not inflation.

 

[devans0]

I follow Keynes economics. I do much better in my investments than I did in the past because of that switch. Until I see otherwise, I will stick with what works for me.

Retirement CPI is different than the general CPI. The government uses the general CPI because it is cheaper. Our paid off homes are more than offset with increased medical, drugs, and insurance. Additionally, as we age, we have diminishing human capital to offset higher costs of services.

My fear is a prolonged stagflation.

I am not in line with conventional thinking, but I'm now comfortable with my investment strategy. It has been stress tested a few times and I do fairly well in avoiding the worst and do better in capitalizing the rebounds. I see areas that will be rebounding very well already.

Edit add, it was an economist on this site that clued me to change my thinking. I went back to school to learn more about econ. Being a retired student is different, to say the least.

 

[gooddog]

"Economist suggests that inflation may be low for a while"

When did ER become a comedy site?