Monday, July 10, 2017

Why Are Some People Selling Inflation Paranoia In An Era of Low Inflation?

A woman burning Deutschmarks for fuel in the 1920's.  Could such inflation happen here?  I doubt it.

I recounted a few months back how I met a young man who said to me in all earnestness, "Obama ruined the economy with inflation!" which left me puzzled until I realized he heard that on a talk radio station and thus was confused.   Just for the record, inflation is at all-time record-setting lows.  In fact, economists are worried about deflation as dampening the economy.   Grocery prices have dropped - eggs are less than a buck-a-dozen!   Prices of all sorts of goods are cheap as they are made overseas.   And since wages have stagnated, there is pressure by consumers to keep prices low.

Inflation today is almost negligable, particularly compared to the late 1970's.

Yet I hear from many readers about inflation.   "How can I hedge against inflation?" one asks.  "Joe Bloviator says buying a house is a good hedge against inflation!" another says.   "What's the point of putting money into safe investments, you'll just be wiped out by inflation!" yet another argues.

And if you look online, particularly in the far-right blogosphere and on right-wing talk radio, inflation is mentioned a lot - hence my young friend's obsession with it.  You would think we were back in the days of "stagflation" of the 1970's and early 1980's, to hear these folks talk about it, rather than an era of inflation so low that it is alarming.

There is inflation, high inflation, and hyper-inflation.   The US has not seen hyper-inflation, such as happens periodically in South American countries, where inflation rates are so high, your money can lose half its value during a single day.   Germany after World War I had a similar problem - devaluating the currency to the point where inflation was running past three digits.

Charts like this may look alarming until you realize that the supply of money is always increasing.

The "logic" that people make about the inflation argument is that the government just keeps on printing money and thus money will be worth less and less over time.  And it is an argument that has some merit, but you have to look at the whole picture, and not engage in fanciful "logic" and catchphrases like "fiat currency" as a substitute.

Yes, the money supply is increasing.  It always has been.   Even if you went to a gold standard, the money supply would increase over time.   In case you haven't noticed, they mine gold out of the ground, and every day, more and more gold goes into circulation.  The idea that a certain currency is immune from inflation is nonsense, the supply always increases over time.

Oh, but what about Bitcoin?  That "cryptocurrency" (repeat again: Blockchain! Blockchain! Blockchain! - keep chanting it until you actually think it means something) has a limited number of "coins" so it must not be subject to an increasing supply or inflation, right?   Well, wrong on both counts.   The problem with "cryptocurrencies" is that they are not really currencies but a means of laundering money.   They are a way you can buy drugs and children on the Internet, or transfer funds overseas without leaving a trail (you hope).   They will never replace ordinary currency for everyday transactions.   People claim such-and-such a retailer "accepts bitcoin" but in reality they don't - they just take your bitcoin, exchange it for dollars or other local currency, and then apply it to your purchase.

They do not keep the bitcoins and pay suppliers with them.  They do not work in a bitcoin ecosystem.  They do not price their goods in Bitcoins, but rather determine what the price is on a transaction-by-transaction basis using current exchange rates because the currency is so volatile.   Saying someone "accepts Bitcoin" is akin to saying France "accepts US Dollars" simply because I can use my credit card there.   The reality is, of course, they use Euros, and my credit card company converts the currency based on current exchange rates.   So enough of this bullshit that Bitcoin is a "currency".

As for its "limited" aspect, that is also untrue.   While Bitcoin may have a limited number of "coins" there are an unlimited number of cryptocurrencies out there and new ones being formed every day.   The "value" of a Bitcoin is entirely subjective, and it could fade to nothing if another currency becomes more popular - as many prognosticators (who are no doubt invested in these new currencies) suggest.

I don't mean to harp on Bitcoin, but one place all this "inflation" talk is coming from is people pushing these oddball currencies.   They want you to "invest" in a made-up currency that can lose 1/3 to 1/2 its value overnight and quite frankly appears to be the ultimate con game of the 21st Century.   I mean, with gold at least, you have some physical thing that has industrial uses.   With "cryptocurrency" you have a digital number representing a puzzle solved by a computer whose worth is, well, whatever people think it is.

So I take this "inflation" talk, when it is hyped by gold-bugs or crypocurrency-bugs with a grain of salt.  It is a sales pitch, nothing more.   It is akin to the car salesman pushing a lease deal and telling you that it will "free up your cash-flow" so you can "invest" or whatever.   It is just happy-talk to get you to sign on the bottom line.  Never take financial advice from a car salesman - or any salesman for that matter.

But should we be worried about inflation?   Well, it is always a concern.  The deal is, whether our current situation is as dire as people predict.   The money supply is going up.   The national debt (remember the debt clock?  What happened to that?) is going up.   But of course, over time these thing always go up.   Only idiots will muse about "how a Pepsi used to be a nickel and now it's a buck-fifty!" or how "you could buy a good car for under a thousand dollars!"

