GeneralLee

I think over the course of this year you will see a very gradual raise in rates. Enough to offset a crash of the market, but will still create a correction.

All 5 Stages

Other options include making subtle yet significant changes to the basket of goods and services such that core inflation is unchanged; or change the new inflation target from 2% to 3% or 4% and still claim victory. Another option is to create a new definition of inflation -- something like "baseline" inflation -- and use this made up metric. If all else fails, the Fed can deflect and blame another country or entity for adversely affecting our markets/currency. Or just brrrrrrrrr ...

A5S

(edited)

Funk

If interest rates for the government functioned like they do for you or me, there would’ve been much stronger political incentives to control budget deficits. If you or I apply for a loan, with a high debt to income ratio, then the bank may say yes, but at very high rates. You can either purchase at exorbitant rates or go home, reduce expenses, increase income and pay down debt, then apply for the loan in a better financial standing and receive lower rates. When the US government applies for more credit (via Treasury sales), the Fed artificially inflates demand by buying T-bills, which keeps the government borrowing rate artificially low, hence no pain for interest rates, and no motivation to sort out budgets. Oh, and we measure government debt relative to GDP, which is mildly moronic because it’s like me measuring my debt against the income of Delta Air Lines. I can’t spend or allocate more of DAL’s money than what shows up in my paycheck, and government income is tax revenue, which despite all sorts of tax code fiddling, seems to remain as a relatively constant percentage of GDP.

There was a time (pre Reagan era Volcker) that the US intentionally ran a semi inflationary monetary policy, which was supported by some political interests (farmers to name one). One of the incentives was that if the US government ran a nearly balanced fiscal policy, year to year, the inflation ate away at the relative value of dollar denominated debts (operating loans for farmers stayed fixed, while the commodities they grew inflated over their operating/harvest season) and the national debt (largely the IOU on the Vietnam War). Theoretically (a solid no, once you realize politicians are involved), you could pursue an inflationary monetary policy while controlling spending (BWAHAHA) and as tax receipts and the economy grow from a numerical standpoint, it would reduce the size of the deficit down until it could be paid down.

Gunfighter

Another data source for monetary policy beyond APC is the Federal Reserve Board. They publish some crazy 5h17 over there.


Fed Reserve Board

• On price stability, the FOMC adjusted its strategy for achieving its longer-run inflation goal of 2 percent by noting that it "seeks to achieve inflation that averages 2 percent over time." To this end, the revised statement states that "following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time."

My take is align your interests by positioning your portfolio in a way that benefits from near term inflation in the 2% or higher range.

gloopy

I agree with your logic but I don't buy the 2% narrative. We've been conditioned to look at "inflation" as one number, and further conditioned to look at CPI as its source. Both are incorrect. CPI (often called "CP-Lie) is a politically designed and influenced index and often diverges mightily from a more wholistic reality.

Just one thing to consider is the inflationary effect of this "new normal" monetary policy on risk free stable income. The Keynesian idiots despise savers and have nothing but contempt for middle class savers and retirees beyond whatever they engineer with their social programs. It was common for each million in savings (or prorated as the case may be) to be worth a safe and reliable $50,000/year in risk free income (5% yield). Even as rates fluctuated around that point you could count on it averaging around that (staggered "CD ladders" for example).

Now one million gets you about 90% less than that ($5500 a year using Bankrate's highest CD rates I could find). Tell the savers about that fake 2% inflation target when your policies cratered their risk free income by nearly 90%. So unless you have a government pension there is no safe income anymore. That pushes the savers and fixed income retirees further out on the risk spectrum. Now retirees have to become their own little hedge fund managers. This is government caused of course, but just like goverment caused spastic increases in health care and "education" due mostly to government intervention and social engineering/command and control economics, the problems keep getting worse because of the solutions they impliment.

Screw the savers though. Those idiots can just go to the stonk market because it always goes up and we can fix our broken and broke social programs by massively expanding them by promising them to the world.

Gunfighter

Gloopy provided a very accurate reason why interest bearing accounts will leave you broke. The 2% number is a lie for the average citizen. Hedonic indexing is one more component to the lie Gloopy identified.

3 Ways the Government Manipulates Reported Inflation

As a future recipient of a government pension and a current recipient of rental income, I much prefer the rental income. The former is targeted to the CP-Lie index, which gets a COLA that is even less than an already low number. It's better than a savings account or CDs, but still loses a little purchasing power every year. The latter is more closely indexed to real inflation numbers and when leveraged, aligns with federal monetary policy. Owning income property provides a cash on cash return exceeding the best dividend stocks. Owning that property with 50-75% leverage grows your equity 2x - 4x the rate of inflation.

I'm not a fan of the system, but I'll play along until we get a better option. Owning your income is better than working for it.

Owlchemist

This is probably just anecdotal but generally inflation is the loss of purchasing power of money due to more of it being in the economy while the supply of goods remains the same. More demand/same supply and all of that.

But it seems to me most of this extra printed money finds its way into the pockets of the extraordinarily rich fairly quickly. These people don't tend to drive up the demand of TVs or milk or whatever. But they do look for places to squirrel away that money in hopes of growing it more, driving up the prices of any speculative vehicle. You can already see this in the exploding prices of stocks, securities, bitcoin, real estate, collectables, trading cards. Even Pokemon cards have exploded in "value" in the past 12 months. I have no idea what this means for the average person but this does seem to be what is happening. What happens with inflation when the rising supply of money is held by a select few?

Gunfighter

You are describing the Cantillon Effect. Those closest to the supply of new money benefit most because they get it first, before it enters circulation among the commoners. Money is generally created by making loans vs printing paper. This is why borrowing money to buy assets is a common path to wealth.

This will lead you down the path to libertarianism and Austrian economics.

Adam Smith Institute - Cantillon Effect

Spend some time with "Cantillon Effect" and your favorite search engine to draw your own conclusions.

gloopy

Precisely.

I'd also recommend "Economics in One Lesson". Very easy and quick read about how and why command and control economics and well intended policy planners always fail in the long run (and some in the short run). If that thin and easy to read book is too much, just google the "cobra effect" then extrapolate that downline into the real world always applying Murphy's Law.

If you found the book worth the read, I'd suggest reading: https://cdn.mises.org/Fiat%20Money%2...20France_2.pdf
Despite being old and dealing in the usually dry subject of upstream economics, it reads like its ripped from today's headlines in a way that's almost fascinating.

panpanpan

How about gold and silver as an inflation hedge? Good has been down but I think the market will eventually wake up. Especially when the bitcoin bubble bursts.