What kind of inflation are we experiencing?

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glennds
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What kind of inflation are we experiencing?

Post by glennds » Fri May 13, 2022 11:07 am

So according to traditional economic theory, there is:
(1) Demand-Pull inflation and;
(2) Cost-Push inflation

I can't quite settle on which we are experiencing right now. If the main issue is excess liquidity that resulted in excess consumer demand then we have #1.
If the cause is price dislocation from pandemic fallout, supply chain disruption, Ukraine war, then we have #2.

Last year when Powell was saying the inflation was transitory, I *think* the Fed was convinced we had condition #2 and with time, post-pandemic, prices and supply would sort itself out. Okay, I get it.
But then when conditions were just getting worse, they move into tightening which suggests the Fed later decided we had condition #1.

So which is it? Or do we have a combination of both? Or something else entirely?
A case can be made for both conditions. Also, I think the labor scarcity problem probably argues in favor of #1 which might have influenced the Fed's change in thinking, if a change in thinking even happened.

A sidecar question that relates directly to the PP - Does gold react differently to one type of inflation versus the other? HB's experience was with the inflation of the 1970s. If this is a different inflationary environment, might gold react differently than it did then?

Interested in others' thoughts.
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Re: What kind of inflation are we experiencing?

Post by joypog » Fri May 13, 2022 11:51 am

working in the construction industry we certainly have both. Supply chains are all gummed up and China's zero-covid policy isn't helping....but there is still plenty of liquidity in the market that wants to get shit built (though I fear how the recent shocks in the stock market might affect how things play out).
Last edited by joypog on Fri May 13, 2022 1:48 pm, edited 1 time in total.
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Re: What kind of inflation are we experiencing?

Post by mathjak107 » Fri May 13, 2022 1:43 pm

Raising interest rates will combat Monetary Inflation only and no other form of Inflation.

Raising interest rates will not stop Demand-pull Inflation -- which is what we're all experiencing -- or Cost-push Inflation -- which we're all experiencing to a lesser extent -- or Wage Inflation.

The theory is that if Monetary Inflation exists -- it is at most 2% presently....the rest is Demand-pull and Cost-push Inflation -- then any combination of raising interest rates and/or decreasing money supply and/or raising taxes and/or cutting government spending will reduce Monetary Inflation...but not not Demand-pull Inflation, Cost-push Inflation or Wage Inflation.

Think Super Bowl tickets. That is an example of Demand-pull Inflation.

The Supply of Tickets is fixed. There's an initial Demand level that sets the initial price of tickets, and that price is higher than pre-season, regular season, and post-season game tickets.

But, Demand is so extraordinarily high that people can get 2x, 3x, 5x, and even 10x face-value.

That's classic Demand-pull Inflation.

If the Federal Reserve raises interest rates, what happens?

Nothing happens very slowly. It has no effect whatsoever on either the Supply of Tickets or the Demand for Tickets.

Let's look at something closer to home: oil prices.

Oil prices rise because Demand exceeds Supply.

Raising interest rates will have ZERO effect on oil prices, but then how could they?

I mean, how could US interest rates or taxes even remotely effect the Supply of Brent Blend, which is a North Sea crude oil and one of the global benchmark oils?

It's really important to understand the differences and economists are the worst and being clear about those differences.

When economists say Demand for Oil increased what they really mean to say is that the Demand Curve shifted to the right and not that the quantity demanded increased or decreased because of a change in price. Price increases or decreases due to changes in prices are reflected by Demand Schedules and Supply Schedules.

Those are two totally different animals.

You should know that twice in our history the Federal Reserve stupidly crashed the economy because they raised interest rates in a futile attempt to combat Demand-pull Inflation.

The first time was the 1952-53 Recession.

Rationing ended in October 1949 and the Korean War started June 1950.

Panicked households, businesses and industries started hoarding anything and everything, including the kitchen sink, because they thought the government would start rationing again and nobody wanted to suffer through that...again.

Housewives were buying shopping carts loaded with sugar, flour, salt, butter and all the things that were rationed during WW II and the post-WW II years.

