Comments on: Inflation: How to Beat it with Smart Financial Planning http://20somethingfinance.com/inflation-how-to-beat-it-with-smart-financial-planning/ Building Towards Personal Finance Success! Thu, 18 Mar 2010 20:06:01 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Gilbert Arizona CPA http://20somethingfinance.com/inflation-how-to-beat-it-with-smart-financial-planning/comment-page-1/#comment-6003 Gilbert Arizona CPA Wed, 23 Dec 2009 00:50:15 +0000 http://20somethingfinance.com/?p=765#comment-6003 It's funny how people underestimate (or just totally ignore) the impact of inflation. In this low inflation environment we don't have any issues. But just give it a few years and watch what happens when the economy turns around and all the money that has been pumped into the economy starts to kick...here comes inflation. It’s funny how people underestimate (or just totally ignore) the impact of inflation. In this low inflation environment we don’t have any issues. But just give it a few years and watch what happens when the economy turns around and all the money that has been pumped into the economy starts to kick…here comes inflation.

]]> By: Britt (Your Roth IRA) http://20somethingfinance.com/inflation-how-to-beat-it-with-smart-financial-planning/comment-page-1/#comment-3860 Britt (Your Roth IRA) Wed, 03 Jun 2009 12:51:16 +0000 http://20somethingfinance.com/?p=765#comment-3860 Interesting article, but I disagree with the idea that inflation will come back in the near term (next couple of years). While the basic premise of an increasing money supply causing inflation is correct, the Fed "printing more money" or "loaning more money to banks" doesn't necessarily increase the money supply. Why? First, let's try to define “the money supply. Money Supply = Printed Currency + Credit While its true that the Fed is printing currency at an unprecedented rate, this cant (by itself) lead to inflation. Its only part of the equation. Credit is the other part, and its being destroyed at a much faster rate than printed currency is being creating. As people save up and pay off their debts, as they default on their debts, and as financial institutions lower credit limits and raise lending standards, the credit side of the money supply equation contracts. The credit side of the equation absolutely dwarfs printed currency, so the effect is much more pronounced. Meanwhile, the Fed can loan all the 0% percent money it wants to banks, but this wont increase the money supply until those banks are willing and able to lend that money to consumers who are willing and able to take on more debt. Those who are still credit worthy are either paying down debt and not taking on more or they have no reason to take on debt in the current economic environment. So the idea that 0% money from the Fed will lead to inflation is wrong. As you state, the real interest rate is actually positive since we're in a deflationary period. So while the nominal interest rate might be zero, the real interest rate is not, meaning there's still a price associated with borrowing. Deflation is in the cards for at least the next couple of years. If you really believe inflation or hyperinflation are just around the corner, then the best advice is to buy foreclosures and other distressed properties. Rent them out until the real estate market turns around. Inflation will drive up housing prices, and inflation will drive up people’s salaries making their currently unaffordable mortgage payments much more affordable. Under an inflation scenario we can expect a quick turnaround in housing and the economy. Only one problem ¦ 500,000 job losses per month. How's that bode well for a housing rebound and demands by workers for higher pay? While I agree it's a good idea to save money and to buy in bulk, I'd be looking for more deflation not inflation (at least not for a few years). Interesting article, but I disagree with the idea that inflation will come back in the near term (next couple of years). While the basic premise of an increasing money supply causing inflation is correct, the Fed “printing more money” or “loaning more money to banks” doesn’t necessarily increase the money supply.

Why?

First, let’s try to define “the money supply.

Money Supply = Printed Currency + Credit

While its true that the Fed is printing currency at an unprecedented rate, this cant (by itself) lead to inflation. Its only part of the equation. Credit is the other part, and its being destroyed at a much faster rate than printed currency is being creating.

As people save up and pay off their debts, as they default on their debts, and as financial institutions lower credit limits and raise lending standards, the credit side of the money supply equation contracts. The credit side of the equation absolutely dwarfs printed currency, so the effect is much more pronounced.

