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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35383  
Subject: Longreits, RE: Inflation Date: 12/5/2009 2:33 PM
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I am curious to learn your general thoughts on inflation - not what your thoughts are on its extend or duration in the future but rather why we you, we, everyone universally, assume inflation on a secular basis (say over most 10-20-30 year periods?

I come to the topic of inflation from a liberal arts/layman’s point of view, not that of a properly-trained social scientist. I’m just a humble house-holder and an investor in financial instruments that can suffer the ravages of inflation. That means that my attempts to explain how I understand the topic are going to be folksy and mathematically-imprecise. Rather than engage the extensive literature on the topic in any meaningful way, I can only speak from personal experience.

So let’s begin, and let’s turn the clock back to the years of the late 60’s and mid-to-late 70’s. Pick a week, any week, go to the grocery store and note prices. On average, they were higher than the previous week. As a single-wage, young-married with three kids, I didn’t care about the why’s of what was happening, which I knew were beyond my control. I just knew my wages were being rendered less effective each week, and at a noticeable rate. The newspaper headlines called the phenomenon “inflation”, which seemed to make etymological sense. Prices were inflating, which wouldn’t be a problem if my wages were also inflating at the same or faster rate. But I was a union worker, tied to a multi-year labor contract without a COLA clause, and my purchasing-power was getting squeezed.

Jump forward thirty years. House, kids, car, etc. are paid off, and I’m a now a single, empty-nester. Price-increases aren’t running at the rampant rate they were formerly. But when I do YOY comparisons on this year’s prices (property taxes, food and energy expenses, medical insurance costs) versus last year’s, I can see that they are increasing by as much as 15-20%, not the 3% or so the government, through the BLS (Bureau of Labor Statistics), says they are.

Simple-minded fellow that I am, I had the following thought. “If my modest, beer-and-bait lifestyle costs me X dollars to support this year, what will that same lifestyle cost in 30-40 years if inflation continues at the same rate that I experience it, as opposed to the rate at which it is reported? Frankly, the thought was terrifying. I could run the numbers in Excel and see I’d soon need $500,000/year to provide what $25,000 once had provided. If my wages were tied to the rate of actually-experienced inflation, then rising costs wouldn’t be a problem. If my investment-gains were tied to inflation –-instead of to risks, of which rising costs is only one component and an overly-under-estimated one at that-- then there would also be no problem, because costs --relative to purchasing-power-- would be constant. I’d be handling more currency, but purchasing-power would be constant.

At that point, I began to engage economics, of which I’ve never had a course in my life. The numbers and charts seemed to reduce to the following explanations. Those who wage wars always need to borrow money. Those who control coinage always debase it. Those who borrow will always depreciate, so that debts can be repaid with cheaper money. That’s the secular explanations you seek. The players who benefit from inflation are acting in secular time frames.

The mandate of the gang of thieves known as the “Federal Reserve” is supposed to be “price stability”, which an unsophisticated person like me interprets to mean that an item that costs $10 this year should cost $10 next year, all other things being equal. The Fed Reserve, however, as the financing arm of the War Department, interprets “price stability” to mean “inflation stability”. They proclaim there is no official target, which there isn’t, but their defacto target is in the neighborhood of 5%. If rising costs increase much more than that, the public becomes restless. In fact, as rising costs approach 4%, the public becomes resentful and unappreciative. Therefore, a Ministry of Propaganda was created to spin the inflation numbers downward --and the GDP numbers upward-- so that wars could continue to be financed at favorable rates in global money markets.

Yes, all of the previous sounds like the ranting of a conspiracy nut. But ask yourself this: Who benefits from inflation? Who is hurt by inflation? The textbook –and correct- answer is that debtors benefit from inflation, and that creditors get hurt. In a nation state --or even reasonably large-scaled economy, such as we’ve had hundreds of since since Ur-- who is the biggest debtor? The king/emperor/Senate (as in Roman senate)/Parliament/Congress, etc. Yes, a few crumbs of benefits are thrown to those from whom wealth is extracted in the form of explicit taxes, but do those benefits exceed the cost of the inexplicit tax they also suffer, namely the tax of the loss of their purchasing-power?

When economies run on hard currency, inflation is kept in check by being counter-balanced by periods of deflation. The swings were often violent and extreme, but over long periods of time, price increases were muted by price decrease, and purchasing power –-on an inter-generational basis – was fairly stable. (That’s how I read the history of inflation.) The fly in the ointment, as ever, was governments whose war cycles ran at more frequent intervals. When faced with the need to raise money for their newest folly, or to pay for the last one, the governmental response was to debase the currency. Nowadays, the preferred governmental method of reducing (or even avoiding) debt-repayment is inflation.

Why does deflation scare governments? Because it threatens their ability to act without seeking approval of their actions from those who finance them. Thus, my simple-mined answer to your question of “Why does inflation exist?” is this: Inflation exists because it serves the monetary and fiscal purpose of those who have the power to control it, not that they always can manage the game to their best interests, for economies being the complex, chaotic things they are.

In present-day America, who is the greatest beneficiary of inflation? The War Department (which isn’t just the Pentagon but all associated contractors and legislators). Obama projects the costs of the AfPak surge to be $30 billion per year. Add in the costs of repairing wounded soldiers and replacing equipment, and the costs –-by some estimates— will be $100 billion per year. The US does not have that much money in its treasury, not when all its other obligation are considered. Therefore, the money will have to be borrowed, and creditors are already telling the US to clean up its books. Capital is a limited resource. Competition for it will increase its price, and that price-increase will spill over into our ordinary lives in two ways: higher taxes on income and property, higher rates of increasingly-denied inflation.

So the matter isn’t academic, and explanations don’t have to be very accurate from either historical or mathematical perspectives. Prices are going up faster than the means most ordinary folk have to offset the increases. In the US, that trend has been in place for at least 40 years, which is the sort of time frames that the conspirators behind the curtains work within. The so-called “middle-class” --which is a group I despise for lots of reasons, for aligning myself with “the working class” — is being stripped of its wealth and unearned advantages. In one sense, that’s a good thing. OTOH, a far worse situation is replacing it: the increasing disparity between the have’s and have-nots. The “have’s” --by definition—- benefit from inflation. The have-not’s, have not, because they are its victims.

So what’s a humble fellow like me to do? Wish a pox on all of their houses and try –in my own way— to not get trampled by the elephants (the rulers) or get eaten by the ants (the general public who are only too eager, though the ballot box, to transfer wealth from others to themselves).

Could inflation ever be tamed? No, there can be no perfect economies or societies. There are always inequities, unfairness, and outright fraudulent behaviors. Too much money is at stake for things to be otherwise. In the rough and tumble of ordinary living, a lot of people are going to get hurt in ways they didn’t deserve. Those who don’t try to defend themselves from inflation and its propagators will get robbed of their purchasing-power. Thus, the topic of inflation concerns me, and it don’t matter to me that my thinking about it might be half-cocked. All I know is that I like my modest, beer-and-bait lifestyle, and I intend to die with no less purchasing-power than I presently have. That means that, through my investing, I have to keep ahead of inflation as I experience it, not as the government or as economists might define it or say it does (or doesn’t) exist. They live in a different world than me, and I trust my own numbers and thinking. Inflation doesn't benefit me. Deflation would. But genuine price stability is the best compromise in the struggle between debtors and credits. That isn't going to happen, not ever, because of human greed and stupidity. So, I scramble to defend myself in the here and now as best I can.

Charlie
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