Business and industry was hoarding metals, minerals, rubber, gasoline, diesel, petroleum lubricants and everything else just in case.

Monetary Inflation was 1.3% but Demand-pull Inflation was 10+%.

Even dumber is the Federal Reserve crashed the economy but Demand-pull Inflation was rampant up until the latter part of 1952.
Last edited by mathjak107 on Fri May 13, 2022 1:55 pm, edited 1 time in total.
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Re: What kind of inflation are we experiencing?

Post by dockinGA » Fri May 13, 2022 1:46 pm

joypog wrote:
Fri May 13, 2022 11:51 am
working in the constructin industry we certainly have both. Supply chains are all gummed up and China's zero-covid policy isn't helping....but there is still plenty of liquidity in the market that wants to get shit built (though I fear how the recent shocks in the stock market might affect how things play out).
I was also going to reply both, coming from someone with experience in US manufacturing industry. The fact that we have both probably explains why inflation is so high (a sort of perfect storm).
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Re: What kind of inflation are we experiencing?

Post by glennds » Sat May 14, 2022 10:53 am

mathjak107 wrote:
Fri May 13, 2022 1:43 pm

The theory is that if Monetary Inflation exists -- it is at most 2% presently....the rest is Demand-pull and Cost-push Inflation -- then any combination of raising interest rates and/or decreasing money supply and/or raising taxes and/or cutting government spending will reduce Monetary Inflation...but not not Demand-pull Inflation, Cost-push Inflation or Wage Inflation.

Thanks for the discussion Mathjak. I'm not in a position to argue with anything you're saying. I posted the original questions in the hope of understanding the distinctions better. That's what discussion forums are for. So to that end:

1. If raising interest rates, tightening money supply and fiscal policy changes will have no effect on Demand-pull, Cost-push or wage inflation, AND if monetary inflation is at most 2%, then why is the Fed tightening and raising interest rates?

2. What type(s) of inflation happened in the 1970s and why did significant increases in interest rates stop it? Or did it?

3. Would you say Wage Inflation is a subset of Cost-push Inflation?

4. If our measure of inflation is price indexes, then how do we distinguish how much of our present inflation is Cost-push vs Demand-pull? It could be 50/50, 80/20 or any other mix.

5. What would happen if the type of inflation we have right now is indeed mostly transitory (let's say pandemic fallout, Ukraine war, etc)? And as such increases in interest rates are not affecting it, but it eventually comes down naturally. But in the meantime the Fed has tightened, and increased interest rates. So we end up with normalized inflation, maybe even deflation, and an excessively cooled, maybe stagnant economy.
So now what? Does the Fed start reducing interest rates?
These are important questions and they speak to why it may be unwise to write off certain asset classes like bonds.

Thanks again,
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Re: What kind of inflation are we experiencing?

Post by Kbg » Mon May 16, 2022 8:25 am

I prefer and think it more usefully descriptive...

Inflation = Increasing money supply + scarcity

Demand pull and cost push are more the mechanics than the underlying reasons. The above also cuts through a ton of BS you read. For example, people asserting the Fed's actions in 2008 until just recently were going to cause inflation. No scarcity = no inflation.

Lastly, in my view the scarcity part of the equation is far more important in figuring out if one is going to have inflation than the monetary part.

Joypog's construction industry example exemplifies what I'm saying...the real problem is the supply chains are gummed up not that there is too much money floating around.
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Re: What kind of inflation are we experiencing?

Post by Kevin K. » Mon May 16, 2022 11:37 am

Good article in the WaPo today that places blame for the current inflation mess where it belongs, IMHO:

https://www.washingtonpost.com/opinions ... on-easing/
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Re: What kind of inflation are we experiencing?

Post by Pointedstick » Wed May 18, 2022 8:36 am

Kbg wrote:
Mon May 16, 2022 8:25 am
I prefer and think it more usefully descriptive...

Inflation = Increasing money supply + scarcity

Demand pull and cost push are more the mechanics than the underlying reasons. The above also cuts through a ton of BS you read. For example, people asserting the Fed's actions in 2008 until just recently were going to cause inflation. No scarcity = no inflation.

