1/24/2011 2:56 PM ET|
10 reasons to love rising prices
We fretted about deflation, and now we are worried about what to do about its remedy, inflation. Maybe we should embrace it.
Friends, readers and consumers, save me your jeers. I come to praise inflation, not to bury it.
I think inflation is getting a bum rap. In the U.S. anyway. Sure, runaway inflation in China and Brazil and India looks like it's going to cause a lot of pain to consumers -- a 70% rise in the price of onions in India? (For more on soaring food prices, see my recent column.) It's also beating up investors -- a 20% correction in Chinese stocks? (I wrote another recent column about the dangers of inflation overseas.)
But back here in the United States? Bring it on. We need inflation. We should open our arms and hug it to our chest like a long-lost friend. Remember that just a few months ago we (well, the Federal Reserve mostly), were begging for the return of inflation to save us from that ol' economy-wrecker, deflation. And now we want to crush it, stomp on it like a bug? What kind of welcome back is that to our old friend?
Inflation in 2010 measured by the headline Consumer Price Index ran at a 1.5% annual rate. Core inflation, which omits increases in energy and fuel costs, came in at just 0.8%. That's the lowest core rate since the beginning of the index. Those are, of course, the government official numbers, which many folks, including yours truly, believe understate inflation. But let's not get sidetracked.
So, in an effort to save one of our country's longest and most important relationships I offer this reminder: 10 reasons why we -- in the United States -- should love inflation:
- Inflation keeps deflation from the door. Deflation can kill an economy (just ask the Japanese). With prices going lower every day, consumers have constant pressure to put off purchases because "it will be cheaper tomorrow." This is no way to run a modern consumer economy. Even the Chinese know it's a bad idea to discourage consumer spending. That's why savings accounts in China pay a negative real interest rate. Every yuan you save today is worth less tomorrow.
- Inflation gives us the illusion that we're making progress in our work lives. And that illusion provides critical grease for the economic wheels. Wouldn't a 5% raise feel good in 2011? Wouldn't it make you feel appreciated at work? You'd start to think that tomorrow you might be able to afford (fill in the blank). Even if that 5% raise was, once you subtracted inflation, equal to 0%, it sure would feel better than the honest-to-goodness 0% raises that many workers have received in the recent past. And workers who feel better -- even if as a result of an illusion -- are more productive (and less likely to throw a wrench at the servers).
- Inflation makes consumers feel richer, so they buy more. Policymakers are still trying to get the U.S. economy revving so that it produces more jobs. Waking up each morning knowing that your biggest asset, your house, is worth less doesn't make you want to strap on that American Express card and drive to the mall. (Don't give me this stuff about nominal versus real prices. We all live in a nominal world.)
- Inflation makes consumers feel that saving is worthwhile. I've been trying to teach my kids to save. Do you know how impossible that is when banks pay 1% or less on the traditional passbook account? If it weren't for the free lollipop, there would be no way to get them to put a buck in at all. And we need inflation's help, not just in building a future generation of savers, but also in making the buy-on-credit-now versus save-to-buy-later decision tougher. Think there's any real incentive to save instead of just charging it when interest rates are so low? We need the whiff of inflation to push them higher.
- By eroding the value of money, inflation reinforces the value of concrete assets. That's important in a world that needs to do a lot of investing in finding and developing new supplies of commodities such as oil and copper. Anything that works to lower the relative cost of capital for these projects is a plus in industries with current supply/demand imbalances.
- Inflation is essential to ending the slump in the housing markets. Cheap mortgage money isn't enough to get buyers into the market when they're afraid that the price of the asset is about to slump. We need inflation's help to get us back to the good old days when homeowners could count on their houses being worth more (in nominal dollars, I know) every year. Inflation can make home ownership a no-lose investment again.
- And while we're at it, we need inflation to make debt loads more affordable long term. How? By shrinking the real value of that debt every year. Owing $450,000 on a mortgage is much easier if inflation is eroding the value of that debt every year by 3% or so. (Yes, inflation pushes up the price of credit, but as long as your own debt carries a fixed interest rate, you don't really care about the higher rates future debtors will pay.)