Meanwhile, the Fed can loan all the 0% percent money it wants to banks, but this wont increase the money supply until those banks are willing and able to lend that money to consumers who are willing and able to take on more debt. Those who are still credit worthy are either paying down debt and not taking on more or they have no reason to take on debt in the current economic environment.

So the idea that 0% money from the Fed will lead to inflation is wrong. As you state, the real interest rate is actually positive since we’re in a deflationary period. So while the nominal interest rate might be zero, the real interest rate is not, meaning there’s still a price associated with borrowing.

Deflation is in the cards for at least the next couple of years.

If you really believe inflation or hyperinflation are just around the corner, then the best advice is to buy foreclosures and other distressed properties. Rent them out until the real estate market turns around. Inflation will drive up housing prices, and inflation will drive up people’s salaries making their currently unaffordable mortgage payments much more affordable. Under an inflation scenario we can expect a quick turnaround in housing and the economy.

Only one problem ¦ 500,000 job losses per month. How’s that bode well for a housing rebound and demands by workers for higher pay?

While I agree it’s a good idea to save money and to buy in bulk, I’d be looking for more deflation not inflation (at least not for a few years).

]]> By: tawan http://20somethingfinance.com/inflation-how-to-beat-it-with-smart-financial-planning/comment-page-1/#comment-2961 tawan Tue, 17 Feb 2009 02:22:21 +0000 http://20somethingfinance.com/?p=765#comment-2961 Thank you for elucidating some difficult financial concepts. I enjoyed reading your article.. Thank you for elucidating some difficult financial concepts. I enjoyed reading your article..

]]> By: Shaun Connell http://20somethingfinance.com/inflation-how-to-beat-it-with-smart-financial-planning/comment-page-1/#comment-2231 Shaun Connell Thu, 08 Jan 2009 20:36:24 +0000 http://20somethingfinance.com/?p=765#comment-2231 K Burbut, Deflation and inflation both cause problems with groups of individuals in the economy, so I certainly agree with you there. As far as to which one is preferable, I honestly couldn't tell you, given that it's hard to analyze a relatively small amount of inflation in a vacuum. The overall impact depends on the other policies and variables taking place. That said, if your car is worth less dollars, remember -- your dollars can buy more. The overall impact to someone who has a job is actually good. But again, that's analyzing an economic issue through the lens of a single individual who still has a job -- many variables are being presupposed. Economics, of course, get messy. :) K Burbut,
Deflation and inflation both cause problems with groups of individuals in the economy, so I certainly agree with you there. As far as to which one is preferable, I honestly couldn’t tell you, given that it’s hard to analyze a relatively small amount of inflation in a vacuum. The overall impact depends on the other policies and variables taking place.

That said, if your car is worth less dollars, remember — your dollars can buy more. The overall impact to someone who has a job is actually good. But again, that’s analyzing an economic issue through the lens of a single individual who still has a job — many variables are being presupposed. Economics, of course, get messy. :)

]]> By: Craig http://20somethingfinance.com/inflation-how-to-beat-it-with-smart-financial-planning/comment-page-1/#comment-2227 Craig Thu, 08 Jan 2009 16:04:20 +0000 http://20somethingfinance.com/?p=765#comment-2227 @k burbut Thanks for clarifying, although with your example, a car worth 20K now may naturally be worth only 19K because it is older, even if there is no deflation. But I do understand your point. Is there a desired % you would like or ultimately you would hope for zero inflation or deflation. @k burbut Thanks for clarifying, although with your example, a car worth 20K now may naturally be worth only 19K because it is older, even if there is no deflation. But I do understand your point. Is there a desired % you would like or ultimately you would hope for zero inflation or deflation.

