Wednesday, March 09, 2011

Inflation, What Inflation?

Let’s look at inflation in another perspective. Figure a worker making $12 per hour that comes out to about $24,000 per year, or $500 per week

Figure one tank of gas per week has double---$25 (extra)
Groceries per week have doubled----------------$50 (extra)
Utilities have increased-----------------------------$20 (extra)
Cable, sales tax, state license fees--------------$ 5 (extra)
Total---------------------------------------------------- $100

So when we do the math, the minimum wage worker has had a 20% haircut. In the span of a year, that is a loss of $4,800 in buying power. You get the same paycheck; it just doesn’t go quite as far.

The well off person with 100K in the bank has lost 20K in buying power. Of course, that really isn’t perceived by the saver, he can get the cash and dance all over the bedroom throwing 100k in one dollar bills everywhere. The concept that his savings have somehow decreased is not at all obvious, after all he still has every dollar.

PIMCO dumps all of their Treasury bond holdings? I wonder what they replaced it with, gold, silver, oil?? It seems the message here, is if you have cash, don’t loan it out for peanuts, rates are going to have to go higher. Student loans could be the goose laying golden eggs. A student with 200k in debt at a future 12% interest rate, amounts to slavery. Of course, how could interest rates ever get that high???

With all of the real estate “under water,” picture Bernanke in a boat named “The Economy” drilling a hole in the bottom of it--to correct this mess. That’s what inflation is all about, the boat is sinking---contrary to popular belief, the water isn’t rising.

So those earning the minimum wage pay the piper big time. If you earn double their wages, your pain is a lot less. If you are retired and living on your savings, you got nailed. The funny thing is, things really haven’t gotten bad--yet. The hourly wage hasn’t been cut, but your spending power has. It’s very invisible and “painless.”

The Great Depression of the 1930’s rang true, because of the belief, that things could get even worse. People were not in control of their lives. All hope had been abandoned. People got sick of hearing that “Prosperity lies just around the corner.”

It will be different this time. All of the people we blamed for the last depression are dead. I think we can excuse them for dying, it wasn’t a planned event.


Anonymous said...

Jim --

You write "The funny thing is, things really haven’t gotten bad--yet."

Could you briefly explain what you believe will happen over the next 5 years?


Jim in San Marcos said...

Hi Anon 7:38

Thats a pretty tall assignment.

I think over the next two years, you'll see the State governments will run out of funds and revenues will decrease even if they raise taxes. This would lead to higher unemployment.

The Federal government on the other hand is printing money (which is a form of taxation) trying to bail out the economy. They can't run out of dollars, but they may trash the currency and everyone's savings.

So we have States coming to the realization that they have spent too much and are approaching financial insolvency. From there, it is a very small step for the average Joe to realize that our Federal government is doing the same thing on a much larger scale.

When you read the personal accounts of people who experienced the hard times of the Great Depression, its easy to empathize with their lack of hope and a fear of what the future had to offer.

Our Federal Government leaders claim things are improving while there are riots in the States. The school year is about to be cut to a half year and no music or sports. The pain is just starting.

In 5 years, it's hard to say what will happen. The rest of the world is worse off than us, and naturally we (The Great Satan) will be blamed for creating their world of misery.

Let's hope I'm wrong.

michael said...

I'm surprised - are student loans really floating rate?

Jim in San Marcos said...

Hi Michael

No, they are fixed and are just about at 8% presently.

This is a government loan, not a private loan. The person will have to pay taxes on their earnings when figuring their actual cost of repayment.

I couldn't find a job in Journalism that would pay enough for me make my student loan payments when I graduated from college. So I went to a field that paid more to start.

Anonymous said...

Jim --

Thank you. We'll be expanding our garden!

Looking back 20 years, when we were planning for retirement (still 5 years off), this is not what we envisioned. But we, like everyone else, will adapt -- no other choice.

Jim in San Marcos said...

Hi Anon 8:18

With the kids off for 1/2 year, they will have plenty of time to tend to the garden.

A sucessful garden is a lot of hard work. It can be a fun experience, if you are a kid. The marshmallows I planted never came up

Anonymous said...

Schools won't get that bad. Alameda,CA passed a parcel tax last week. It only adds about $400. a year to the average homeowner's taxes, and will prevent lay-offs, cuts in music and sports, etc.
If every city would just pass a parcel tax, schools will be fine.

