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Inflation Fallacy


Ham Hockers
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Inflation IS a bad thing like the Fed says. The 70's proved that pretty conclusively didn't it? Our hero Warren Buffett wrote a good piece on it in the 70s:

 

http://fortune.com/2011/06/12/buffett-how-inflation-swindles-the-equity-investor-fortune-classics-1977/

 

to me its a no brainer. As someone with a lot of skin in the market, one of the biggest macro factors I look at is the inflation rate. I am riding this bull market as hard as I am because inflation is muted.

 

Ok as a current example of bad inflation, I invested in Oi of Brazil, my biggest mistake since the financial crisis. It is a capital intensive company in a country with high inflation. And the company sucks! I vow to never invest in a high inflationary environment again.

 

 

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Randomep, the article doesn't say that inflation can't be bad. But everybody likes it when it is their wages that inflate.

 

But I am saying inflation (too high) is universally bad. In what sense is inflation good? If I understand what you are saying then by his argument Stalin can be considered a great man because there are still russians today who celebrate his reign. Of course they were the people who didn't wind up in the gulags, they benefited from the slave labour. Capitalism breaks down when you have runaway inflation.

 

I mean bribery can be considered good for the civil servants. But really, except for a select few like a tinpot dictator, everyone suffers under bribery and corruption in the long run. Same for inflation.

 

 

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Randomep, the article doesn't say that inflation can't be bad. But everybody likes it when it is their wages that inflate.

 

But I am saying inflation (too high) is universally bad. In what sense is inflation good? If I understand what you are saying then by his argument Stalin can be considered a great man because there are still russians today who celebrate his reign. Of course they were the people who didn't wind up in the gulags, they benefited from the slave labour. Capitalism breaks down when you have runaway inflation.

 

I mean bribery can be considered good for the civil servants. But really, except for a select few like a tinpot dictator, everyone suffers under bribery and corruption in the long run. Same for inflation.

 

I have no idea what you're talking about. Did you even read the linked article?

 

It's just saying that inflation can be bad, neutral, or good. It depends on what economic actor you are and what it is that becomes more expensive. If your wages inflate faster than the prices of the things you buy, inflation is good for you. And anyone's higher price is someone else's higher revenue.

 

Over the past 100 years, how much less can you buy for a dollar? Yet are people living better or worse? What matters in the end is the value that you produce and get, not how many nominal dollars you get and spend.

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Randomep, the article doesn't say that inflation can't be bad. But everybody likes it when it is their wages that inflate.

 

But I am saying inflation (too high) is universally bad. In what sense is inflation good? If I understand what you are saying then by his argument Stalin can be considered a great man because there are still russians today who celebrate his reign. Of course they were the people who didn't wind up in the gulags, they benefited from the slave labour. Capitalism breaks down when you have runaway inflation.

 

I mean bribery can be considered good for the civil servants. But really, except for a select few like a tinpot dictator, everyone suffers under bribery and corruption in the long run. Same for inflation.

 

I have no idea what you're talking about. Did you even read the linked article?

 

It's just saying that inflation can be bad, neutral, or good. It depends on what economic actor you are and what it is that becomes more expensive. If your wages inflate faster than the prices of the things you buy, inflation is good for you. And anyone's higher price is someone else's higher revenue.

 

Over the past year, how much less can you buy for a dollar? Yet are people living better or worse? What matters in the end is the value that you produce and get, not how many nominal dollars you get and spend.

 

I admit I didn't read every word, it didn't make sense after about 3 paragraphs. But still why don't you understand what I said? Sure price raises will benefit somebody. But think in practical terms.  Like his example. It is good to sell something for $2 instead of $1, then he sells the goods at the inflated price. But he didn't really add value he is able to raise the price because everyone else is raising prices. Say he paid $1 for it. His profit is $1. But he isn't really ahead because if he buys another apple to sell he will have to pay $2.  So is he back where he started? No! because he made a profit of $1 and had to pay $0.33 cent tax! 

