Inflation vs. Deflation

NEW -> Contingent Buyer Assistance Program
I believe this is the key that will open the gateway to inflation.





<a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=avQ3LP7o44oU&refer=home">FDIC May Run ?Bad Bank? in Obama Plan to Remove Toxic Assets </a>
 
Two Jack in the Box tacos were 2 fer $0.99, and are now 2 fer $1.39 for an increase of 40%.

A Large Dr. Pepper was $1.69, and is not $1.99 for an increase of 18%.





And the rotorooter job to clean out arteries is higher also.
 
[quote author="awgee" date=1238123889]Two Jack in the Box tacos were 2 fer $0.99, and are now 2 fer $1.39 for an increase of 40%.

A Large Dr. Pepper was $1.69, and is not $1.99 for an increase of 18%.





And the rotorooter job to clean out arteries is higher also.</blockquote>
They are still $.99 at the ones that I frequent. Although I have noticed that the Jack's Spicy Chicken Sandwich did increase from $3.29 to $3.69.
 
My grocery bill has gone down substantually as of late. I feel that bread, milk, oj, eggs, etc. have gone down in price. Oh and so has steak.
 
[quote author="BlackVault CM2" date=1238125053]My grocery bill has gone down substantually as of late. I feel that bread, milk, oj, eggs, etc. have gone down in price. Oh and so has steak.</blockquote>
Yeah, lots of deals at Albertson's. I picked up a few ribeye steaks for $4.99/lb....yummy.
 
Re: meat prices... the worst drought on record (and diversion of corn to ethanol) meant that cattle feed ran out and cattle was slaughtered. Guess what it means for the meat prices going forward. Too tired to post "proof", just search the interwebs.



There has been a massive inventory run down as consumer demand fell off the cliff. It came with the capacity being shut off. No new Toyota trucks have been made for several months for instance.
 
Echoing Earthbm's comments, there is significant supply destruction going on in commodity space as result of falling demand and prices. This will be costly across the complex when the global economy starts moving forward again, though that may be some ways off. Take the cattle example. In order to increase production of beef, feeder cattle must be diverted from the feed lot (and eventual slaughter) to pasture for breeding. The cycle in cattle production necessary to ramp up output is typically 8-10 years. Obviously, diverting cattle from feed to breeding reduces supply and increases prices in the short run.



Tar sands oil production is break-even at ~$65/barrel. As oil prices have plummeted a great deal of supply has come off-line. Though these additional supplies can be brought back online it is not without cost and delay.



If you believe that future aggregate demand will return or exceed 2007 levels one the current recession is past (I do), then commodities coudl reasonably expected to benefit.
 
[quote author="CapitalismWorks" date=1238201032]Echoing Earthbm's comments, there is significant supply destruction going on in commodity space as result of falling demand and prices. This will be costly across the complex when the global economy starts moving forward again, though that may be some ways off. Take the cattle example. In order to increase production of beef, feeder cattle must be diverted from the feed lot (and eventual slaughter) to pasture for breeding. The cycle in cattle production necessary to ramp up output is typically 8-10 years. Obviously, diverting cattle from feed to breeding reduces supply and increases prices in the short run.



Tar sands oil production is break-even at ~$65/barrel. As oil prices have plummeted a great deal of supply has come off-line. Though these additional supplies can be brought back online it is not without cost and delay.



If you believe that future aggregate demand will return or exceed 2007 levels one the current recession is past (I do), then commodities coudl reasonably expected to benefit.</blockquote>
I totally agree with you, the drop in demand is being meet with cutbacks in supply. Once demand picks back up, prices will increase for a lot of things due to those supply cutbacks. However, I don't seem demand returning to the 2005-2007 levels for a logn, long time. The savings rate increase we've seen will be here to stay for quite some time and that will keep demand from increasing too much.
 
I liked microeconomics in school. It just made sense to a numerically inclined 22-year old. The longer I live the less I seem to understand.



"once aggregate demand comes up"...



The example of cattle being slaughtered had nothing to do with demand. The drought was really that bad (it did rain in Texas a few weeks ago for the first time).



Reality is way more complicated. You can have negative growth AND inflation.



On the micro level, this has to do with fixed and variable costs. all costs are variable in the long term. (even your plant and equipment... you can chose not to pay for upkeep). A couple of generations of MBAs have been indoctrinated in the model of leveraging capital to drive variable costs to zero by expanding production and generating sales via price cuts.



The equivalent of this in the aggregate economy is that real labor compensation did not grow for the last 30 years, while capital expanded. Well, guess what, it's the return ticket now and you have to ride the Obama train all the way. So you will have labor enjoy the ever increasing share of the shrinking pie..............
 