Anonymous said...

Isn't raising taxes inflation as well. It doesn't fix the problem of funding of schools or anything else if average joe can't afford to eat.

Jim in San Marcos said...

Hi Anon 12:41

Your comment " It only adds about $400," made me do a double take. If you are unemployed and a home owner, you're not paying the tax. If you earn the minimum wage here of $8 per hour, that's almost two weeks wages after taxes. This is a tax increase on the taxes you are already paying for schools.

During the Great Depression (the previous one) local governments raised taxes and got less back. The added burden made people who were already struggling to survive, toss in the towel and give up.

In our area, Poway parents voluntarily pay $500 a year if they have kids in the band. And that isn't even a tax, it's the music teachers salary. Not everybody pays up either.

I'm not sure how it will work out for California, there are too many strings attached to educational funding. And that's another long story.

frakrak said...

Hi Jim,

Groceries, well we have only two major competitors here and they are engaged in a milk pricing war that could potentially send a healthy dairy industry to the wall. Consumers are reaping the rewards here, but grocery prices in general are absurd down under. Again are we seeing multinational organizations repairing their bottom line after the GFC, by gouging their captive market? Giving an appearance of inflation? I am presuming that the record profits these two companies are making are leaving our shores in the form of share dividends etc.

Utilities what are their inputs that have justified their rapidly increasing profits? Our power generation, telecommunications, (our largest bank until privatized) were until quite recently government owned and profitable, now we, as captive consumers are being gouged while profits are leaving our shores, is this the same for you?

Governments here also are increasing charges almost weekly, but ask them to stop throwing our money away on stupid waste is never brought up in the political conversation.

Jim I believe we are getting a buzz cut from a system that lacks real competition, and not from too much money chasing too few goods.

Oil may have some relevance here, but the rest of this Jim I am highly dubious in accounting normal economic theory for price rises, where an equally plausible explanation is that we have all become serfs to massive trans global companies that will eventually enslave us all to a tidy profit margin on some distant offshore balance sheet! I really don't see the competition anymore on price. I see only competition to come up with ways to fleece the flock of more of their hard earned cash, whether it be governments, utility companies, food producers etc,

zgirl said...

I think you can forecast a lot of the future by looking at who has the power to make things happen, and what their circumstances dictate as the best possible option. Here in the U.S., the government has the power to create inflation, and the enormous debt + unfunded liabilities would be substantially reduced in an inflationary environment. I hope to be wrong (I'm a saver, not a borrower), but I think we can count on inflation over the long term.

Social security promises a given payout for a given pay-in. It's tough to decrease the pay-outs, even as more boomers retire. BUT, if you can inflate the wages being paid-in, it deflates the value of the pay-outs while balancing income against outflow. The same is true of government/military retirees, and government debt. Note that this requires gaming the inflation calculations that entitlement programs are tied to, but we've got that covered.

Jim in San Marcos said...

Hi Zgirl

The way to sum it up is; the government borrows hard earned dollars today and pays back inflated dollars many years in the future.

And if you are counting on the government plan for retirement, you'd better get use to oatmeal. The reality that government promised in the past is just a pipe dream. Everyone wanted to believe in it; and of course we all get to be disappointed by our overly optimistic expectations.

Jim in San Marcos said...

Hi Frakrak

I think you are mixing up government with private enterprise. Government run enterprises don't have to show a profit, the taxpayer foots the bill. Private enterprise has to show a profit or it goes broke.

Your quote "Again are we seeing multinational organizations repairing their bottom line after the GFC, by gouging their captive market? Giving an appearance of inflation?" I don't see where it is against the law to make a profit. Competition will level the playing field. Plus, if the company is doing good, buy their stock, thats where the dividends end up--as a check in someone's mail box.

I do feel your frustration with the way things are. Your reference to being reduced to serf status, pretty much implies that we are starting to observe a noticeable drop in our standard of living. And I'm sure you will agree that that sucks! But as for who to blame?----It took everyone of us to get to where we are today.

Anonymous said...

