Lendari

So lately, I keep coming across investment advisement services talking about inflation of the dollar. Here's a great example (this is not an endorsement of Stansberry or of investing in commodities in general - please do your own research and invest responsibly).

www.youtube.com/watch?v=nI-BIVWlc7A*

We know that there was a lot of bad debt out there (Bank Bailouts, General Motors, Fannie and Freddie Mortgages, etc...) and we know the government is spending insane amounts of money on policing the middle east, and (until just recently) on a domestic spending agenda that was previously unprecedented.

We also know they aren't raising taxes proportionally to their spending. In about 3 months, they plan to again raise the debt ceiling and print more money...


Bankruptcy - Shocking admission from Tim Geithner:<br />U.S. on the brink of catastrophic collapse

http://www.shtfplan.com/headline-new...apse_01062011*


Anyways, I just wanted to start a discussion on this topic.

Every time the government prints money, the money you have is worth less and less. Eventually it will be worth nothing. In a way this is another tax. So you get taxed when you earn it, and taxed when you spend it AND you are taxed when they print more of it.

Most Americans don't even realize this is happening and I just wanted to see opinions about how sustainable people think this big government spending addiction is, if you've considered diversifying your investments in gold (or silver or other commodities) and just generally if you've ever thought about a world where the US Dollar wasn't the "top dog" currency and of indisputable value.



* Sorry it won't let me post links, add the www prefix to these.

The_Jazz

How is this a tax? Devaluation/inflation doesn't take money out of anyone's pocket except for spending power.

My assets range from municipal bonds to some commodities (that I don't physically hold) to stocks and mutual funds. I've considered the devaluation of the dollar but don't see any sort of immenent crash, so except in my extreme longrange plans I really don't plan for it at all, just like I don't plan for meteor strikes.

Also, it looks like a sizeable percentage of the "bailout" money is going to be returned with interest, which is going to make the overall effort a moneymaker. AIG is getting ready to be divested if their stock offering is approved (which it most likely will be).



---------- Post added at 05:42 PM ---------- Previous post was at 05:41 PM ----------

Linkified and moved to Economics, btw.

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Baraka_Guru

Inflation is something governments try to manage. If they can keep the rate at around 2%, they're happy. What they and economists don't like is instability. Inflation shooting above that 2% threshold into 4% or higher? They don't like that. It means too much of a shock on the changes in purchasing power and that has repercussions in the economy at large.

They also don't like deflation. Right now the American economy is at a risk of deflation because of the possibility of dropping demand. If demand drops prices drop, and if prcies drop then production drops, and if production drops wages drop, and if wages drop then demand drops...etc... It's called a deflationary spiral and it could potentially be more nasty than a moderately high inflation rate because of its loop effect.

The printing of money, though it will cause inflationary pressure, is also used to bolster the stock market. If the stock market is bolstered, then companies have the capital to expand business operations, which is good for the economy. If demand can be generated with this expansion, then inflation will be kept in check. That's the plan.

The alternative might be stagflation or that deflationary spiral thingy I mentioned. I say go for it.

The bigger issue isn't the printing of money, it's the borrowing and spending of it when the economy is doing well instead of paying down debt.

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—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
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Seaver

Answers.com - Who is Porter Stansberry

Yeah... found guilty of fraud.

Might want to avoid financial advice from youtube.

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Cynthetiq

I'm with Jazz, how is it a tax?

Tax is very well defined and has been since the inception and creation of the United States of America.

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samcol

This type of spending definitely is not sustainable, how long is the question.

The fractional reserve spending is indeed a tax because its the government spending money that's causing the value of the money i have in my pocket become worth less.

The government is taking value out of your pocket, that is essentially a tax imo.

~~edit

I wanted to add that I did buy quite a bit of gold. I basically dumped my life savings into gold and silver when gold was at about $950 despite the recommendations of people around me. I'm feeling pretty good about the decision at this point.

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The_Jazz

samcol, when the exact same thing happens without the intent, it behaves in exactly the same way. Therefore it can't be viewed as a tax. It's also not "money you have in your pocket" so much as the future purchasing power of that money. If you're saving that money, then it impacts you. If you're investing that money, then the question becomes much more complex. It's one reason that I'm bond-heavy right now.

Is it necessarily good? No. Is it necessarily bad? Not necessarily.

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"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo

Cynthetiq

taking value is not the same thing as tax.

If you have $100 in your pocket you still have $100 in your pocket. If it buys less because of inflation that is not a tax at all.

If you purchase something or are taxed on something you will have less than the $100 and that taxed money goes someplace in a ledger collecting and snowballing.

otherwise, I don't see how it is a tax.

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Baraka_Guru

I think what some are trying to say here is that it's "like a tax." The government is imposing a "kind of" tax on you by devaluing the currency via printing more of it. The government "has" more money when it prints more, so it has somehow generated revenue. So..."kind of a" tax.

Except it's not really, and a government's influence over the money supply is one of the tools it uses to smooth out the bumps in the economy.

