Inflation

Discussion of the Bond portion of the Permanent Portfolio

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Inflation

Post by ppnewbie » Thu Apr 01, 2021 12:19 am

I was out the other day and got a coffee, which I have not done in a few months because of COVID. I nearly had a mild shock when I learned the coffee cost $5.75!
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Re: Inflation

Post by mathjak107 » Thu Apr 01, 2021 2:22 am

Shortages and supply issues are not the same as monetary inflation...if we stop the over use or get more supply the prices fall right back ..look at oil,. It was almost double a deacade ago
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Re: Inflation

Post by doodle » Thu Apr 01, 2021 6:47 am

CPI data also factors in consumer substitution in response to price changes. Packing a thermos of my own coffee still costs less than a dime! Coffee on the go for me has experienced a 90% deflation!
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Re: Inflation

Post by doodle » Fri Apr 02, 2021 3:20 pm

Dr. Lacy Hunt on why all this debt will eventually lead to deflation. Take it for what it's worth...but an educated voice he certainly is. Perhaps another reason why holding all assets is a good approach in these uncertain times


https://youtu.be/UhwK0rV0JDA

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Re: Inflation

Post by doodle » Fri Apr 02, 2021 9:41 pm

Dr. Hunt expanding further and addressing the steps that would be necessary to take us from deflation to inflation...

https://www.macrovoices.com/podcast-tr ... nflation
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Re: Inflation

Post by mathjak107 » Sat Apr 03, 2021 7:24 am

If anything , inflation is far easier to break then deflation..another wave of variant covid may require even more stimulus.

Not all looks good even with the stimulus checks .

Personal income fell 7.1% in Feb , retail sales slumped 3.0%, industrial production dropped 2.2%, existing home sales dropped 6.6%, , and new orders for non-defense capital goods fell 0.8%, the first decline there since last April.

what if one of the more contagious variants takes hold. Or the easing of restrictions prompts a new surge in cases and we have to go back to more restrictive actions once again.



So the inflation fears may be over blown
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Re: Inflation

Post by doodle » Sat Apr 03, 2021 8:23 am

I don't know what part of the interview to highlight as it was full of great insights in its entirety, but basically Hunt makes the argument that you can't cure a debt bubble by increasingly taking on more debt. As long as the federal reserve act isn't altered to allow the federal reserve to directly finance government spending then we are stuck in a situation where larger and larger amounts of debt create smaller and smaller effects. Once the stimulus is withdrawn deflation sets in again. The alternative of direct financing by the Fed would cause inflation which would be destabilizing and be much worse than a slow grinding deflation according to Hunt.
Dr. Hunt: Remember, debt is an increase in current spending in exchange for a decline in future spending, unless you generate an income stream to repay the principal and interest. And we’re borrowing astronomical sums.

But the funds are going to maintain daily living needs of people to put food on the table, pay their rent. A humane activity, politically popular. But it will not generate an income stream to repay principle and interest.

And one of the key points that I’ve made for a long time is that when you use the economy’s production function, what the debt is doing is it’s triggering diminishing returns. And the production function, GDP is determined by technology interacting with the three factors of production: land, labor, and capital.

And the production function states that if you begin to overuse one of the factors of production, let’s say borrowed capital, initially the GDP will rise. But, continue to make overuse of that same factor of production, the GDP levels out. And further overuse leads to a decline in GDP.

In other words, the overuse of debt triggers a nonlinear reaction. Up GDP first, flat, then down.

And when the growth rate falls, then that pulls the inflation rate lower. This is what explains, clearly, what’s been happening.


At the end of last year, government debt was 107% of GDP, which was an all-time record. The three bills that have just recently passed – the Family First Act, the CARES Act, and then the bill just passed yesterday that provides an additional $400 billion for the Payroll Protection Plan – account for about 16% of GDP, based on last year’s GDP.

But, of course, the GDP is declining.

And in addition to that, the social security payments are going up, the unemployment payments likewise. And income tax collections are going down, both corporate and personal.

And so the government debt-to-GDP ratio by the end of the year or early next year is going to be somewhere around 125-130%.

