Frightening quote of the day
Posted by aogMonday, 19 July 2010 at 16:00 TrackBack Ping URL

So who fears deflation? Debtors fear it. And who is the biggest debtor? The federal government – to an extent never seen before in the history of this country.

Minnesotastan

And who’s going to suffer the most from massive inflation? The “poor” that our government claims to be so concerned about.

Comments — Formatting by Textile
Bret Monday, 19 July 2010 at 16:43

I don’t necessarily disagree with you. I’m curious as to your explanation though.

Annoying Old Guy Monday, 19 July 2010 at 16:46

Because the best hedge against inflation is assets. The more of your wealth that is in non-cash assets, the less damage you will suffer. The poor tend to (1) have more debt and (2) have far less of their wealth (in absolute and relative terms) in non-cash assets.

Bret Monday, 19 July 2010 at 18:10

In that case I mostly disagree with you. Debtors love increasing inflation (that’s the other side of the Debtors fear deflation coin). On the other hand, nominal gains in assets due to inflation are taxed which generally harms asset holders.

In my opinion, the reason the poor are hurt by “massive inflation” is that it’s much harder to allocate capital and investment which damages the economy and the poor are always hurt the most when economic trouble is afoot.

Harry Eagar Monday, 19 July 2010 at 22:06

Yeah. For the poor, the only real option they have of putting more of their wealth into a non-cash asset would be trading for a newer pickup truck, which would promptly depreciate.

Besides, I don’t think that being in non-cash assets has worked very well as a hedge against inflation over past few years.

Hey Skipper Monday, 19 July 2010 at 23:22

It has for me.

pj Tuesday, 20 July 2010 at 08:35

The Feds fear deflation but they also fear inflation. Federal debt is mostly short-term (4 year average maturity) and any significant rise in interest rates would quickly blow up the federal budget. It would also wreck the banks, forcing the government to make good on trillions in guarantees they issued during the 2008 crisis. I think they know that the 1970s was not a good time for the economy or the federal government.

Of course, there may come a time when disaster is inevitable and politicians care only to delay it a few months longer. That’s when inflation becomes attractive …

Bret Tuesday, 20 July 2010 at 10:53

Hey Skipper wrote: “It has for me.”

I don’t think we can consider the inflation of the last few years “massive”.

Bret Tuesday, 20 July 2010 at 11:03

pj wrote: “The Feds fear deflation but they also fear inflation.

Sort of, but not directly.

The federal government usually pays a real interest rate of 2% to 4% regardless of the inflation rate. In other words, they pay the inflation rate plus 2% to 4%.

The problem with massive inflation is that there tends to be large variance in the cost of money (i.e. it becomes far less predictable) which damages capital formation which damages the economy which reduce real tax receipts which, of course, the government hates.

Annoying Old Guy Tuesday, 20 July 2010 at 11:15

Federal debt is mostly short-term (4 year average maturity)

So, the problem wouldn’t show up for 2-4 years? That is, until after the next midterms / Presidential election cycle? Not very re-assuring, especially given the looters currently running the government.

Harry Eagar Tuesday, 20 July 2010 at 14:50

Skipper, I thought you wrote about how your Michigan real estate deflated.

Hey Skipper Wednesday, 21 July 2010 at 06:31

bret:

I don’t think we can consider the inflation of the last few years “massive”.

Without bothering to make it clear, I was responding, and maybe incorrectly, to the first half of the sentence “being in non-cash assets”.

Income averaging in stocks and mutual funds has done very well for me.

Harry:

No doubt I took a beating on the Michigan house. That was in a market without a speculative bubble of any sort, and I sold before the sub-prime schlamozzle.

I, and everyone who lives in the area, should cast a hairy eyeball at the UAW for cooking our gooses.

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