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Topic: Is an Inflation 'Bomb' Detonating?
Posts: 17199
Location: Cairns, Queensland

Politics aside because boring, is a large global inflation event happening right now?

- Supply chain disruption worldwide causing shortages of s*** to sell.
- Labor shortages in western service based economies.
- China's electricity issues to continue into 2023 because face.
- Western countries awash with cash minted by the governments as a buffer against the whole virus thing.

I'm noticing big gains in crypto lately and while this is nice and all I wonder how much of that is inflation-driven with money floating around. Also anecdotally my BRZ basically doubled it's carsales list price between 2019 and now. Again nice, but is it real money?

If we are in the middle of an inflation tsunami, what's the best course of action for the man on the street?
Posts: 2219
Location: Canberra, Australian Capital Territory

Some excellent insights, I look forward to this thread not becoming hot wet garbage as we discuss this further.

I am no economist, and as someone who recently played Russian roulette with the housing market, I’m split.
On one hand I’d really like to see some things change (like the housing market in Australia) and concede that it’s a really good time to sell a car, reliable or not.
Posts: 40200
Location: Other International

Most of the the economists I read are calling this transitory inflation and have lots of data to back it up (including just this morning some stuff from US Fed Chair showing no indicators of a wage/price spiral in the US at least).

Supply chain stuff is a big deal. I am working in logistics at the moment so have a front row seat to what is going on. The experts I work with predict this will continue through next year so the pressure of freight pricing will continue to have inflationary impact on pricing for stuff we import (i.e., literally everything). Planet Money has done a bunch of interesting podcasts on this, including this recent one about the bullwhip effect, which describes one of the interesting phenomenons in supply chain stuff.

There is some guessing that once the supply chain stuff starts resolving, it will happen very quickly and there will be a massive oversupply of both capacity and stuff - there was even some speculation that this could be so severe as to be /deflationary/. There are a lot of people working to try to resolve these issues, including really weird things like mass production of containers to try to deal with the container shortage.

Again, another excellent Planet Money episode looking at the container shortage problem in the US, which is so severe that they're sending empty containers back to China as fast as possible so they can be filled up with crap and then brought back to the US - denying US exporters the chance to get their stuff on a ship.

The labour shortages are real and a problem. Worth remembering that something like 1 in 500 Americans have died of COVID (and that number is getting worse, not better). Seems a lot of people have opted out of more risky working environments if they can get anything better.

Assuming a BRZ is a car, there are many stories of people who bought cars in the last couple years now able to sell them for more than what they bought them from. If that's not a sign we're living in the Upside Down I don't know what is. Car shortages are of course a problem of supply chain issues as well, in distribution & issues with chip supply and all sorts of other things (Just In Time planning falling apart in several cases).

The main lever feds have against inflation - the big red RAISE INTEREST RATES button - does not seem in danger of being pressed any time soon.

Can't recommend NPR's Planet Money and Indicator podcasts enough; they have basically been invaluable for me in the last few years to learn more about economics, particularly macro stuff in an engaging and approachable way. Has a US focus but still a lot of global stuff.
Posts: 41580
Location: Brisbane, Queensland
dont forget HUGE GAINZ in property prices.

Posts: 40201
Location: Other International

The property situation is f***in mind blowing but, at least in Australia, probably hasn't contributed too much justttttt yet. Most people, especially in the last ~year or so, should have only been given mortgages if they could afford the repayments with a little bit of headroom (thanks to banking reforms) and there hasn't been much interest rate pressure with everything still being at record lows.

The true challenge is going to be if (when) the Reserve decides to kick up interest rates and applies pressure to those people that do not have enough margin. In theory this could lead to a bloodbath in the property markets as many are forced to sell or downsize.

In the possible event Labor get in and in the staggeringly unlikely event they try to do anything with negative gearing it would be chaos.

I reckon there is zero chance of this happening; no Australian government will f*** with the housing market. I believe government (regardless of who is in power) will open wide the borders and let in a million new immigrants to keep pressure on housing prices before they let the market fall significantly. The curse of being a vast empty country and having clueless politicians who want to just cram everyone into the same few cities.
Posts: 17200
Location: Cairns, Queensland

Most of the the economists I read are calling this transitory inflation and have lots of data to back it up

Yeh, not sure anyone notable is claiming long-term structural inflation rather than an event, thought that was pretty clear in the OP.

So the questions (for me anyway) are how massive is the inflation; how long will it last; and is a correctional (deflation? stagflation? flat growth?) period expected to follow?

Edit: Australian property market does not seem especially resistant, the pandemic era has brought the biggest surge in prices for 30 years according to the ABC?