Now, let me explain how diminishing returns is working. There is a large number of econometric studies that indicate that when government debt reaches about 50% of GDP, there is a deleterious effect on GDP.

And when it goes to 60%, the effect is more intense. There is a greater loss in growth against trend at 70%. At 90% debt to GDP, an economy loses about a third of its growth rate against trend.

We’re going into territory that we’ve never been before. But diminishing returns are at work.

And so the programs, while they are popular and certainly understandable from a humane standpoint, they are going to weigh the economy down. And the net result is that it’s going to produce very poor economic growth going forward. And that’s going to drive the inflation rate lower, not higher.

This is the path that Japan has taken in the last 30 years. Government debt-to-GDP rate has risen from 60% to 225%. And it’s been combined with all types of monetary policy manipulations as well. And the Japanese economy has become progressively weaker.

And that’s the path that we’re following.

So this is really not stimulus. It gets us by. It helps people out. It’s probably necessary, absolutely necessary. But it’s going to retard growth for a very, very long period of time.
Last edited by doodle on Sat Apr 03, 2021 10:17 am, edited 1 time in total.
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Re: Inflation

Post by doodle » Sat Apr 03, 2021 8:38 am

The more educated voices one exposes oneself to, the more one recognizes the deeper wisdom behind the permanent portfolio. The economic landscape is truly complicated and the future really is unknowable. In the short term the market is a beauty contest being judged by blind men but eventually fundamentals will win out.

While the entire market is piled on to the idea we are going to have growth and inflation, Dr. Hunt makes a very convincing argument why this just isn't the case. So far, his models have held up. I personally would be uncomfortable betting against him, yet also don't want to miss out on the gains to be had by holding stocks presently and benefitting from the momentum of the crowds.
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Re: Inflation

Post by pugchief » Sat Apr 03, 2021 2:07 pm

doodle wrote:
Sat Apr 03, 2021 8:23 am
As long as the federal reserve act isn't altered to allow the federal reserve to directly finance government spending then we are stuck in a situation where larger and larger amounts of debt create smaller and smaller effects. Once the stimulus is withdrawn deflation sets in again.
So maybe those LTTs that everyone here have been eschewing might be beneficial after all....
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Re: Inflation

Post by I Shrugged » Sat Apr 03, 2021 3:01 pm

I seem to be wired to be an inflation hawk. I tend to see inflation everywhere, but it sure looks like we are on the Japan track, and have been for some time now. I agree with doodle's sentiment that the PP does a good job at all of this. As time goes by, I spend less and less energy trying to out-think the PP.
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Re: Inflation

Post by doodle » Sat Apr 03, 2021 3:15 pm

I Shrugged wrote:
Sat Apr 03, 2021 3:01 pm
I seem to be wired to be an inflation hawk. I tend to see inflation everywhere, but it sure looks like we are on the Japan track, and have been for some time now. I agree with doodle's sentiment that the PP does a good job at all of this. As time goes by, I spend less and less energy trying to out-think the PP.
So far the inflation camp has been dead wrong for almost 15 years. They have been warning of impending inflation since the first bailout...and through subsequent trillion dollar deficits year after year we still have failed to see inflation materialize. That empirical evidence should at least cause one to perhaps reevaluate conventional wisdom

Our demographics certainly are beginning to mirror what is happening in japan....and that goes for Europe as well. Overall, the huge increases in population seen over the last 100 years are starting to taper off and even decline in some areas of the world. Combine this with the additional deflationary pressures of technology and a deeply indebted world and it seems like just the right ingredients to generate a long term deflationary trend.

Of course nothing is ever set in stone and governments in the past have shown themselves capable of debasing the currency and causing inflation. If one is honest though, at this point in the game there really isn't any way to be certain which way things will turn out.