Have a look at this article: Money supply - Wikipedia, the free encyclopedia

At this point in the business cycle (recession, trough, leading to recovery), a boost in the money supply—while putting the dollar more at risk of inflation—has a good chance of bolstering real production. More dollars flowing through the economy have a greater chance of being spent, devalued somewhat or not. Too few dollars out there being spent tends to make things grind to a halt.

And let's not forget that a devalued dollar is good for domestic producers who have foreign customers. The depressed greenback is attractive to people outside of the U.S. who buy U.S. goods. This is good for local manufacturing, especially if you want a recovery. (And I know there are several people here at TFP who gripe about the state of local manufacturing, outsourcing, and losing jobs overseas.)

Before jumping to the conclusion that printing money is always bad, look at the big picture and realize all of the economic elements that are influenced by it.

Exactly. It all depends on the timing and the factors that it influences, not to mention the magnitude. Governments consider both short-term and long-term consequences/benefits and then make decisions based on that.

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

samcol

Well, I think you have to look at why the government engages in this fractional reserve banking. They do it because they can't generate enough money from TAXES to pay for the huge spending increases.

So they print money in order to account for the excessive spending which in turn financially hurts the TAX payer through devaluing of the currency.

It's not a legally defined tax, but acts as a de facto tax.

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Baraka_Guru

But when they print money, it doesn't go directly into the government coffers to help cover government spending. It becomes available to the economy through the banking system.

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

Cynthetiq

If what you are saying is true, then they would just be printing money to cover the deficit. It is an economic stimulus more to give more money to the banks than it is to put money into the government coffers to pay for programs. The money doesn't just show up in their coffers, it shows in the Federal Reserve who releases it to the banking system.

It may feel like a tax to you but I cannot agree in any shape or form that it is a tax. If it was, we'd have some sort or representation for it, meaning that it would be passing through congress in some fashion. But it doesn't.

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ASU2003

It is like a tax because the politicians could either raise real taxes or get more money from the private Federal Reserve Corp. It has been easier politically for them to get more money from the Fed than to raise taxes on the voters. However, when I go and buy a new car, I am paying twice as much now then in 1990 for the same car. I have to make twice as much, which isn't always the case. And there are lots of people who refuse to pay over a certain amount for a product on principal (I will never pay $200k for a home or over $20k for a car, no matter how depressed the dollar is). It also hurts retirees and people without a stable income or exposure to the markets.

The other 'good thing' about devaluing the dollar is that stock prices go up. Not because the companies did anything, but because it takes more money to buy a share. How many people would understand that if the US dollar got really strong and the stock market dropped by 50%, that it is a good thing?

As an international traveler, I do run into problems where it costs more to buy things overseas as well.

Seaver

There has been very little inflation since 1990.... you're not paying close to double for the "same" car and you know it. The car you're paying "double" for has "double" the features which make it more expensive.

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Baraka_Guru

If you calculate it, $20,000 paid for a car in 1990 would cost just over $33,400 today. The inflation rate from 1990 to 2010 is just over 67%, or an average of 3.35% annually. I mentioned above that a rate of 2% would keep people happy, but even as high as 4% would be desirable so long as the global rate moves at around 2 or 3%.

So, yes, the car is more expensive now than in 1990, but moderate inflation is desirable to keep unemployment in check. What we don't want is hyperinflation or deflation, as both situations are unstable.

Be happy with 3.35%. If it goes above 4%, then maybe start to worry. But between 2008 and 2009, inflation has been really low because of deflation. Basically, we should be hoping for a bit if inflation at this point.

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

ASU2003

The other problem is that they calculate it across the entire country. Nationwide companies have to sell to the coasts as well as the center part of the country. I'm not sure that the inflation rate made certain items in the communities get more expensive just because the dollar lost value

What about a home built in 1990? In Phoenix, Detroit, Cleveland, or San Francisco, the outcome on the decision to use 1990 dollars to buy a home would be different based on location. If you were to sell in 2011 and all move to the same area, some were benefited by the flood of cheap money, while others may have even lost money from saving at a lower interest rate than inflation.

I just wonder what would happen to our economy if we willed $14 trillion into existence overnight to pay off the debt? How much would prices rise? Imported goods and foreign travelers would get hit hard, but I'm not sure what other repercussions it would have.

And I don't have a problem with deflation. At least until I make more money and have it all in investments. I'm not sure deflation would be as bad as they think, some things just cost too much.

Cynthetiq

Yes, things are more expensive here in NYC than any other continental place in the US. Watch any Red Lobster commercial and see that the special is not valid in Times Square and Hawaii.

How much is a Big Mac Value meal out over by you? By me it's almost $8, and then include tax.

Tangible goods, durable goods, those are more expensive if I buy them in NYC. I am lucky I have a car and I can drive out to where the prices are more favorable BUT I may have to travel to NJ and pay an $8 toll to get back into NYC, so my savings must be more than $10.

