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Simple Inflation Question


KFRCanuk
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I have never lived through inflation as a consumer.

 

I would expect inflation to hit on my personal loans first. For those whom have lived through inflation, do you remember how long it took for employers to increase salaries in times of high inflation?

 

Also, if you believe that inflation is coming, did you push out your mortgage term to 10 years?

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The Zimbabwe experience:

 

3 cash markets develop; local currency ($Z), hard currency (USD), black.

 

Harsh central bank foreign currency controls. All foreign currency export receipts exchanged at the central bank for $Z at the 'official' rate. Currency evasion, & inducement, becomes an art form.

 

Salary is paid in $Z with raises every few weeks, but its preferable to take it in hard goods (fuel) for onward sale in USD. The same work paid in $Z, costs multiples more than it would if it were paid for in USD. Survival depends on how good a 'facilitator' you are.

 

Property & mortgages value in USD, with re-appraisals at least annually. Monthly USD payments, low L/V ratios, mortgages are floating rate demand loans. $Z mortgages or payments convert at the 'official' rate. Different appraisal values, L/V ratios, exchange rate conversions available for an inducement.

 

Plastic is denominated in USD. 1st question asked is 'How are you paying'. Hold up your Visa/MC/Amex & have a pleasant experience. Say $Z & expect the accountant to immediately sit next to you counting up the notes.

 

Those on a fixed income get devasted, & need to sell some kind of hard good on the street every week. Usually kids selling on behalf of grandparents, & not something to wish on anyone.

 

SD   

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Having been a working stiff in the late 70's I remember the run up in interest rates very well.

 

The early 70's was an inflationary period as the US (then it had a much larger chunk of global GDP) found itself borrowing and printing money to cover the costs of LBJ's great society spending and the disastrous (and very expensive) war in Vietnam. The resulting inflation forced Nixon to abandon the gold standard and later to impose wage and price controls to tame the beast. Wage and price controls (the Keynesian solution) were unworkable and were abandoned. A new term was coined.. "stagflation", hitherto theoretically impossible... economic stagnation in an environment of rising wages and prices.

Inflation continued to rage and was finally brought to heel by monetary policy... increasing interest rates until the appetite for new money was quelled and demand contracted. The resulting slowdown resulted in increased unemployment and downward pressure on wages. Consumers became savers again, as returns on bonds and deposits were also high. The price of gold spiked then abated as inflation was gradually tamed. Consumers tended to opt for long term mortgages at high rates for fear that the rates would be even higher if they took short term money.

 

In my own case, I was building a house on spec, finishing and putting it up for sale just as interest rates were rising weekly. I had a buyer one week who qualified for a mortgage at 13%, but when we tried to close, the rates were at 14.5% and the buyer no longer qualified. Eventually, the bank foreclosed as my sweat equity evaporated on falling house demand and prices. C'est la vie.

 

I guess the lesson here is that any debt you take on today, will be repaid at higher interest rates if the government or banks have their way ... and they will. Monetary inflation is simply a method for governments to raise money without seeming to raise taxes... and they need that money now more than ever.

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One big difference between the 1970s and now is that a large part of the world was following centrally planned economies and flawed economic theories based upon politics and not economics.  This sidelined much of the worlds productive capacity (China, India, Russia and much of Latin America) to create goods and services the world demanded versus what the central planners thought folks needed.  This disconnect lead to increased prices because the centrally planned systems did not have the pricing signals to correct the supply for demand.  Demand was eventually brought down by high interest rates.  In the following years, as more markets began supplying the world demand prices moderated.  This deflationary trend continues today.  This is what the world was like in a globalized economy before the Depression.  This trend is currently being offset by an increase in money supply.  As long as the price declines continue to be greater than the money supply increases, prices will go down.  This is the reason why are standard of living can increase with stable or declining wages.  I think economic progress should be measured in how many hours does it take to buy a given basket of goods and services versus the amount of wages (which does not take into account changes in purchasing power). 

 

Packer       

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I read in a book that some guy made $3.50 in 1976, and that was minimum wage I presume. And today's minimum wage is certainly not double that. What happened to the ravages of inflation over 30+ years? Did productivity gains have such a dramatic impact on the effect of inflation on wages? If so, the future may not be quite as dark as people think.

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I read in a book that some guy made $3.50 in 1976, and that was minimum wage I presume. And today's minimum wage is certainly not double that. What happened to the ravages of inflation over 30+ years? Did productivity gains have such a dramatic impact on the effect of inflation on wages? If so, the future may not be quite as dark as people think.

 

$0.75 in 1950

$1.60 in 1974 

$2.30 in 1976

 

 

 

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Minimum wage today is $7.25. 

 

Scorpion, what did you mean by the minimum wage is certainly not double the $3.50 number you referred to?   It's almost exactly that.

 

And it's 4.53x the 1974 number.

 

I guess, being born in 1973, I have always assumed that inflation is a given.  That it's just a part of life as I know it.  My thinking is always taking into account inflation.  This is why I think only a lunatic would buy 30 year bonds at 2.5% or 3.5%.  After taxes, that's 2.3% return at best... and who in their right mind is thinking inflation over the next 30 years will be just 2.3%? 

 

I think it's the older folks who have a harder time accepting it.  I have trouble believing that Hoisington is going to make a real return after-tax for his investors on that money that he kept invested in 30 yr bonds when the market for them offered only a 2.5% yield late last year.  He thinks the yield is going even lower... but if it doesn't he will be depending on the inflation rate remaining under 2.5% for a long time.  Seems far too risky.

 

 

 

 

 

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A couple of inflation related charts from Wikipedia

 

http://upload.wikimedia.org/wikipedia/commons/7/7d/Federal_Funds_Rate_%28effective%29.svg

 

Notice the increase since Nixon closed the gold window in 1972:

 

http://upload.wikimedia.org/wikipedia/commons/8/88/USACPI1800.svg

 

 

From seekingalpha.com

 

http://static.seekingalpha.com/uploads/2008/8/4/saupload_jq5.jpg

 

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