Capitol Hill Blue Forums Military & Security Non-Conventional Theories Deflation

Inflation is generally the friend of young families and the enemy of the retired: Young adults tend to sign 30 year contracts to pay a fixed interest rate on a house. (Sigh...at least they used to!) Over that 30 years, the fixed payment becomes a smaller and smaller fraction of their inflating income.

The retired person living on a bond, pension, or anuity-based income may have a much more difficult time if inflated prices make more and more "essentials" unaffordable.

Long-term deflation that starts cutting people's income relative to their fixed-rate mortgages would mean more short sales and foreclosures. But on the bright side, retired folks might be able to pay for both food AND heat!

What often happens when discussing inflation or deflation is that the two get confused with price increases or decreases. The increase or decrease is not inflation or deflation, but the result of inflation or deflation. Once this is understood, discussion is more apt to avoid arguing at cross-purposes.

I agree that we are experiencing deflation (too little money chasing too many goods). This is why car dealers are offering "two for one" sales. Chain Grocery stores have greatly increased their "specials". Retailers are running continous "sales". Houses are reduced in price. Construction material is cheaper.

Some might say that this is mere "supply and demand", but the fly in that ointment is that the drop in prices for goods (and maybe services) seems to be fairly well spread across the board and appears to be nation-wide. Some might then say, how can this be when the government is churning out tons o' cash? Well, that cash is not going to as many people and much of it is being held rather than being spent. Both result in too few dollars chasing too many goods. It follows from this that there is less need for the current size of the work force. See the cycle being generated?

There is a bright spot. Falling prices are the cure for deflation if left alone.;-)
Yours,
Issodhos

Hmmm... If the young family benefits so much from inflation, then when the "young" become the "retired" surely they will use their decades of accumulated "benefit" of inflation to easy and even nicely pad their retirement, would they not? Or, when adjusted for inflation and the consequent loss of purchasing power, perhaps they have spent a lifetime simply swimming in place -- if lucky. Sort of like a hamster on an exercise wheel.
Yours,
Issodhos

Thanks for the explanation; I was not sure what the exact difference was.

Sigh! Unfortunately, inside every crisis aided and abetted by government meddling there is also a government "solution" just waiting to get out and do its own meddling.

Given the media's misuse of the words, it is not hard to be misled (to be fair, I don't think they have the slightest clue). It is like the use of the "cost of living index" interchanably with "inflation". Irks me because it misleads so many.
Yours,
Issodhos

Yes, quite complicated. Aside the point about food prices falling, I'd agree with Issodhos. Unlike oil, the speculation in food futures seems to be holding, probably because, unlike oil, the supply is closer to the demand... (food can't be "stored in the ground").

The "older"/"younger" discussion is interesting to me. As an "older", I think I have benefitted by being in a mild inflationary period. Putting a sharper point on that, though, I'd point out that the benefit came from savings... by putting money away, and forgoing the larger house, the newer car, and entertainment expenses across the board. The mortgage was paid early, and we never borrowed to buy for cars, vacations or "wide screens tv" things. Since the advent of credit cards in the late '60's, we only paid monthly interest three times ... once for late payment and twice during a period between jobs. This wasn't because we we "holier than thou", or rich, or overly frugal. It was just the way we grew up. Debt was bad because it took away from the money we earned. Other than a house mortgage, our first two cars, and a $100 loan from mother-in-law to buy some used furniture the banks didn't see much of our money.

But... despite this, and some small savings during deflation (we don't buy much any more), there's a problem:

I was hoping to leave Inflation to another day and another discussion, but it's just about impossible. After banks, brokers, and speculators did the Ponzi thing, and stole money from an unsuspecting public... creating non existent credit instruments, charging usurious interest rates, and pumping up bubbles through bucket shops... Now they (money people, greedy corporations, an elite group of nouveau riche consciousless self made billionaires who leveraged the bubbles) then paid the Lobbies Billions to influence willing politicians to deregulate and change protective laws... thus extending the "theft" by many years.