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Baraka_Guru

The value of the dollar would plummet, and hyperinflation would indeed be the case. The money supply would spike (due to $14 trillion in new currency in addition to an expected major sell off of the greenback). In many ways, this is the opposite of a deflationary spiral. When prices skyrocket because of a diluted value of currency, wage pressure increases. Local production wants to pay these wages since prices are so high. They want to fill demand because of the money to be made. But the whole thing is unsustainable, as the currency value is shot and prices become out of reach. In the worst-case scenario, the currency would be abandoned altogether.

You should have more of a problem with deflation than with moderate inflation. If deflation gets out of hand, companies cut back production to hold onto their money. Depressed prices mean less profit potential and less reason to produce more. Less production means fewer jobs. Fewer jobs means less spending. Less spending means less demand. Less demand means less reason to produce. It's a vicious cycle.

Deflation is usually a greater risk than moderate inflation, especially during a recession or trough. The last thing you want at these times is a reason for companies to cut back production (falling prices).

The last major deflationary period in the U.S. was during the early years of the Great Depression. It happened because too many people wanted cash (runs on banks/bankruptcies) but the government didn't do anything to make it available (via printing more). So what happened is everyone hoarded what cash they could, boosting the value of it and causing prices to plummet due to dropping demand. Dropping demand shuttered factories.

Surely this isn't something you want. The last deflationary period was during this past recession. Did you have a problem with that one?

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

Willravel

Was the 2% inflation plan supposed to be permanent? It really seems like it was intended to just be temporary until we could figure out a better system. I ask this sitting in a house that 50 years ago was worth about $15,000, was 5 years ago worth over $1,000,000 and is now worth about $500,000. I have to imagine that, for the vast majority of people (a.k.a. people who aren't hedge fund managers and bank CEOs), a more stable, slower to change system would be much better.

Baraka_Guru

I don't think there is any hard and fast "plan," but many economists would argue that maintaining inflation at an average rate of 2 to 4% is more desirable than any alternative (hyperinflation/deflation).

Like many things in an economy, it's about maintaining a balancing act.

But sometimes you have to take other considerations into account. Housing prices are also at the mercy of market forces of buying and selling in such ways that many other products hardly ever see.

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

Willravel

What about leveling out? I realize that most capitalist economies depend on growth for no apparent reason, but what would happen if there was no inflation or deflation, just a stable currency?

Baraka_Guru

interesting question, but I don't think it's possible. Supply and demand will always be dynamic, thus making prices dynamic.

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

samcol

Yes, prices will always be dynamic, but with the system we have now the currency is dynamic and the goods are dynamic. If we had a fixed currency it would be easier to set prices on goods and services and avoid the bubbles/crashes.

There's no reason for a good or service to increase in price outside of supply and demand unless there's a new feature or advancement in the product. I call what the fed does artificial inflation, because there's no new value added to the product, but the price goes up due to currency manipulation.

and to quote wikipedia lol

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Baraka_Guru

The problem of a fixed currency is that very few economies do it. This would quite possibly put you at a disadvantage when it comes to balances of trade (i.e. deficits, where foreign currencies become more valuable and thus domestic spending becomes more appealing).

Unless you're a proponent of a fixed global currency?

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

Projectguru

I absolutely see the correlation between taxes and inflation! Money was invented for spending power. When inflation increases it is the same as sales tax increasing or income tax increasing. The only difference is that the government doesn't collect the funds DIRECTLY. However, when they were printing that money it was because they needed and used it for what they wanted. It's truly taxing without using the word because it all ultimately affects the citizens.

The_Jazz

No, inflation is not the same as sales tax increasing. Inflation may or may not be government created, and it doesn't affect spenders in the same way.

By your logic, a shortage of goods because of a production slowdown is a tax because it ultimately affects citizens. The price went up, didn't it?

__________________
"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin
"There ought to be limits to freedom." - George W. Bush
"We have met the enemy and he is us." - Pogo

Baraka_Guru

I think a problem that keeps popping up here is the idea that government is a major influence on inflation. Let me be clear: government is nowhere near a 100% influence on inflation.

If you want to look deeper than monetary policy---which is merely an influencer that seeks to maintain the 2 to 4% rate I mentioned---you will realize the lion's share of pressures on inflation resides in the balance between supply and demand. So the conditions surrounding labour, capital, production, and demand have a much greater impact on the direction of prices.

If prices drop (say, through a deflationary period), then companies are going to scale back production because there will be less money to be made. This leads to unemployment.

If prices steadily increase through an average inflation of the 2 to 4% I keep talking about, then companies keep chugging along and expand their businesses, seeing how price growth is robust enough to keep along with it. This creates jobs.

You want your government to encourage a balance. Deflationary periods are almost always a sign of trouble.

Even if you consider inflation as a kind of tax, you should happily pay it so long as it remains reasonable. It's good for the economy and therefore your livelihood.

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

Cynthetiq

This is why I find it problematic. People see the negative effects and call it a tax, but when it's postive? It becomes then something like "good for me" or "the corporation has been raping us with the higher prices."

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