On inflation

[Mental]

So, my cousin is posting some of the more hysterical Glenn Beck-Ron Paul brand of financial criticism videos on his Facebook account. One of them has something about the possibility of Zimbabwean hyperinflation happening here. Knowing Beck to be the passion-play actor he has come to be, I of course am taking it all with a massive grain of salt.

I do note that American manufacturing has taken massive hits across the board, particularly in the auto industry, and "the country produces nothing but money" is usually the prerequisite for hyperinflation. But I also have to say that when I take a walk through the various malls or shopping outlets that are out there, "too few goods and too much money" does not seem to be the major impediment to purchase. In fact, it's more like the reverse. Inflation doesn't seem to be up, in fact the CPI actually *dropped* for the first time this year in decades, I believe. I go to Fry's and they're sitting on piles of gigabyte flash drives they're trying to sell for five bucks apiece.

So, you all being the lot of accountants that some of you are, what's your take on the inflation situation? I have to say, all things considered, I don't know that I feel like panicking. One of the things I don't know that people have considered is the very deflationary nature of the demand for goods when markets are more saturated with them, both at the consumer level and the warehouse level...and people have way more crap than they ever have, and I and a bunch of other people I know at least are looking around going "God, I have a lot of crap, maybe I don't need to go out shopping so much."

Of course, I'm not sitting on a big pile of money either, which may be biasing some of my views, which is why I'd like to hear what you all think.

[Don]

I think the problem is that just because you have a pile of money doesn't mean you're going to go out and go buy a new car, or an overpriced home, or whatever. The general price level is just too high, and people know just because we're printing a ton of money doesn't mean we're all suddenly wealthy, so they're still hanging onto that money and if the money doesn't get spend, you don't have inflation... at least for a while.

In the long run increasing the money supply so much has to lead to some inflation, but I think that'd come after the price level have fallen even more.

[Zeus]

Naturally, as people make more and more coin you'd expected commodities to increase. You'll always see that. But our inflation over the last 8 years has been tied to the unnatural propping up of the economy. So the real question is: are commodity prices going to take a hit like the rest of the economy? Sure, for large purchases such as cars, boats, homes, etc, you'd expect to see a pretty fast correction in relation to the economy. They're often luxury items and when times are hard - I was laid off a month ago myself - people ain't gonna buy these things nearly as much. People will fix up their cars - my friend is a service advisor at the largest dealership in Canada and he says business is better than ever right now - or rent for a little while longer. Demand goes down, prices naturally follow.

But what about smaller items? Again, it depends on what is a luxury and what isn't. It also depends on what is a "premium" product vs what is not. Take clothing for instance. You need clothing, it's a requirement. But do you need that $200 sweater from A&F? No, no you don't. You WANT it (that's at the core of this discussion: wants vs needs; this is an issue a LOT of people have a hard time understanding). Will a $30 sweater from Walmart suffice for the time being? Sure it will. So you'll buy that $30 sweater and two weeks of groceries instead. By extension, you'd expect the pricing on value priced items to stay relatively constant, which it has for the most part. There has been some downward pressure on those due to the extent of the recession/depression we're in, but it's been relatively minimal.

What about vacations? Well, what we saw more this summer is people driving instead of flying. That leads to a perfect example of price correction: the gas prices. They react VERY quickly to demand vs supply. Remember last year when they went up to $1.40 Cdn / lt or something along the lines of $5 a gallon? What happened? People stopped buying larger vehicles and stuck to the smaller ones. The car market pricing for larger vehicles suffered HUGE 'cause of the inflation in gas pricing (a year later the effect seems to be relatively permanent too). It's the same effect as people losing their jobs just the other way. Gas took up "too much" of their household income so they lessened the amount they spent on it. Same as if your household income drops and you look to cut out how much you spend on gas.

The real dilemma is this, though: you drop commodity pricing and you lose jobs. You lose jobs, less income to go around, demand drops putting further downward pressure on pricing.....and so on. A bit of a vicious cycle, huh? So it's in the best interest of the government to ensure that they stunt this cycle at a certain point otherwise things get worse.

Take it one step further and you can see why both the US and Canadian government are propping up the car manufacturers (and by extension, all of Wall Street). Like I said before, it was a requirement not an option, they all knew that. Regardless of how unpopular it was with the majority of the people, it was required.

[Zeus]

I think the problem is that just because you have a pile of money doesn't mean you're going to go out and go buy a new car, or an overpriced home, or whatever. The general price level is just too high, and people know just because we're printing a ton of money doesn't mean we're all suddenly wealthy, so they're still hanging onto that money and if the money doesn't get spend, you don't have inflation... at least for a while.

In the long run increasing the money supply so much has to lead to some inflation, but I think that'd come after the price level have fallen even more.

Whether or not a price level is too high is relative to the average household income. The level was perfectly fine a year and a half ago. Now that the average income has dropped significantly, it hasn't. It's the same as when I go to the Dominican and can buy everything for nothing. The average worker there makes the equivalent of $100 US......a month. We spend that on one video game up here.

The money supply was due to the demand caused by the unnatural propping up of the economy as well as natural inflationary forces. It really wasn't a huge effect in terms of CPI

[SineSwiper]

So, my cousin is posting some of the more hysterical Glenn Beck...

Your cousin believes in this guy?