Posts: 41581
Location: Brisbane, Queensland
im rich selling my house now vs what i paid for it*

*unless of course i want to buy another house to live in.
Posts: 17201
Location: Cairns, Queensland

You could buy a flash house in Aurukun though!
Posts: 41582
Location: Brisbane, Queensland
i still have a lot to give society.

maybe when i can buy a caravan and live in that.
Posts: 24846
Location: Brisbane, Queensland

The US Federal Reserve and US govt together injected over $5 trillion dollars during the last 2 years.

This was intended to offset a fall in the velocity of money caused by the COVID19 pandemic.

All other major central banks have been doing a variety stimulatory activity through
- zero and negative interests rates
- central bank bond buying
- yield curve control
- quantitative easing
- lowering of bank capital borrowing requirements.

This has caused an epic rally in equity markets and a fall in the yields of ALL major asset classes: real estate being the prime example, see also junk bonds. Only just at the last Fed meeting has there been confirmation of tapering the Fed's bond buying program however no talk of increases in interest rates. Some minor economies have raised rates slightly but I think this will be temporary - see below.

The next problem is that because central banks and governments (particularly US, EU and Japan) have loaded themselves up with extreme amounts pf public debt, with no possible way of ever repaying this debt, the only way they can manage an exit from the situation is via a controlled demolition of their currencies, through a protracted period of moderate inflation. 10 years of 5% inflation would devalue a currency by 72% and solve the public debt problem (while stealing further massive amounts from the poor to deliver to the rich - just what the politicians and elites want).

The only problem with long term persistent inflation is that the public eventually wiseup and the toothpaste cannot be put back in the tube.

Velocity from economic activity picks up, the excess liquidity cannot be taken back by central banks for fear of stalling the recovery, M2 x velocity causes a hyperinflation bomb. It will happen slowly and then very quickly.

How to protect yourself?: borrow a lot of money right now and buy assets of any kind (crypto, gold, real estate, equities).

Retirees, pensioners, savers will be annihilated.
Posts: 41583
Location: Brisbane, Queensland
what about my super? how is that going to go?

Posts: 40202
Location: Other International

The only problem with long term persistent inflation is that the public eventually wiseup and the toothpaste cannot be put back in the tube.
"long term, persistent inflation" is how modern economies are designed to operate - unless you are saying long term, persistently INCREASING inflation, which is a different thing?
Edit: Australian property market does not seem especially resistant
I meant that it is (currently) largely de-coupled from inflation concerns. Property prices are up because of all the free money that has been pumped into the system combined with low interest rates combined with massive FOMO on behalf of every Australian that is now terrified they will never be able to buy a home if they don't do it RIGHT NOW TODAY (largely courtesy of those most vile of leeches, real estate agents, and their unwitting helpers, the media).

I think the problem is going to be if interest rates DO go up, then ironically we might see even more inflation - the cost of living will go up for most people, so it seems more likely that prices will go up to try to fix this before we see people desperate to offload their houses.

10 years of 5% inflation would devalue a currency by 72% a
how did you do this maths? I get less than 40%. Still a lot. But I've seen noone projecting 5% inflation for 10 years.
Posts: 24847
Location: Brisbane, Queensland

what about my super? how is that going to go?

super will be fine generally because they are mostly invested in equities, bonds and property trusts so will track these outcomes

But I've seen noone projecting 5% inflation for 10 years.

Major governments NEED to do it otherwise their public debt will suffocate their economies, just like japan has stagnated for the last 20 years with suppressed bond yields. Governments need to inflate away their public debt.

Suppression of interest rates will inevitably result in inflation because the cash becomes worth less than the asset. Cash is trash. The best real world example is residential housing yields that used to be 5% are now 3.5%. And that is why real estate is so much more expensive in the major capital cities.

I am buying commercial and residential real estate at the moment and the prices are far higher than I would normally accept but the train is about to leave the station.
Posts: 40203
Location: Other International

so your position is that we'll see a new inflation target set at 5%? or are you saying they need to do it but won't?
Posts: 24848
Location: Brisbane, Queensland

ever since 2008 GFC, major economies have been trying desperately to generate inflation to combat the deflationary impact of technology and China's rise as an industrial superpower with a suppressed currency.

America tried Quantitative Easing, Japan tried bond yield suppression and eventually government intervention in ETFs and equities, and the EU negative bond yields.

None of this has worked and actually made the rich richer and poor poorer.

Now governments have hit the final frontier: uncontrolled fiscal expenditure: Modern Monetary Theory. Government expenditure is only constrained by avoiding inflation. This means Massive monetary stimulus payments, incentives not to work, giant new social expenditure programs. All intended to immediately increase demand for services and thus demand for labour. Once full employment is reached, inflation will follow as demands for wage increases take off.