Lastly, in my view the scarcity part of the equation is far more important in figuring out if one is going to have inflation than the monetary part.

Joypog's construction industry example exemplifies what I'm saying...the real problem is the supply chains are gummed up not that there is too much money floating around.
Pretty much this. It's a combination of both.

If the money supply increases to generate more demand, but the supply of goods and services can rise quickly to keep up because there was a lot of extra unused capacity, there's no real inflation.

In this case we have a lot of new money from pandemic-era bailouts, direct payments, and savings, and they're chasing a supply of goods that's not able to increase fast enough, or at all. The reasons for this are interesting and varied. Some of it is China's ongoing lockdowns, which dampen supply because the world largely moved its manufacturing there, so what happens where affects everyone. Some of it is idled factories and productive capacity outside of China during the pandemic that takes a lot of time to spin back up. Some of it is caused by commodity price shocks, like oil and food prices logically shooting up as a result of the war in Ukraine. Some of it is caused by hiring difficulties due to labor's better bargaining position now and some residual hesitation about going back to work during even the tail end of the pandemic. Some of it is due to raw material constraints, e.g. a huge surge in demand for EVs due to high gas prices, which can't be met because car-makers mis-forecast demand and can't spin up quickly due to bottlenecks and insufficient capacity in the industrial lithium market.

Lots of interesting things happening all at once as the world un-snarls from 2 years of misery.

I don't expect this to last that long though. These things have a way of working themselves out. Economic incentives still function.
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Re: What kind of inflation are we experiencing?

Post by Kbg » Wed May 18, 2022 9:38 am

Not talked about as much...but scarcity of labor is a significant factor I think as well. It has been a really long time since business has had to "pay up" for workers and the fact that unions are getting any traction at all suggests a tight labor market.

P.S. It's good to have PS back and posting a bit.
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Re: What kind of inflation are we experiencing?

Post by glennds » Wed May 18, 2022 8:54 pm

Pointedstick wrote:
Wed May 18, 2022 8:36 am

In this case we have a lot of new money from pandemic-era bailouts, direct payments, and savings, and they're chasing a supply of goods that's not able to increase fast enough, or at all. The reasons for this are interesting and varied. Some of it is China's ongoing lockdowns, which dampen supply because the world largely moved its manufacturing there, so what happens where affects everyone. Some of it is idled factories and productive capacity outside of China during the pandemic that takes a lot of time to spin back up. Some of it is caused by commodity price shocks, like oil and food prices logically shooting up as a result of the war in Ukraine. Some of it is caused by hiring difficulties due to labor's better bargaining position now and some residual hesitation about going back to work during even the tail end of the pandemic. Some of it is due to raw material constraints, e.g. a huge surge in demand for EVs due to high gas prices, which can't be met because car-makers mis-forecast demand and can't spin up quickly due to bottlenecks and insufficient capacity in the industrial lithium market.

Lots of interesting things happening all at once as the world un-snarls from 2 years of misery.

I don't expect this to last that long though. These things have a way of working themselves out. Economic incentives still function.
Very good dissection, thanks for sharing.
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Re: What kind of inflation are we experiencing?

Post by glennds » Thu May 19, 2022 10:22 am

Desert wrote:
Thu May 19, 2022 9:17 am


It may be possible that a low inflation environment can't coexist with near full employment.
Ironic that when all is said and done, these are the two goals of the Fed.
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Re: What kind of inflation are we experiencing?