Jim -- this is my opinion of where we are heading...
They'll be more deleveraging, debt destruction, failed banks and businesses, etc. for another few years and the asset deflation will make everyone think we are headed into a deflationary depression. Yet, inflation will be working its way in and the first phase will be stagflation. Then the money printing and credit creation will gain traction and the money supply will start to expand... people will lose confidence in the USD and the velocity of money will pick up, and then we'll head into high inflation, probably not hyper-inflation. You'll survive if... you get your cash into tangible assets before the upwards swoop of inflation really takes hold; put some of your cash into gold/silver; are able to deliver products/services that are basic needs; hold onto your debts and then pay them off with super cheap dollars; have things you can barter and trade with; and have a garden/greenhouse to supplement your diet (also giving you produce to trade for other staples); own your own home (take advantage of the low prices, finance it with smallest down payment possible, pay it off easily with cheaper dollars).
You can prosper in a deflation, you can prosper in an inflation. Just need to be prepared.

It will not be a deflationary depression, it will be inflationary. Ever since Bretton Woods deflations have not occurred. The chance of Deflation was further inhibited when we came off the gold standard in 1971. Deflation is highly unlikely with a central bank/fiat currency system. Like Greenspan, Bernanke's solution to everything will be liquidity. He'll print trillions and trillions and destroy the USD before he allows deflation... that behavior is in his DNA. As printing, borrowing and spendthrift policies is in the DNA of our Congress.

I may be wrong. Anything could happen with so many variables (weather, energy, war, government interference, etc.) But my opinion is prepare for very high inflation.

Anonymous said...

At $8. an hour, (about $16,000 ayear) there is no way you can become a homeowner in CA. Parcel taxes are paid directly only by people who are homeowners,(althought everyone gets to vote on it.)
If you have a $400,000. house, taxes are already about $6,000. ayear.
So another $400. is no big deal.

Anonymous said...

The problem with being in massive debt and running huge deficits in a country with no hope of major growth is that you become CRISIS PRONE.

All it takes is a crisis or two and you are history.

Civil unrest in Middle East and North Africa; Japan's earthquake/tsunami; many of EU's member countries on brink of bankruptcy; etc. are enough crises already to throw things into major imbalance.

These are interesting times. Uncertain times. Unpredictable times.

Jim in San Marcos said...

Hi Anon 9:30

I beg to differ. I'm sending my son to Berkeley for 28K per year. $400 dollars is a big deal to our family.

Jim in San Marcos said...

Hi Anon 12:03

I agree completely. One other thing that has been overlooked, is starvation.

Unhealthy populations lend to the appearance of super diseases.

I think that it is no coincidence that the "Four Horsemen" ride together. When it rains, it---- you know what I mean?

Anonymous said...

When I was in high school in New Jersey (67-69) a gallon of gas was 25 cents. My mother would bring home bags and bags of groceries (with high quality meats) for the week at the total cost of $40.

40 years later... now gas is almost $4 per gallon and a week's groceries is around $300.

I'd say we've had a little bit of inflation over this time period, eh?

But during that time there was never anything like the printing and debt like there is today. One could extrapolate that in another 20 years a gallon of gas will be $25 and a week of groceries will cost $2,000.

Gawd elp us!

Jim in San Marcos said...

Hi Anon 8:19

When I was very young, I use to chuckle when my grandfather use to complain that bread, when he was a kid, was a nickle a loaf. At that time it was 25 cents. At the age of twelve, his concept of price had little meaning to me, I perceived him as a frugal but nutty tightwad.

Now I can wear his shoes and understand what he was talking about.

The youth of today has no concept of inflation---yet. You suggest that 20 years from now we may see grocery bills up to 2,000 a week. I hope your are right, I'm thinking that your prediction could come true in less than 4 years. Let's hope I'm wrong.

Thank you for your comments.

frakrak said...

Thank you for your response Jim. Yes there is a lot of frustration, and yes making a profit is OK :)

I don't see anything new under the sun here with our current economic circumstances, it has all happened before. England as I remember (from primary school history) had a trading company that dominated world trade (Victorian era), so I am relatively happy to accept my lot with all.

I venture on a few sites (The market Oracle and The automatic earth, and for some visual entertainment, Max Kieser, Bloomberg etc....

It probably is best to pack away the conspiracy theories (in the full light of western history) and let the big money get on with it!!

Always like to read your blog Jim,

Anonymous said...

1 word goverment.They did this all of it.And Iam 12