At the moment the entire market is fixated on growth and inflation. Stocks have been on a tear and for those in the permanent portfolio I would imagine one would be getting close to a rebalancing band again especially after the good fortune to rebalance into stocks during the market crash last year. It will be interesting to see how the year continues but I'm certain that there will be a lot more volatility moving forward and opportunity to capitalize on those movements.
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Re: Inflation

Post by jalanlong » Sun Apr 04, 2021 2:15 pm

pugchief wrote:
Sat Apr 03, 2021 2:07 pm
doodle wrote:
Sat Apr 03, 2021 8:23 am
As long as the federal reserve act isn't altered to allow the federal reserve to directly finance government spending then we are stuck in a situation where larger and larger amounts of debt create smaller and smaller effects. Once the stimulus is withdrawn deflation sets in again.
So maybe those LTTs that everyone here have been eschewing might be beneficial after all....
I am not so fluent on bonds, certainly not as much as I am on stocks. Even if we do enter into a deflationary period, how much juice can you ultimately get out of long bonds that are already at 2.3% ? Stocks and gold can theoretically go to the moon but aren’t long bonds capped more or less?

Also, hasn’t our government decided as a matter of policy that they will fight deflation with every tool they have?
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Re: Inflation

Post by pugchief » Sun Apr 04, 2021 3:03 pm

jalanlong wrote:
Sun Apr 04, 2021 2:15 pm
pugchief wrote:
Sat Apr 03, 2021 2:07 pm
doodle wrote:
Sat Apr 03, 2021 8:23 am
As long as the federal reserve act isn't altered to allow the federal reserve to directly finance government spending then we are stuck in a situation where larger and larger amounts of debt create smaller and smaller effects. Once the stimulus is withdrawn deflation sets in again.
So maybe those LTTs that everyone here have been eschewing might be beneficial after all....
I am not so fluent on bonds, certainly not as much as I am on stocks. Even if we do enter into a deflationary period, how much juice can you ultimately get out of long bonds that are already at 2.3% ? Stocks and gold can theoretically go to the moon but aren’t long bonds capped more or less?

Also, hasn’t our government decided as a matter of policy that they will fight deflation with every tool they have?
You can't fight deflation very effectively. Ask Japan.
Read Tyler's piece on bond convexity. There is still a helluva lot to made in bonds if their rates continue to decline.
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Re: Inflation

Post by ppnewbie » Sun Apr 04, 2021 11:28 pm

There is a whole section in the Wall Street Journal this weekend about how housing prices are shooting up across the country.
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Re: Inflation

Post by ppnewbie » Mon Apr 05, 2021 11:04 am

mathjak107 wrote:
Thu Apr 01, 2021 2:22 am
Shortages and supply issues are not the same as monetary inflation...if we stop the over use or get more supply the prices fall right back ..look at oil,. It was almost double a deacade ago
Disagree on this point. My personal opinion is that the price will not be lowered.
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Re: Inflation

Post by tomfoolery » Mon Apr 05, 2021 1:33 pm

There hasn’t been any inflation in spite of the anti-government extremists goldbugs waiting for society to collapse so they can live out their apocalyptic fantasies of eating baked beans with an AR16 strapped to their back.

Other than a handful of areas like housing, healthcare, and food, none of my expenses have risen one iota.

I think inflation is the bogeyman that libertarians use to keep poor people poor and rich people rich.
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Re: Inflation

Post by jalanlong » Mon Apr 05, 2021 1:50 pm

tomfoolery wrote:
Mon Apr 05, 2021 1:33 pm
There hasn’t been any inflation in spite of the anti-government extremists goldbugs waiting for society to collapse so they can live out their apocalyptic fantasies of eating baked beans with an AR16 strapped to their back.

Other than a handful of areas like housing, healthcare, and food, none of my expenses have risen one iota.

I think inflation is the bogeyman that libertarians use to keep poor people poor and rich people rich.
How do you backbend into an explanation as to how the 3 things which have risen in price the most in the last 20 years, housing, college and healthcare, are the three things the government has their hands in the most?
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Re: Inflation

Post by ppnewbie » Mon Apr 05, 2021 2:02 pm

tomfoolery wrote:
Mon Apr 05, 2021 1:33 pm
There hasn’t been any inflation in spite of the anti-government extremists goldbugs waiting for society to collapse so they can live out their apocalyptic fantasies of eating baked beans with an AR16 strapped to their back.

Other than a handful of areas like housing, healthcare, and food, none of my expenses have risen one iota.