Post by glennds » Thu May 19, 2022 10:38 am

glennds wrote:
Wed May 18, 2022 8:54 pm
Pointedstick wrote:
Wed May 18, 2022 8:36 am

In this case we have a lot of new money from pandemic-era bailouts, direct payments, and savings, and they're chasing a supply of goods that's not able to increase fast enough, or at all. The reasons for this are interesting and varied. Some of it is China's ongoing lockdowns, which dampen supply because the world largely moved its manufacturing there, so what happens where affects everyone. Some of it is idled factories and productive capacity outside of China during the pandemic that takes a lot of time to spin back up. Some of it is caused by commodity price shocks, like oil and food prices logically shooting up as a result of the war in Ukraine. Some of it is caused by hiring difficulties due to labor's better bargaining position now and some residual hesitation about going back to work during even the tail end of the pandemic. Some of it is due to raw material constraints, e.g. a huge surge in demand for EVs due to high gas prices, which can't be met because car-makers mis-forecast demand and can't spin up quickly due to bottlenecks and insufficient capacity in the industrial lithium market.

Lots of interesting things happening all at once as the world un-snarls from 2 years of misery.

I don't expect this to last that long though. These things have a way of working themselves out. Economic incentives still function.
Very good dissection, thanks for sharing.
Been giving this some thought. It looks to me like the Fed agreed with you about things working themselves out on the supply side. For several months they took the position that inflation was transitory. If this proved correct, then it was a function of time, and this much tightening should not have been necessary on the demand side. But they got backed into a corner by (i) passage of time (ii) public pressure as inflation continued to rise.

So if your (and the Fed's early) thesis is correct, and things do ultimately work themselves out on the supply side, AND in the meanwhile the Fed has reduced demand, then what do we have?
An induced economic recession? Or simply a deflationary (but not recessionary) environment? And should the latter be the case for why bonds shouldn't be counted out just yet? I ask because right now it seems like everyone has given bonds up for dead.
It's a high wire act for the Fed.
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Re: What kind of inflation are we experiencing?

Post by joypog » Thu May 19, 2022 11:05 am

glennds wrote:
Thu May 19, 2022 10:38 am
It's a high wire act for the Fed.
When I was younger I'd say "love to have their problems".

Now I'm like "don't need those headaches".
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Re: What kind of inflation are we experiencing?

Post by Kbg » Thu May 19, 2022 11:56 am

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Re: What kind of inflation are we experiencing?

Post by joypog » Thu May 19, 2022 2:35 pm

the moontower piece was long...and barely comprhenisble to a noob like me. If anything, it basically says things can go in a lot of ways, just as HB claimed by designing the PP.

But his "thoughts for new grads" is a great post. Thanks for the reference.
https://moontowermeta.com/thoughts-for-new-grads/
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Re: What kind of inflation are we experiencing?

Post by Kbg » Thu May 19, 2022 4:38 pm

Simple summary...the days of everything cheap due to Chinese labor/manufacturing/and just in time supply chains are over
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Re: What kind of inflation are we experiencing?

Post by joypog » Thu May 19, 2022 5:05 pm

Kbg wrote:
Thu May 19, 2022 4:38 pm
Simple summary...the days of everything cheap due to Chinese labor/manufacturing/and just in time supply chains are over
So that sounds like an inflation prediction?
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Re: What kind of inflation are we experiencing?

Post by jhogue » Fri May 20, 2022 8:22 am

Kbg wrote:
Thu May 19, 2022 4:38 pm
Simple summary...the days of everything cheap due to Chinese labor/manufacturing/and just in time supply chains are over
The average American consumer would say they are experiencing inflation at the gas pump, food at the grocery store, and rent in their neighborhood. Does all that have much to do with Chinese labor/manufacturing?
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: What kind of inflation are we experiencing?

Post by Pointedstick » Sat May 21, 2022 8:33 pm

Desert wrote:
Thu May 19, 2022 9:17 am
It may be possible that a low inflation environment can't coexist with near full employment.
Mainstream economic theories posit pretty much exactly that. It's why the Fed's stated job to optimize both is whimsy and in practice they end optimizing for one or the other because you can't really have both. I would agree with you that that's what we're seeing right now.