 

He has 1 apple. before

sells 1 apple for $2.

has $1 profit and pays 33% tax. So now he has $1.66

buys another apple for $2.

 

he has 1 apple and -$.33 debt.

 

The reason is that our tax laws were invented with the notion of stable prices.  So it is wrong to say the price raiser is a winner, because he will benefit and suffer from inflation. Pretty soon he will go out of business. And you mentioned labour does great if they get to raise wages, ya but what if he loses his job? That's what happened in the 70's.

 

High inflation is universally bad. We think in terms of stable prices. I don't know what ideal world the author is thinking of that will make inflation benefit anyone in the long run or be neutral in the long run. Certainly we have to change the way humans think and how the banks and tax laws are made.

 

 

 

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I don't understand what it has to do with what the article was about. Granted, it was way too prolix, but all its saying is that inflation can have all kinds of effects on all kinds of people, and that the short-hand of "inflation = bad" is too reductive.

 

If it was universally bad, the fact that the dollar has probably lost over 90% of its value over the past 100 years (or whatever) would probably be a catastrophe, yet we're much better off.

 

Also, places with deflation aren't exactly doing better in real terms than places with inflation. What matters is the real economic stuff going on underneath whatever nominal amounts you use to exchange goods and services.

 

You're reading way too much into what I wrote, by the way. I'm not saying inflation is good. I'm saying it's more complicated than that.

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And you mentioned labour does great if they get to raise wages, ya but what if he loses his job? That's what happened in the 70's.

 

It seems like maybe 2-3 additional people out of 100 were unable to find work during the 70s.

 

I'm looking at unemployment data: 

http://www.infoplease.com/ipa/A0104719.html

 

Or perhaps 1 in 100 if you compare the unemployment rates of the 1970s to that of the early 1960s.

 

 

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I don't understand what it has to do with what the article was about. Granted, it was way too prolix, but all its saying is that inflation can have all kinds of effects on all kinds of people, and that the short-hand of "inflation = bad" is too reductive.

 

If it was universally bad, the fact that the dollar has probably lost over 90% of its value over the past 100 years (or whatever) would probably be a catastrophe, yet we're much better off.

 

 

My father likes to talk about how much the inflation of the 1970s helped him.  He really stretched himself buying a home in 1970, but 10-15 years later his wages had soared and the debt on the mortgage did not. 

 

So he had positive operating leverage.

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I don't understand what it has to do with what the article was about. Granted, it was way too prolix, but all its saying is that inflation can have all kinds of effects on all kinds of people, and that the short-hand of "inflation = bad" is too reductive.

 

If it was universally bad, the fact that the dollar has probably lost over 90% of its value over the past 100 years (or whatever) would probably be a catastrophe, yet we're much better off.

 

Also, places with deflation aren't exactly doing better in real terms than places with inflation. What matters is the real economic stuff going on underneath whatever nominal amounts you use to exchange goods and services.

 

You're reading way too much into what I wrote, by the way. I'm not saying inflation is good. I'm saying it's more complicated than that.

 

I don't understand what you don't understand. Like I said I read the first few paragraphs. Paragraph 3:

-----------------------------------------------

Sometime in February, I will ask my ECON1000 students: "So, why is inflation a bad thing?"

 

I can anticipate the look on their faces. Some will give me that look of sympathy, normally reserved for those who aren't too bright. Others will look like they know this must be a trick question, since I wouldn't ask anything that were really quite so obvious. Finally one will answer.

 

"Because if all prices rise 10% we will only be able to afford to buy 10% less stuff. Duh!" Except the "Duh!" is silent.

----------------------------------------------------

 

Everything I wrote in my last post (not the one about stalin) addresses the 3rd paragraph of the article!  If I talk about the 3rd paragraph only I am not addressing the point of the article???  Boy I'd love to be in his ECON1000 class when he asks that question!

 

And about Stalin, I was just saying in any "unfair" distribution of wealth, someone will benefit. ERICPOLOY's father is a perfect case in point.....

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