I think inflation is the bogeyman that libertarians use to keep poor people poor and rich people rich.
I called roto-rooter the other day to fix something. They were very late so I fixed it myself but kept the appointment just to be sure. They repairman came in. Looked it over and said good job and wrote me an invoice for $330.
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Re: Inflation

Post by tomfoolery » Mon Apr 05, 2021 2:52 pm

jalanlong wrote:
Mon Apr 05, 2021 1:50 pm

How do you backbend into an explanation as to how the 3 things which have risen in price the most in the last 20 years, housing, college and healthcare, are the three things the government has their hands in the most?
Just imagine how much more expensive and unattainable for the poor those three things would be if not for government programs!
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Re: Inflation

Post by pugchief » Mon Apr 05, 2021 7:50 pm

ppnewbie wrote:
Mon Apr 05, 2021 2:02 pm


I called roto-rooter the other day to fix something. They were very late so I fixed it myself but kept the appointment just to be sure. They repairman came in. Looked it over and said good job and wrote me an invoice for $330.
As Vinny would say, !!!!!!!
$330 for a service call and no repair? That's ridiculous, even for a plumber.
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Re: Inflation

Post by ppnewbie » Mon Apr 05, 2021 7:55 pm

pugchief wrote:
Mon Apr 05, 2021 7:50 pm
ppnewbie wrote:
Mon Apr 05, 2021 2:02 pm


I called roto-rooter the other day to fix something. They were very late so I fixed it myself but kept the appointment just to be sure. They repairman came in. Looked it over and said good job and wrote me an invoice for $330.
As Vinny would say, !!!!!!!
$330 for a service call and no repair? That's ridiculous, even for a plumber.
I called and complained and got it down to $185 for no repair! What a bargain.
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Re: Inflation

Post by pugchief » Mon Apr 05, 2021 7:58 pm

ppnewbie wrote:
Mon Apr 05, 2021 7:55 pm
pugchief wrote:
Mon Apr 05, 2021 7:50 pm
ppnewbie wrote:
Mon Apr 05, 2021 2:02 pm


I called roto-rooter the other day to fix something. They were very late so I fixed it myself but kept the appointment just to be sure. They repairman came in. Looked it over and said good job and wrote me an invoice for $330.
As Vinny would say, !!!!!!!
$330 for a service call and no repair? That's ridiculous, even for a plumber.
I called and complained and got it down to $185 for no repair! What a bargain.
My plumber charges $75 for a service call, plus the cost of the repair. Who knew what a bargain it was!
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Re: Inflation

Post by Kriegsspiel » Mon Apr 05, 2021 8:15 pm

I've been doing my own plumbing in my house. So far I've replaced the handle/flapper assembly in my toilet (easy), and took apart, cleaned, and reassembled the piping under the sink (took several tries to put it back together without it leaking). I also fixed my brothers sink by cutting off the top of his metal pipe and attaching a pex to it with a sharkbite (easy) before doing either of my own stuff.
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Re: Inflation

Post by ppnewbie » Mon Apr 05, 2021 8:20 pm

Kriegsspiel wrote:
Mon Apr 05, 2021 8:15 pm
I've been doing my own plumbing in my house. So far I've replaced the handle/flapper assembly in my toilet (easy), and took apart, cleaned, and reassembled the piping under the sink (took several tries to put it back together without it leaking). I also fixed my brothers sink by cutting off the top of his metal pipe and attaching a pex to it with a sharkbite (easy) before doing either of my own stuff.
Great Job.

I replaced the thermocouple on my gas hot water heater and relit the pilot but wanted to make sure my repair was safe. Youtube is a beautiful thing for howto videos.
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Re: Inflation

Post by pugchief » Mon Apr 05, 2021 8:58 pm

Kriegsspiel wrote:
Mon Apr 05, 2021 8:15 pm
I've been doing my own plumbing in my house. So far I've replaced the handle/flapper assembly in my toilet (easy), and took apart, cleaned, and reassembled the piping under the sink (took several tries to put it back together without it leaking). I also fixed my brothers sink by cutting off the top of his metal pipe and attaching a pex to it with a sharkbite (easy) before doing either of my own stuff.
I do most of my own plumbing as well. But I know my limits.
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