My kids' school transportation system is totally snarled right now due to a bus driver shortage. Up until recently there was enough supply of people willing to drive a bus for $10 an hour. Even during the height of the COVID pandemic when nobody was vaccinated and this unpleasant job was more dangerous, there were enough bus drivers. But suddenly, inflation picks up and workers get a better bargaining position and now there aren't enough bus drivers! Evidently driving that bus for $10 an hour didn't look so attractive anymore once there was a huge spike in demand for labor and other employers started to offer sweeter deals. So the school district raised the hourly wage to $12: still a shortage. $14: still a shortage. $16: better, but still a shortage! They're now up to $18 and still shuffling buses around due to a lack of drivers. Every month the sticker on the back of the bus advertising the hourly wage has a new one slapped on top of it with a higher number! We may end up with bus drivers making $25 an hour before all is said and done.

It seems quite clear that this dynamic is driven by being close to full employment; those prospective bus drivers have a lot more options for less unpleasant work at higher wages now. But it sure is a good time to be someone who was driving that bus for $10 an hour last year, that's for sure. They've gotten an 80% pay raise if they kept the job.

Of course in retrospect, $10 an hour to operate a large and dangerous vehicle carrying precious, irreplaceable cargo that treats you with disrespect seems like a joke. That's not a livable wage for an average person (not a FIRE/ERE person) even if it were a full-time job, which it's not. The implication here is that low inflation comes at the price of the immiseration of those doing unpleasant jobs.

An interesting trend is towards school bus electrification. This is practically a no-brainer, and it's already happening across the country. School buses are driven in a way that is 100% compatible with maximum efficiency for an EV, and cost drastically less to maintain and "fuel". They are quiet and don't belch nasty engine exhaust into your kids' faces. With such huge batteries, they could even rent out their electrical capacity to stabilize the grid during hours of peak demand, if they have vehicle-to-grid hardware and a utility with such a market set up. Such vehicles cost more upfront but fleet vehicles recoup higher purchase prices very quickly if they have lower fuel and maintenance costs. So here too we are seeing the same shift seen across the entire economy for 200 years towards higher-wage workers operating more efficient machinery. Eventually the total cost of school transportation may come down again due to the costs being distributed differently: more money paid to drivers, less to mechanics and fossil fuel companies. But while that shift is in the middle of taking place, we have more expensive drivers operating vehicles whose fuel and maintenance cost a lot money, so the total price rises and boom, inflation.
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Re: What kind of inflation are we experiencing?

Post by Pointedstick » Sun May 22, 2022 9:52 am

Another thing to keep in mind is that economies are truly global now. The whole world is experiencing inflation, not just the US. We can't really blame the Fed or Biden or congress because every country is seeing the same simultaneous inflationary pressures of higher demand and lower supply. The market factors causing these pressures are global, not national. Labor markets are still fairly local, and that's what individual governments have some control over, but there too, we see the same trend of high employment causing rising wages worldwide. National governments will try to address this in their own ways, but really there's very little they can do about geopolitical and foreign economic factors out of their control.

If there are any world leaders most responsible for the current moment of inflation though, they would be Putin and Jinping. Putin for starting a war that caused grain and fossil fuel prices to skyrocket, and Jinping for his face-saving "zero COVID" policy of total lockdown in the heart of the world's manufacturing supercities. Both of these political decisions have significantly reduced the supply of goods and fuels for which the whole world is experiencing a spike in demand now that we're coming off the pandemic and everyone is flush with bailout money.
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Re: What kind of inflation are we experiencing?

Post by Vil » Sun May 22, 2022 11:24 am

Pointedstick wrote:
Sun May 22, 2022 9:52 am
The whole world is experiencing inflation, not just the US.
Yes, you are definitely not alone. The euro area annual inflation rate was 7.4% in April 2022, a year earlier, the rate was 1.6%. European Union annual inflation was 8.1% in April 2022, up from 7.8% in March. A year earlier, the rate was 2.0%. These figures are published by Eurostat, the statistical office of the European Union.
The lowest annual rates were registered in France, Malta (both 5.4%) and Finland (5.8%). The highest annual rates were recorded in Estonia (19.1%), Lithuania (16.6%) and Czechia (13.2%). Compared with March, annual inflation fell in three Member States, remained stable in two and rose in twenty-two.Where I live, we enjoy a gut-wrenching 12.1%, expectations are that by end of May it would get close to 17%.
According to the same report:
In April, the highest contribution to the annual euro area inflation rate came from energy (+3.70 percentage points, pp), followed by services (+1.38 pp), food, alcohol & tobacco (+1.35 pp) and non-energy industrial goods (+1.02 pp).


