Inflation: The Unspeakable Crisis

Michael Kinsley at the Atlantic is worried that more people aren't worried about inflation, and is sharp on what sucks about it:

A stable currency is firm ground on which you can build a life. Inflation turns life into Through the Looking-Glass: you have to run faster and faster to stay in the same place. Saving is for suckers, and money needs to be spent sooner rather than later. Planning even a year or two ahead becomes nearly impossible.

….if we are doomed to repeat this particular bit of the recent past [our last scary bout of double digit inflation in the late 70s], the press has failed in its self-imposed obligation to be the "first draft of history."

According to the considerable discussion of inflation on the Web, my alarm is misguided. Every economist I admire, from Paul Krugman and Larry Summers on down, is convinced that inflation will remain low for as long as we can predict…..  Krugman has charged that inflation fearmongering is a nefarious Republican plot….. 

This time, inflation will be a lot harder to stop before it turns into hyperinflation. Whether Obama navigates these shoals successfully will be a big factor in his historic reputation. And journalists will be kicking themselves (and other people will be kicking journalists) for missing a disaster story on the level of Hurricane Katrina, if not 9/11 itself.

In short, I can't help feeling that the gold bugs are right. No, I'm not stashing gold bars under my bed. But that's only because I lack the courage of my convictions.

That final zinger hurts. Those with reasonable doubts as to the stability of this whole freakin' system are in the unenviable position of, if struggling to be "prudent," making lots of big decisions that are going to seem really short-sighted, depending on whether or not things go seriously awry. That is, going gold will make you either King of the World or the nuttiest of chumps. Well, that's what hedging is all about, I suppose, but most hedging is done within the ol' dominant paradigm. Gold seems more like a "all bets are off" bet.

Inflation is a looming crisis we at Reason have not been ignoring: see lots of examples.

Comments

[Jose Ortega y Gasset]

Not just inflation... the return of stagflation.

[The Gobbler]

"In short, I can't help feeling that the gold bugs are right. No, I'm not stashing gold bars under my bed. But that's only because I lack the courage of my convictions."

I vividly recall the late '70s inflationary period. I would say that other hard assets are better to hold than gold, which can plummet in value as quickly as it rises.

Spend your money on something like an Indian motorcycle. When gold loses 75% of it's value, the bike will likely lose less than 25%.

[Clich? Bandit]

the discussion on which hard assets are best is a matter for deeper research and some opinion BUT hard asstes regardless are better than paper any day.

[josey]

Machinery is good. And you can build stuff with it too.

[Clich? Bandit]

That is, going gold will make you either King of the World or the nuttiest of chumps

Nonsense! Gold is no different than other hard assets. All of which have a measure of stability in an inflationary environment. Gold is simply easier to exchange dur to historic value. A standard, good times, all is well, portfolio is recomended to have 10% in metal assets. That is because it is not as much an investment but a cesation of inflationary effect on cash savings. 10% in gold and you counter ballance long term devaluation. So since that is the "mainstream" wisdom then why is upping that to 30 or even 40% in uncertain inflationary times such a bad or "crazy" idea? Speculation aside, gold and silver ARE excelent stores of value. The old mantra "gold doesnt go up and down...the dollar does." is true. If gold falls then your dollar will have more buying power and if it goes up you have reduced your loss to silly government actions.

Doesnt seem that crazy to me.

Just saying

[Brandybuck]

Gold is different, because gold gets hyped to ridiculous extremes. Remember the gold boom/bust of 1980?

Yeah, other stuff gets hyped too, but only with gold do you get normally sane Austrians claiming that the boom will never end.

[Clich? Bandit]

Understood, also why diversity aint just a class put on by HR. Gold, Silver, industrial materials (steel is soso). Anything that is realively resticted in production and fungable (and not 30% controlled by assholes like oil is) is a decent hedge. I am going to agree, however, that guns and ammo are good too. But 30% of my portfolio in gunns and ammo? While a wet dream that probably wont be the amount I spend. Guns and ammo are highly effect in somewhat smaller quantites.