Inflation, grandpa, even normal inflation, causes prices to go up over time.   Yes, our national debt is at all-time highs.   It usually is.   The population is booming - it always does.   Things go up over time, which is why we have to account for inflation when comparing prices of the present to the past.   But even inflation is hard to measure, as what indicies do you use to measure it?   Buying power?  Investment return?  Interest rates?  What?

Inflation itself is hard to nail down.   You have to measure the dollar against something else that is not a dollar in order to see what the rate of inflation is.   And no two economists use the same index.  Generally, we talk about inflation in terms of "buying power" of the dollar.   And that makes sense until you think, "buying power of what?"

Food?  Fuel?  Cars?  Houses?  Clothing?  Some sort of amalgam of all of these?

As I have noted time and time again in this blog, we are a far wealthier country than in the past in many regards.   Comparing "buying power" today to that in the past negates our different spending habits today than in the past.    As I noted in another posting, in 1975, a tube-type 25" color television that got all 13 channels and UHF sold for over $500.   Today, this buys a huge flat-screen television that can do so much more.   The "equivalent" of that 1975 set - a 25" flat-screen is still 1000% better, but costs maybe half as much, if that.   When it comes to consumer electronics, we have seen deflation all along.

But even ordinary consumer goods are far cheaper, thanks to China.   Simple things my parents wanted they had to do without.  My Dad wasn't going to pay $99 for a Weber barbecue kettle or a Coleman ice chest.   Today, people have multiples of these items.   Clothing is another example.   While the Washington Post thinks that a pair of blue jeans costs $350, the reality is, clothing is cheaper than ever before, and the fact that we are willing to spend $50 on a "designer" t-shirt is just a sign of how much more money we have to waste in this country.

Of course, no one is ever happy about housing prices - they always seem to go up, and a house always seems just out of reach for many and a major expense for most.   Always has been, always will be.  The idea of  "cheap affordable housing" whatever that means, will always be a dream and not a reality.  Land is scarce and houses are expensive to build.   There is no free lunch here.

But housing is one of those things that most people pay for in monthly installments either in the form of rent or in mortgage payments.   And in most markets, the cost of housing is based on the law of supply-and-demand, just like anything else.   A house like mine costs about $400,000 here on retirement island.  The same house inland can be had for about $150,000 or less.   In the hinterlands, maybe $75,000.   In the DC market, maybe $600,000.   In the bay area, over a million.   Location, Location, Location!  The three most important things in Real Estate.

In areas where demand for labor is high, labor rates go up.   People have more to spend and there is less land available.   Prices go up based on how much they can pay per month to rent or buy.   And the "sales price" of a house will depend on the monthly cost - which is based on price, interest rate, taxes, and even insurance.   Play with one of these factors, it affects the others.

So even inflation is a hard thing to measure, depending on what factors you decide to include in your inflation index.  The Consumer Price Index is put out by the labor department based on a "Market basket of goods" and even has regional derivations.  Yes, inflation varies from State to State and city to city as well.

Will inflation go up?  That is the key question.   Of course it will.   You cannot have record low inflation forever.   One thing is sure about markets, and that is change.   When you see a stock skyrocketing, you know it will go down.   When the market tanks, it will eventually bounce back.  When the price of gas is low, you know you are due for a price hike.   Overall, over time, these things trend in one direction, of course.  The question is, are these things increasing in a linear or exponential manner?    Our national debt is going up - that may or may not be something to be alarmed about.  The question is, is it going up at a rate that is unsustainable?   Similarly, the money supply is increasing.  Is this a cause for concern or not?

At the present time, I think not.  First, the alarmist calls about inflation are coming from people at the extremes of the political spectrum - not a place for trusted data.    Second, a lot of this chatter is coming from people trying to sell something - gold, bitcoin, or other "investments" to "hedge against inflation" - hedging against something that largely doesn't exist yet.   Third, inflation isn't going to take off like a rocket.   You are not going to wake up tomorrow and find that your money is worth 50% less than it wasn't today.   These things do take time to accelerate, and we will see the signs long before inflation becomes even a minor concern.

And fourth, there ain't much you can do about it anyway.   People talk about "hedges against inflation" but this is largely happy-talk designed to get you to invest in a house, or gold, or whatever.  Worrying about inflation is like worrying about your eventual death.   It isn't going to do you any good or prevent it from happening.   You are just better off not worrying so much and enjoying the now.

And maybe that is the fifth reason why I am not worried about inflation.   The people who are stoking this argument are selling fear, and fear is not an emotion to be trusted.   They are trying to get people to be so afraid they won't think straight anymore.   Fear is a powerful weapon that can be used against you.  It is how you get cows to stampede off a cliff.  It rarely protects you from the thing you are afraid of.  In fact, it tends to make you a victim, in the end.

Enjoy this era of record-low inflation and stop worrying.   It's not like you have a choice in how the economy is run anyway.   Unless your last name is "Yellen" - and even then....