So, US-fellows, as Liverpool fans use to sing - "You will never walk alone" ... Here the exact numbers:
IR_042022.jpg
IR_042022.jpg (77.19 KiB) Viewed 3466 times
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Re: What kind of inflation are we experiencing?

Post by joypog » Sun May 22, 2022 2:37 pm

19.1% Oh shit...I'd hate to be an estonian.

Vil wrote:
Sun May 22, 2022 11:24 am
So, US-fellows, as Liverpool fans use to sing - "You will never walk alone" ... Here the exact numbers:
And this podcast is well worth checking out (a bit precious as NPR casts are wont to do, but still very good).
https://www.wnycstudios.org/podcasts/an ... erzy-dudek
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Re: What kind of inflation are we experiencing?

Post by Kbg » Mon May 23, 2022 11:27 am

jhogue wrote:
Fri May 20, 2022 8:22 am
Kbg wrote:
Thu May 19, 2022 4:38 pm
Simple summary...the days of everything cheap due to Chinese labor/manufacturing/and just in time supply chains are over
The average American consumer would say they are experiencing inflation at the gas pump, food at the grocery store, and rent in their neighborhood. Does all that have much to do with Chinese labor/manufacturing?
Nothing...that wasn't the point I was making nor the original author.

However, just in time manufacturing is one of the significant reasons why we are in the state we are and impact 2 of your items and I think a case could be made for oil as well. Inventory as a concept (literally) became a bad thing vs. a means to stock surplus in order to provide a buffer for unseen/unknown risks. Currently, we are finding out what it is like to live in a world where there is very little buffer. Accordingly, even small negative/unforeseen things can have large impacts.

Weird side note: I was in an academic program about 20 years ago where I had the opportunity to thoroughly study "systems theory." I was not looking forward to it at all but it ended up being pretty fascinating stuff really. When you get into complexity theory there is a basic tenant that the more complex something is the harder it crashes when it goes off the rails. I think we are seeing the former logistics/supply system(s) going off the rails at least to a degree.

In systems theory there is a generalized tradeoff...efficiency or robustness (less prone to systemic failure). It's not an either or thing but generally you optimize one at the cost of the other. One of the two isn't necessarily better or worse than the other either. It is simply a tradeoff

So back to the specifics of the post...globally, business optimized for efficiency of which a benefit is lower cost. The downside is what we are seeing now. If anyone is tracking the baby milk formula problem a lot of on the right media is focusing on government screw ups that exacerbated things...and that is all true (so far as I know). To me though, the real question and fundamental problem is...why are there so few baby milk manufacturers in the USA.

Or my favorite pet rock...why does a fundamentally maritime nation not build it's own commercial shipping anymore? Low cost is not everything.
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Re: What kind of inflation are we experiencing?

Post by joypog » Mon May 23, 2022 1:21 pm

Kbg wrote:
Mon May 23, 2022 11:27 am
Or my favorite pet rock...why does a fundamentally maritime nation not build it's own commercial shipping anymore? Low cost is not everything.
When we were the global solo-power you could argue we did....

(beyond that I completely agree with your concerns about slack. On a personal productivity level I've always wanted to be only 85-90 percent topped up, otherwise any hiccup really screws things up. Of course in a salary world, the bosses are fine with keeping me at 110% capacity...which is why I would eventually move on to another company and they'd end up with 0%)
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Re: What kind of inflation are we experiencing?

Post by Tyler » Fri May 27, 2022 3:52 pm

I thought you guys might enjoy this one:

Proven Ways to Protect Your Portfolio From Inflation

Spoiler alert -- Harry Browne knew what he was doing. 8)
Last edited by Tyler on Fri May 27, 2022 9:34 pm, edited 2 times in total.
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