40s and 9s. My favorite sto'

[Invisible Finger]

Gold gets hyped, but never to the ridiculous extremes real estate gets hyped. Partly because government gets no benefit from you holding gold whereas your real estate holdings get taxed.

[Brandybuck]

But gold gets hyped even without government props. Real estate booms are almost always 98% government created.

[CrackertyAssCracker]

I'm Austrian. I have no problem believing that this gold boom will end with about a 50% downward movement against the dollar. (Given that the dollar is still used, which isn't a sure thing).

I'm pretty damn sure that real interest rates (all the way down the curve) need to be positive before there is any risk of that starting though.

[JW]

You watch...the big inflation will kick in just as I pay off my non-mortgage debt and my 401 hits a new high.

[joshua corning]

Well, that's what hedging is all about, I suppose, but most hedging is done within the ol' dominant paradigm. Gold seems more like a "all bets are off" bet.

So land and housing is cheap because of the bursting of the bubble...it will soon be more expensive because of the looming hyperinflation Armageddon. and gold is at some sort of all time high right now.

Perhaps gold is not the best hedge in this market.

By the way if you try this be ready to fucking sell it. Many many many poeple this last round lost tons of money on real estate speculation. Know it will not go up forever and be prepared to liquidate or you will be fucked.

[Invisible Finger]

That is the one problem with gold, some gold holders have a harder time selling an asset they physically own, whereas paper assets are much easier to part with.

[Clich? Bandit]

Ha tell me there wont be inflation!

[Jose Ortega y Gasset]

Firearms > gold.

[Brian Sorgatz]

It might just be worth living through a hyperinflationary period in order to see the Obama administration properly humiliated for its arrogance and incompetence.

Schadenfreude is one of life's precious consolations.

[.]

That sonofabitch and his supporters would never admit they were wrong.

[Jersey Patriot]

That's right. We should see the immiseration of our country, and the destruction of its currency and economy, because you don't happen to like the sitting president. Exactly how stupid are you?

[Legate Damar]

Isn't the (non-automobile) manufacturing sector a hedge against inflation as well? The companies therein have traded debt for manufacturing capacity, both of which move in the right direction for you if hyperinflation hits. Meanwhile, the physical good that they produce should garner the accurate-to-the-minute market price (assuming there's no price controls, in which case we're all hosed whether you hold gold or not.)

Am I missing something?

[TickleStick]

Just that in times of financial crisis, the Federal govenment has confiscated gold. Obama could do it too:

http://www.wellsfargonevadagold.com/exec-order.html

[.]

He can confiscate it only if he can find it.

[Gilbert Martin]

"depending on whether or not things go seriously awry"

If things go SERIOUSLY awry, gold bars won't do you any good.

Guns and ammunition will.

[joshua corning]

So guns and ammo helped in 1979 how again?

Your investment plans for the looming hyperinflation seems to be to robbing a convince store.

Good luck with that.

[kohlrabi]

Perhaps 'seriously' in all caps meant something worse than 1979.

[robc]

Yep, I take SERIOUSLY to mean Mad Max level awry.

Gold is good for moderately awry, like the 1970s or Zimbabwe.

[joshua corning]

If you are over 30 and MAD MAX level awry occurs you might as well point that gun at your own head...

That is if you do not have underage children...If you do then you should only point at your own head when they become really hungry.

Seriously what use are you if you are say 38 out of shape and have a gun? All you will end up doing is offing those younger and stronger and more able to rebuild so you can live two extra years.

Besides you have seen a world before Mad Max levels. You will be wanting to off yourself in half a year tops anyway.

[Hmm]

At 30 smething I can afford the weapons you can't, the time to use them, and have the wisdom to get rid of you first or at least leave a lasting impression on you. Why off myself when I can make you my bitch in Thunderdome.

[Joshua Corning]

I am 38.

400 million people living in the US without electricity and running water and cars and phones and going back to medieval times when people did not live past 35 anyway and the land only supported about 1 million people and those people actually knew how to survive off the land...

And you with your over weight belly encyclopedic knowledge of 90s grunge bands, gritted up guns, wet ammo and loot from 7 11...