Now that the scam has been exposed, we have to go back in and spend several trillion dollars to indemnify those who put us into the debt in the first place.

You will hear the term "nationalizing the banks" a lot in the near term. That is pure unadulterated bullhockey. It's a bailout. Nationalization means taking the banks away from the bankers and we won't be doing that. Plain and simple... it's a bailout of private industry, without making them pay back their ill gotten gains.

Back to deflation... It will be short. Probably less than two years.

Ok... here's what will happen (Disclaimer - my opinion, not shared by some others) and the reason why:

Current government debt is being carried at a low rate, because of the perception that it is safer in the US, than in other countries. The government is paying a very low interest rate to carry this debt. Other countries and private investors, are putting money into US securities, not to make money, but to keep it safe. (ahem... for the time being)

Pay attention here.

Two things are happening:
First... about forty percent of the money that the government has borrowed (now, before the bailout) .... is short term, and will be bought back within a year. (The current US debt is about $10.5 Trillion dollars), and we are paying it back at a very low percentage rate.
Second, we are going to add between two and three trillion to that amount within the next year.

This kind of incredible debt is so high that there is no way to pay it back in today's dollars.

Heres what will happen:
1. First, when the short term federal securities are redeemed, the government will have to re-borrow the money and that will be at much higher interest rates.
2. This means that all interest rates will go up. (for purposes of explanation, here's an exaggerated scenario) The money that we borrowed last year at 3% will be refinanced at 13%. That means that evryone who is lending, will have to increase their rates. In this case, probably to 18%+.

This is just not sustainable. The nation cannot function when debt as a percentage of GNP is too high to allow the economy to function.

So... Here's what happens.
Again... pay attention

The only way to get rid of that debt, is to pay the stated amount back in cheaper dollars. There are two ways to do this (which really are the same, except stated in different terms.)

The cheaper dollars can be developed by devaluing the dollar. In effect, the government could say: All of the dollar bills in circulation will be revalued to be worth $.50. In other words, the government will pay $.50 for each dollar of debt. This is not likely to happen.

The cheaper dollars can be created through inflation... not the 2% to 4% inflation that we've been hearing about over the past 15 years (CPI), but inflation of (as in the above example)50% or, probably even more. High inflation, (depending on the different definitions... see Google) can be termed hyperinflation.

The bad part, is that a loaf of bread may cost $20, but the good part will be that the government debt will be paid off much faster.
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I'm not into "quoting statistics" to "Prove" what I consider to be a simplification of a subject that's difficult to understand, so "Citations Please" is not my forte. I accept that there are those who will argue every point that I've made, and that's fine, because that's what discussion is for... What I don't accept is one liners that say ... "you're wrong".

So back to the subject of deflation... It's the loss of buying power, loss of jobs, and a cycle of downturns. It's a matter of going to a "bottom". It could last a very long time, but given the strength of the US in education, standard of living, and an infrastructure that is "built"... I don't believe that it's likely. My guess is about a year and a half.

The clue to the beginning of inflation will be to watch the Federal Treasury cost of money.

Last point, re: old/young benefits. Most older people who are out of the work force will be hurt as their dollar buys less. Most younger people will see their pay increase in line with inflation... and while they will hurt in the interim, over the long haul, they'll be fine... and if we all get really lucky, the nation will have learned a lesson... That free enterprise is good, but regulation is needed. Hopefully the nation won't forget as they did after the great depression.

..sigh... I won't be around to find out!

You might wanna check this out:
Ask not what your banks can do for you

The problem with your "vision" itstarted is that it is based on events that have never happened before. That doesn't mean that they can't happen, it just means that they have not happened EVER in the history of civilized economics.

What have all the bailouts done so far? For the person outside the financial world they have done nothing at all.

Financial companies have cut a lot of jobs in 2008 and now they are not prepared for what is happening. The mortgage applications have gone through the roof in the past few weeks. Of course not all these loans will be closed for different reasons but history tells us that a very high percentage do close. Companies are scrambling to hire, yes, hire people to staff the call centers, loan processing, post closing departments, etc.