The worldwide shipping blockages are a result of labour shortages in freight and dock workers. They have been paid primarily in America not to work or their eviction mortarium means there is no hurry to pay the rent, thus no need to go of benefits.

so your position is that we'll see a new inflation target set at 5%? or are you saying they need to do it but won't?

No government will admit they want you to lose 5% of your savings/wages every year. they will just go ahead and do it. governments don't give a s*** about people - the only purpose is power.
Posts: 40204
Location: Other International

they will just go ahead and do it.
do what
Posts: 24849
Location: Brisbane, Queensland

implement massive fiscal expenditure without increasing interest rates. "running the economy hot"
Posts: 17202
Location: Cairns, Queensland

Posts: 936
Location: Sydney, New South Wales

Weimar Germany hyperinflation was transitory too.
Posts: 353
Location: Brisbane, Queensland
I know Trog already said it, but the whole world relies on inflationary pressures.

Having more is what drives consumerism, and to a large extent helps us maintain order through having some clearly defined version of what success looks like in a material world.

Also, there's lots to consider when reading and learning about it. I tend to think much of the hyperbole written about inflation being bad (whether it be housing inflation, cost of goods inflation or other) comes from a position of wanting; while the inflation is good talk usually comes from a position of maintaining. Once you follow one path, it's difficult to find comparative viewpoints, but they are worth uncovering, imho - if for nothing else than to understand others views....
Posts: 24850
Location: Brisbane, Queensland

The US just recorded 6.2% annual inflation overnight. Is that transitory? We will find out in the next two months when people are about to get a rude shock how much their Thanksgiving and Christmas celebrations cost.
Posts: 40205
Location: Other International

I dunno man but I woke up this morning and it was 17 degrees celcius in the middle of November. Is an ice age coming?

You can sell a car you bought a year ago for more than you paid for it. Are cars a good investment now?

Most of the economists seem to be saying it is transitory and they back this up with varying levels of evidence - for whatever that is worth. (I tend to view economists as historians - they're basically only accurate after s*** has already happened and then can look for justifications.

There are so many confounding factors at the moment (e.g., UK -> Brexit -> no EU lorry drivers -> supply chain issues -> literally no food on shelves -> higher prices) I don't feel anyone really knows. But it feels like advocating buying into well-acknowledged massive asset bubbles might not be a sound strategy when you can wait a little bit and see how transitory it is.

Also: not sure if inflation in the UK is the same as inflation here. Does anyone care about inflation in the UK? (I mean, I do, because I still have a ton of money in pounds.)

I'd also note:
- it's not hyperinflation
- still waiting on an explanation for your maths?
- as usual I disagree with almost everything you say on the political aspects of it but not going to address any of that stuff
Posts: 24851
Location: Brisbane, Queensland

- still waiting on an explanation for your maths?

10 years of inflation at 5% is 62% depreciation in purchasing power- my mistake. that is a terrible outcome for savers, an excellent outcome for borrowers, and the required outcome for governments.

it's not like this is a new trick. inflation has been on hiatus since 2008, but steady inflation has been the default in the post WW2 economy. it gets disguised by various statistical tricks, like removing residential housing from the measurement. the government doesn't want the people to know about their secret 5% per annum tax.

It's not hyperinflation in the traditional sense of the term. But for a whole generation of people who have no experience with inflation at all, 5% per annum is a brand new world. They have to adjust their thinking to pre-empting the inflationary effect. This will cause more pressure in asset prices, wages and consumer prices as Gen Y/ Millennials seek to get on the front foot.
Posts: 40206
Location: Other International

This will cause more pressure in asset prices, wages and consumer prices as Gen Y/ Millennials seek to get on the front foot.
Definitely happening in housing. We are trying to buy (like every other a****** idiot at the moment) and I am astonished by the number of people that seem to be half my age looking at houses in the same price bracket as me.

Either young people make wayyy more money than I think, or they are simply willing to sign up for a huge amount of debt at an early age
ut for a whole generation of people who have no experience with inflation at all, 5% per annum is a brand new world.
I would also note many of these people have no experience with anything other than record low interest rates. the idea that interest rates might pop up significantly if inflation sticks around and impact their mortgage repayments is, I think, massively under-represented in a lot of the dialogue.

I still remember getting 8-9% on term deposits in ~2008 while the GFC was happening
Posts: 16

I would like to point out a little history.
The current huge prices for housing also reflect the huge interest rates people paid to get their houses in the past.
I bought my house in 1980 and paid 14.5% (variable) for most of the loan period to Australia's biggest bank.

Also Australia's CURRENT inflation is around 2.1% and I do not live in America.

P.S. Always a big fan of yours trog. Thanks for ALL the fish!
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