Yeah I have to say you are definitely underestimating your chances at ruling thunder-dome.

[Joshua Corning]

and have the wisdom to get rid of you first or at least leave a lasting impression on you.

Actually if you are going this route i suggest you try not to leave any impressions and leave more corpses...if 500,000 people just like you killed 400 people each you might just have a chance.

That is if you do not need glasses, do not have any medical conditions, know how to make penicillin....and when you hit forty if you have all that you can expect someone 20 or so
who had those same things can off you.

And those lonely 5 years of your "survival" as you walk a dead world you will be haunted about the perfect past which slowly fades each hour from you murder filled mind.

[JR]

You don't have to make an all or nothing bet. Putting 5 or 10% of your assets in precious metals would presumably provide some insurance against inflation.

[Brian Doherty]

JR--To be sure, but I'm talking less about the "helping keep some of my assets stable in case of a year or two of double digit inflation" gold buyers and more about the "I fear that soon the U.S. dollar will be a worthless piece of scrap paper" gold buyer.

[robc]

5 to 10% of your assets in gold provides a nice hedge against Zimbabwe level inflation too. At least you get to keep 5 to 10% of your assets. Assuming you can defend your gold.

[Brian Doherty]

Robc---My point, which I guess I failed to get across, is that if (as Kinsley hints) you are SURE that the whole goddamn game is over, but are just enough constrained by what everyone else it telling you to lack the courage of your convictions, you will feel like a goddamn chump that 90 percent of your assets were still tied up in dollars---which you KNEW dammit where going to be worthless soon. Conversely, if you go deep into gold, you are bound to see that xxx percent lose anywhere from 50-70 percent of its value likely in case of a return to a decade ago's conditions. This sort of catastrophe hedging feels psychologically different to me than standard "within the game" hedging of "well, I'm covered if 15 percent of my assets go down 20 percent" sort of hedging. Maybe it isn't an interesting point, but it seems to me it has to weigh psychologically on super goldbugs in some way.

[Invisible Finger]

But hardly anybody has 90% of their assets tied up in dollars, they have them tied up in dollar-denominated assets. You can easily denominate them in something else.

So you are making a point that is based on unreality.

[Brian Doherty]

Inv. Fing.--are you saying a complete collapse in value of the dollar is not something the average joe investor in America needs to care about? When you say "something else" do you mean other govt paper monies? Or that merely owning paper pieces of equities or commodities, which is what most people who invest at all own as far as I understand it, whether denominated in dollars or not, will be enough to sufficient to weather the storm of the sort of utter collapse in the international system of paper money that the serious goldbug anticipates? (Or is this a "own a bunch of land and all the actual physical things one needs to survive on that land" thing?) I am again speaking of the investment dilemmas of a narrow mindset: one who thinks they know deep down that the entire paper money system is about to tall apart. I don't think most goldbugs think that it's just the dollar at risk, though I am not a goldbug mind reader.

[prolefeed]

Every economist I admire, from Paul Krugman and Larry Summers on down

There isn't any "on down" from Krugman. Nowhere to go but up from there.

And he lost all credibility when he said "admired".

[Brandybuck]

True that. Krugman has ceased being an economist, and is now nothing more than an automatic gainsaying of anything to the right of Trotsky.

[dennis]

In the 90s Krugman was actually a serious thinker, he wasn't always right, but he was at least a real, and important economist. Somewhere during the Bush years he must have suffered a complete breakdown and emerged as a raving buffoon.

[celtigirl]

you got it right prolefeed! Kinsley's list of admired economists immediately made the rest of his comments suspect; although I do agree with him that not enough policy making individuals are worried about inflation.

Volker, where art thou now on inflation?

[Brian Doherty]

Celtigirl--that's exactly why I thought this worth noting; even a guy as centristly centrist as a centrist can be on mainstream econ issues is raising his hand tentatively to say, "Hey, prof, but what about inflation?"

[joshua corning]

There isn't any "on down" from Krugman

Pro may I please draw your attention to one Mr. Brad DeLong.

