Inflation

[Sniper]

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As gas prices go up, everyone has less left in their budget, after buying gas to buy everything else.


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Squiff, maybe I don't drive enough, but how much impact do you really think the higher gas prices have on an individual basis? $30/month?

[squiffy]

Multiplied by 250 million Americans? Trucks, trains, and airplanes use gas.

[Sniper]

[ QUOTE ]
Multiplied by 250 million Americans? Trucks, trains, and airplanes use gas.

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There is no doubt that the total impact is large, and the impact widespread across many industries.

However, looking at the issue of just paying a little more each month to fill your tank, how much impact do you really think that issue taken in isolation really has?

[squiffy]

That's just it. You cannot separate the two. Impact on Bill Gates may be small. Impact on businesses nationwide is huge. And on middle income or lower income people huge. Depends how much you make.

Electicity costs for this one business have gone up from 5K to 7500 K or so. That's not significant?

http://money.cnn.com/2005/08/31/news..._gas/index.htm

http://www.honoluluadvertiser.com/ap...509040310/1071

It's kind of like this. I am not serving in Iraq. No brother or sister there. So no impact on me, day to day whatsoever.

But financial impact on our society and psychological impact of deaths huge. Can you really separate the two?

I don't lose any sleep over Iraq on a day to day basis. Does that make my relative indifference valid? It's my reality. But in analyzing the impact on society, my personal experience is almost invalid.

It's one experience out of 250 million experiences that you need to consider.

Everything's connected. http://money.cnn.com/2005/09/02/news...pact/index.htm

And psychologically, I am thinking twice before taking weekend trips out of town, due to high gas prices.

[laserboy]

Inflation is most often associated with increasing consumer prices. But inflation, in the true monetary sense of the word, is actually the result of increase in money supply or in available credit. When the government starts printing dollars bills at full steam or opening the credit spigots, this reduces the value of a dollar. The side effect of this is increasing consumer prices as excess liquidity in the markets chases up prices.

My personal view is that we have already had massive amount of inflation. This is evident in the exploding prices of such things as real estate, education, energy, healthcare and so forth.

Rising prices as a result of rising commodity prices is not true inflation, as there is no accompanying increase in wages or money supply. The current rise of commodity prices is due to external conditions of supply and demand, not an increase in money supply. In fact, as someone mentioned, absent the wage increases, rising commodity prices is actually net deflationary as consumers will have less money left over to spend on other things. Needless to say, this is a complicated topic.

If you want to profit off the increase in commodity prices, why not just buy commodities? Check out collateralized commodity funds such as PCRDX, QRAYX, or Rogers Raw Materials Fund. These have historically high correlation with "inflation".

http://www.kitco.com/ind/Puplava/jan252005.html

[laserboy]

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Another option to consider is investing in US Treasury inflation indexed securities. I believe they are called I-bonds or TIPS (Treasury Inflation Protected Securities)

Please correct me im wrong...

Kevin

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The main problem with TIPS is that their return is based off the CPI, which is a highly doctored statistic. The government uses things such as hedonic adjustments or outright manipulation so at the end of the day you have a nice small and steady figure. In my opinion the CPI is basically just another piece of government propaganda designed to keep the proles in the dark about how the government is sticking it to people.

The government tells us that inflation has been steady at 3% a year or whatever, but the fact of the matter is most important expenses such as housing, energy, education and healthcare have been skyrocketing over the past several years. If you had been invested in TIPS for the past five years, saving for a house, your kids college education, or your retirement, you would have gotten completely owned by inflation.

Remember inflation is just another way for the government to steal your money. You would be wise to keep your money in countries whose cnetral banks are fiscally responsible and whose leaders are not financial buffoons.

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens... Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. " - John Maynard Keynes

[FishHooks]

Gas prices are highly elastic in the long run (and are inelastic in the short run)which means they take up a decent part of someone's budget. So when gas prices go up it forces people to conserve, thats why in history when gas prices rise they eventually fall back down because people conserve.

[squiffy]

Yes, but the fed was lowering short term rates substantially due to recession, economic slow down, and fears of possible deflation.

I thought the Fed does this by open market operations, buying and selling treasury bonds and the interbank lending rate.

So didn't the Fed increase the money supply, easing short term credit rates, which produced the housing boom and car selling boom, and triggered lending and economic growth?

The Fed did increase the money supply.

[squiffy]

Fed did start reducing rates during the last recession. They do this by changing the money supply. We have been printing money. But now are increasing rates, decreasing the money supply.

http://www.minneapolisfed.org/pubs/f...i-ajr.cfm?js=0

http://www.federalreserveeducation.org/pfed/##

[laserboy]

That is correct.

The Fed lowered interest rates to historically low levels following the last recession, essentially giving money away at negative real interest rates. This provided a short term boost to the economy and spurred a rise in lending and liquidity.

Like I said, this has driven up the prices of most asset classes over the past several years. The accompanying rise in real estate prices is a good example of true inflation.

That type of "fix" is unsustainable, as it leads to the devaluation of your currency and the erosion of citizen's wealth.

My opinion is that there is a very real possibility of deflation in our future as credit tightens up and systemic problems in our banking system start to surface. I think that many of the credit that has been extended will eventually go bad (real estate is again a good example), essentially sucking out billions of dollars of fake "money" from the asset markets and resulting in a decrease in the money supply. This is similar to what happened in Japan in the 1990's, but I don't want to get into that discussion again. [img]/images/graemlins/smile.gif[/img]

I think that rising commodity prices are a separate issue altogether, based on global supplay and demand factors. Prices of goods can rise and fall regardless of monetary inflation. For instance, prices of DVD players and various Walmart goods have "deflated" the past several years due to the effects of Chinese labor.

Prices of some goods will rise and some will fall, but I do believe that we are in a long term secular bull market for many commodities.