Beef demand has been falling domestically for three of the past 4 years. Obviously there are multiple factors in the ongoing supply destruction.



http://www.agmanager.info/livestock/marketing/BeefDemand/default.aspAnnual All Fresh Retail Beef Demand Index



Annual Domestic All Fresh Beef Demand Index

1990 - 2008

% Change

Year 1990=100 1998=100 from prev yr

1990 100.0 132.0

1991 96.7 127.6 -3.3%

1992 91.3 120.5 -5.6%

1993 87.5 115.5 -4.2%

1994 86.4 114.0 -1.3%

1995 82.8 109.3 -4.1%

1996 79.3 104.6 -4.3%

1997 75.5 99.7 -4.7%

1998 75.8 100.0 0.3%

1999 77.6 102.3 2.3%

2000 79.9 105.5 3.1%

2001 81.8 108.0 2.4%

2002 84.3 111.3 3.1%

2003 84.3 111.3 0.0%

2004 91.9 121.3 9.0%

2005 88.5 116.9 -3.6%

2006 85.6 112.9 -3.4%

2007 85.8 113.2 0.2%

2008 82.6 109.0 -3.7%
 
<em>"Prices in the broader economy are not falling despite the worst recession since the 1930's because of the government's programs and the mind-boggling increase in the Federal Reserve's balance sheet. Velocity of money (spending and business transactions) has slowed due to the weakness in the economy. However, as reflected in the chart below, holdings of cash are exploding. As people in the deflation camp alter their deflationary forecasts, holders of cash will rightfully become nervous about their loss of purchasing power. As a result, the velocity of money will rise despite the weak economy - a theme quite common for highly indebted countries. To believe that there is deflation today and to assume it will continue into the future is to misunderstand the definition of inflation."</em>







<a href="http://www.safehaven.com/article-13111.htm">real deflation or inflation?</a>
 
So, what's a good inflation hedge strategy?



Buying a house is out -- they depend on financing, and interest rates will go up, so the house price won't.



Gold is out -- it relies on consensus among others that it is an inflation hedge (greater fools)
 
[quote author="earthbm" date=1240286667]So, what's a good inflation hedge strategy?



Buying a house is out -- they depend on financing, and interest rates will go up, so the house price won't.



Gold is out -- it relies on consensus among others that it is an inflation hedge (greater fools)</blockquote>


gold
 
I go for rice rather than beans and save on TP...



Now, for the remaining 99% of my personal expenditure.... I would buy gasoline, but it is too volatile.
 
[quote author="awgee" date=1240287646][quote author="earthbm" date=1240286667]So, what's a good inflation hedge strategy?



Buying a house is out -- they depend on financing, and interest rates will go up, so the house price won't.



Gold is out -- it relies on consensus among others that it is an inflation hedge (greater fools)</blockquote>


gold</blockquote>


TIPS ?
 
[quote author="irvine_grad" date=1240293587]

TIPS ?</blockquote>


inflation indexation is taxed as financial income, so for 20% inflation you pay 10% in taxes, leaving you with -10% return in real terms. This may be Ok, the cost of storage for your rice or gasoline is probably >10%.



Ammo would be a better store of value than gold, but everyone else seems to have had this ideaa already...



I just realized that the most efficient way to proceed is to define my consumption basket for the next year or two and then buy it now. And it is exactly this kind of thought process that will lead to inflation...
 
I do not like TIPS because they are indexed to the CPI. The CPI was negative, -0.5%, in the latest reporting. The CPE, which the Federal Reserve uses in it's calculations was higher than the anticipated 1.8% and was actually 2.9%, as reported today along with a negative GDP of 6.1%.





The government's calculation of CPI is absolute b------t. The government calculates it's entitlement increases based on the CPI.











A large Dr. Pepper at Jack in the Box including tax is $2.47!

A double scoop cone at Baskin Robbins including tax is $5.39!







Yield on the 10 year is 3.11%.

Geithner and Bernanke must be having a cow right about now.
 
[quote author="awgee" date=1241077279]I do not like TIPS because they are indexed to the CPI. The CPI was negative, -0.5%, in the latest reporting. The CPE, which the Federal Reserve uses in it's calculations was higher than the anticipated 1.8% and was actually 2.9%, as reported today along with a negative GDP of 6.1%.





The government's calculation of CPI is absolute b------t. The government calculates it's entitlement increases based on the CPI.











A large Dr. Pepper at Jack in the Box including tax is $2.47!

A double scoop cone at Baskin Robbins including tax is $5.39!







Yield on the 10 year is 3.11%.

Geithner and Bernanke must be having a cow right about now.</blockquote>
That's why you gotta love the $1 menu at McDonalds...small coke, small fries, and a mcdouble for $3 plus tax. Plus a 6-piece chicken mcnugget is $1.29 on tuesdays at my local one.
 
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