[yonemoto]

I seriously love how liberals can say this:

"Saving is for suckers, and money needs to be spent sooner rather than later."

out of one side of their mouth and scream that the capitalism is the reason why we destroy our environment out the other.

[TickleStick]

I get a kick how they advocate the theory of natural selection and then pass laws trying to save flora and fauna that can no longer compete.

[TickleStick]

FTR I find the theory of natural selection to be sound, but couldn't care less about some obscure snail.

[G]

Inflation ? Dudes, you should be more worried about deflation, because that's what's coming next.

[Aresen]

Based on what macro-economic theory do you predict deflation when the US government is pumping $1 trillion plus into the economy per year and, even in its own best case scenario, will have annual deficits of $500 billion plus for the next decade?

Even Galbraithians aren't that dumb.

[G]

Before accusing me of stupidity, you'd better do some reading. Stuff like this

http://www.zerohedge.com/artic.....ent-increa

The Fed is doing all that pumping in a desperate attempt to fight deflation. What comes after said deflation ... well, that's anyone's guess.

[yonemoto]

that's what schiff said and we still got deflation. shoulda listened to mish.

Seriously. Until the gub'ment starts printing $10k bills and handing them out to citizens, private debt contraction can still give the printing presses a wallop.

[G]

Oh, and one more thing.
The fact that prices are not exploding despite all the money printing and liquidity injections should tell you that deflation is here.

Maybe you should think about that (and think hard) before dismissing me as just another moron

[Invisible Finger]

(Also remember the UAW squawking about not getting raises when inflation was close to zero.)

There's a reason Von Mises named his book "The Theory of Money AND Credit." A Central Bank can only control one of those at any time.

[Mad Max]

H&R posters seem to like guns and gold.

Well, 2 out of 3 ain't bad.

[anonymous]

Are you suggesting the three are of equal value?

[guy in the back row]

Instead of gold, what about silver? Is that a good hedge as well?

[yonemoto]

a better hedge is platinum or palladium. If the dollar tanks, you're good. If the economy picks up, you're good. Just be careful, the last cycle, those two guys were a preceding indicator of the stock market crash.

[anonymous]

Me, I've got a big-ass stockpile of eezo, and a strained wrist to show for it.

[Anonymous Backstabber]

"Every economist I admire, from Paul Krugman and Larry Summers on down, is convinced that inflation will remain low for as long as we can predict"

RED ALERT!!!

[Brad Warbiany]

You see, this is why I homebrew.

When things go SERIOUSLY awry and the nation resorts to cannibalism, nobody's gonna eat the guy who knows how to make beer.

[joshua corning]

nobody's gonna eat the guy who knows how to make beer.

Hookers should do pretty good as well. How do you invest in hookers?

[EVL29]

How do you invest in hookers?

You just ask them 'how much?'.

[anonymous]

Buy hooker capital. A nice brothel should do the tricks. Er, trick.

[Invisible Finger]

Don't put all your eggs in one basket.

And don't avoid particular baskets for irrational reasons.

[yonemoto]

best libertarian portfolio: Stocks, real estate, gold, silver, palladium, platinum, and cigarettes in case tshtf.

[Max]

Michael Kinsley is my favorite liberal columnist, much less dull than average.

An important fact about inflation: inflation is not merely a tax on people who hold paper money, it's also a tax on investment. The reason is that you pay taxes on nominal gains, not real gains. So if inflation is high, the effective tax rate on investment can exceed 100%.

[Invisible Finger]

Yes, but technically the capital gains tax is doing that, not inflation in and of itself. They could change the formula to real gains but at 70% and the effect is exactly the same.

[Max]

Even if the capital gains rate were cut to 0%, it wouldn't solve the problem, since some investments deliver their return in the form of income (e.g. bonds and bank accounts).

[miklen]

Then there is the problem of what to do if the government confiscates your IRA and 401K to "protect" you from evil speculators. They did this recently in Argentina.

Having some real money just might give you enough time to figure out a way to outwit the people who are causing the problem.

[Captain Awesome]

"No, I'm not stashing gold bars under my bed."

Sounds like someone doesn't want us to think there's gold to be had under his bed. Or maybe he just keeps it somewhere else.