]]> By: K Burbut http://20somethingfinance.com/inflation-how-to-beat-it-with-smart-financial-planning/comment-page-1/#comment-2222 K Burbut Thu, 08 Jan 2009 10:16:27 +0000 http://20somethingfinance.com/?p=765#comment-2222 Hello Shaun, I am neither saying that it is bad inflation will happen. I was just saying why deflation is bad and why it should be fough with inflation. I read there is a danger of deflation appearing in US. Best regards. Hello Shaun, I am neither saying that it is bad inflation will happen. I was just saying why deflation is bad and why it should be fough with inflation. I read there is a danger of deflation appearing in US.
Best regards.

]]> By: Shaun Connell http://20somethingfinance.com/inflation-how-to-beat-it-with-smart-financial-planning/comment-page-1/#comment-2213 Shaun Connell Thu, 08 Jan 2009 00:46:59 +0000 http://20somethingfinance.com/?p=765#comment-2213 K burbut, I never really made the claim that it was bad that inflation is going to happen, only that it will. As the Financial Times reports, the Fed is certainly talking about making it explicit policy to create inflation: http://www.ft.com/cms/s/0/1d472830-dc5a-11dd-b07e-000077b07658.html Inflation is just where our currency shifts around a bit. The wealth is static, but the numbers change. Making the right moves now can mean we gain quite a bit. K burbut, I never really made the claim that it was bad that inflation is going to happen, only that it will. As the Financial Times reports, the Fed is certainly talking about making it explicit policy to create inflation: http://www.ft.com/cms/s/0/1d472830-dc5a-11dd-b07e-000077b07658.html

Inflation is just where our currency shifts around a bit. The wealth is static, but the numbers change. Making the right moves now can mean we gain quite a bit.

]]> By: stephanie http://20somethingfinance.com/inflation-how-to-beat-it-with-smart-financial-planning/comment-page-1/#comment-2211 stephanie Thu, 08 Jan 2009 00:17:37 +0000 http://20somethingfinance.com/?p=765#comment-2211 Excellent analysis. Nothing I didn't already know, but a good reminder about how and why things work. It's too bad more people in this country don't understand basic Economics. My guess is that most people in government know the long-term consequences of their actions - but if they want to get elected (and re-elected), they have to provide short-term relief to the masses who don't understand that real change can't be achieved overnight. Excellent analysis. Nothing I didn’t already know, but a good reminder about how and why things work. It’s too bad more people in this country don’t understand basic Economics. My guess is that most people in government know the long-term consequences of their actions – but if they want to get elected (and re-elected), they have to provide short-term relief to the masses who don’t understand that real change can’t be achieved overnight.

]]> By: Laura http://20somethingfinance.com/inflation-how-to-beat-it-with-smart-financial-planning/comment-page-1/#comment-2210 Laura Thu, 08 Jan 2009 00:02:34 +0000 http://20somethingfinance.com/?p=765#comment-2210 Excellent article, thank you for the information! You are very well organized, and broke down the concept so it was easy to understand. I hope to read more from you in the future! Excellent article, thank you for the information!
You are very well organized, and broke down the concept so it was easy to understand. I hope to read more from you in the future!

]]> By: K burbut http://20somethingfinance.com/inflation-how-to-beat-it-with-smart-financial-planning/comment-page-1/#comment-2209 K burbut Wed, 07 Jan 2009 22:38:03 +0000 http://20somethingfinance.com/?p=765#comment-2209 @Craig and Shaun: Deflation is not good because it lessens consumption: If you know that f. ex. your car, now worth 20 000 bucks will be worth e.g. 19 000 bucks in six months due to deflation, would you buy it now? Or wait? This covers all articles in one's economy. Therefore deflation should be fought, as well as excessive inflation. Small inflation is good as it encourages economy, too high, on the other hand is devastating. Cheers. K Burbut @Craig and Shaun: Deflation is not good because it lessens consumption: If you know that f. ex. your car, now worth 20 000 bucks will be worth e.g. 19 000 bucks in six months due to deflation, would you buy it now? Or wait? This covers all articles in one’s economy. Therefore deflation should be fought, as well as excessive inflation. Small inflation is good as it encourages economy, too high, on the other hand is devastating.
Cheers.

K Burbut

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