For example, I work in a department in post closing and we have about 150 people in it. We are hiring 60-80 people in the next 2 weeks (we can do this because there are a lot of people with experience in the mortgage business that are looking for jobs).

How long will this refinancing boom last? No more than 9-12 months but this will get the second market for mortgages back in gear. Due to the recent changes in underwriting, these loans will be a lot higher quality than before and the vast majority of them will be 30 year fixed.

So the person that keeps saying... I've lived a frugal life and haven't incured a lot of debt yet all these people that spend, spend and spend more money they benefit from the bailouts. Well, here's your chance to benefit. With good credit you can get a 30 year fixed loan with a rate of 4% or even lower.

Now back to the topic at hand: deflation.

Issodhos defined it very well. Deflation occurs when too little money chases too many goods. How do you fight deflation? You make sure that the people have more money to buy those goods. Look for the new administration to "gift" another $600 or so to people soon.

Well, here's your chance to benefit. With good credit you can get a 30 year fixed loan with a rate of 4% or even lower.

I KNEW I shouldn't have paid off the house!

Aside on the bailout for the people...
What I suspect is that no one is going to get a $500 check, but that the government isn't going to take out as much money from the "reduced pay" checks. In other words, the witholding tax will be reduced... and my second guess, is that the government is not going to make a commitment as to how long that will last.

On the other hand, I don't think there will be many restrictions on the monies going to banks and corporations... not just the lack of loan guarantees but any limitations on salaries othr than CEO's... and I don't see any "clawback" rules happening.

I really hope I'm wrong.

You could refinance the house and get cash out to pay any other bills or just take out cash and put it in your bank for the "tough times ahead" and still only pay around 4% interest and have an interest deduction on your taxes. Just cuz you paid the house off doesn't mean that you can't use the equity you have to your advantage.

Yes, it is a good thing to live with little debt but there are times when you can use the tax code to your advantage.

... and if finances are structured so that one doesn't have to pay taxes?

The house is a very important thing to "own"... especially for older married people, because of a great many laws that deal with this.
In a way, even though this isn't directly applicable to deflation per se, the original post to start the thread did discuss the effects of deflation, and how to survive it.
Sooo... even though this may not be applicable to most on this thread, there are some financial actions one can take to avoid the effect of deflation... and inflation.
Here are a few that might be applicable to older people, but that don't always get used.

1. consider IBonds - inflation adjusted government bonds. I have some I bonds that are currently paying in excess of 8.3% interest.

2. many states and or local communities have programs to freeze or adjust taxes on homes.

3. should one spouse go into nursing home, the annual rates of from $70,000 to $120,000 per year, can eat up one's saving nest egg rather quickly. The state can and does take all but: a small amount of the couple's savings, and the family car, to satisfy the bills, before the state will pay the nursing home costs. The only other thing that the spouse can keep is the house. It's generally a good thing to own, rather than rent for this reason.

4. some states have assistance programs for seniors, that have fairly high levels of income (not net worth) to help with things like auto licenses, supplemental drug programs, tax filing assistance, heating costs, free education classes, some food assistance programs, and senior center programs for social activities, fitness classes, meals, free ride programs, Alzheimer respite groups and a myriad of other benefits.

It's very likely that many of these programs will be the first to fall, as communities become strapped for cash to pay for the basic obligation of government.

The interesting part of all of this, is that younger persons tend to be angry about paying to support these senior benefits. I know that I would.

It all comes back to the very scary question of how to plan for the future, and especially how to keep what one has during both deflation and inflation. The answers aren't coming easy. I figure that spending in the retirement years comes to about 75% of what precious earnings were. If one earns $60,000, and retires at age 65, he/she will get about $15,000 from social security, which means that it will take savings of about $600,000 to live to the expected age of 85. (not counting inflation).

From personal experience, while working is fun, it's not as easy to put in a full days work, when you're in you 70's and 80's.

With personal savings at a negative 1% last year, hyper inflation and/or dollar devaluation might very well be the best "out" for some younger people.

Many interesting subjects for discussion when looking into the future.