- Without inflation we have no hope of containing the U.S. national debt. The U.S. government needs inflation to reduce the real value of the its debt even more than strapped homeowners do. As of January 20, according to the very frightening U.S. debt clock, the U.S. national debt was $14.1 trillion. That's roughly $45,000 in debt for every U.S. citizen (which is almost as big a burden as the $52,000 in personal debt per citizen). That doesn't count the unfunded liabilities for programs such as Medicare. Think there's much chance that burden will be sustainable in the long term without some help from our friend inflation?
- Inflation is also crucial to restoring our personal and national financial discipline. At current interest rates, money is simply too cheap for the federal government and Congress to pay much attention. At current interest rates, the payment on the U.S. national debt comes to just $414 billion a year (not the 3.6 trillion I mistakenly noted in an earlier version of this story. That's was the interest paid on all debt in the United States including consumer and corporate debt). . That's a ton of cash, but it's not enough to crowd out spending on crucial government programs. Inflation pushes up interest rates so that we can't afford to build that lame weapons system in some congressperson's district. Then, whammo, we have a crisis on our hands. And we all know we're not going to fix this problem without a crisis.
- Best of all, inflation makes it easier to tell stories that begin "When I was your age . . . " Try this one for fun: "When I was your age, I used to pick beans in the hot sun for a whole day to earn just $1." That sounds pretty good, at least until your kids are old enough to figure out that a $1 in 1958 would be worth about $7.60 today. (Here's an inflation calculator they could use. Don't let them near it.
Correction: The interest on U.S. national debt is $414 billion a year. The column used an incorrect number originally.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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Yeah, and we should also drink lye to cure our sore throat and scrub our rectum with Comet with Bleach while we're at it... I'd always suspected that Jubak lacks a little integrity, but this bold faced kind of hucksterism is rather shocking.
The name of the game long term is ZERO SUM. Whoever can run the most efficient economy long term will come out ahead. Cancerous bursts like the "Chinese miracle" (there is no Brazilian miracle, by the way, and half the other "miracles" touted by economists are just made up hocus-pocus like the "Eastern European" miracles) may work briefly, but by introducing more demand for non-renewable resources they just run the clock down further towards the eventual dusk of humanity.
Any economy hoping to have long term longevity will have to learn how to utilize less and produce more and the "consumer economy" model is just not compatible with these requirements. The allegation that inflation does anything but goad people into spending more on less is just absurd; the flipside is, this spendthrift mentality goads those who produce real goods (and thus expend non-renewable resources) to produce more in the hopes of capturing every potential consumer. This creates a vicious-cycle nightmare where everybody spends without much thought on things without much utility, while discarding things of great utility purely because they have been conditioned to only value the act of purchase, not the inherent utility of the things they are purchasing.
Inflation might look viable as a strategy to reduce national debt, but there are other strategies. Some have even been known to (shudder, shudder...) PAY OFF that national debt and work on a balanced budget. But sophists have conjured up scenarios where such strategies are supposedly job killers and morale killers.
Well, Jubak, the emperor has no clothes. Just look at Brazil of the eighties, or the Weimar Republic to see what the long term effects of inflation are. It's demoralizing, unstable and just stupid to pretend that there is anything positive long term in inflation, other than giving more heartburn to the billions of already disadvantaged humans hanging on by their fingernails worldwide.
Not only is it immoral to suggest such a destabilizing approach (by "embracing", he really means, "let's just continue to drive inflation") but it will result in misery for billions, will continue to fan the flames of race and ethnic conflicts and will also perpetuate the widening schism between generations.
What it comes down to is, at some point young people will again wake to the eternal fact that the generations before them have swindled them and that they were only bred to be beasts of burden. Inflation will create such a high barrier of entry to success that those who would normally have the initiative to succeed will instead use this creativity to topple the status quo. And I hope when they do, it falls right on the head of careless, thoughtless and callous number-crunchers like Jubak.
If Jubak hasn't sold out to the US Chamber of Commerce, then he sure needs to. He's already trumpeting their agenda at jet-blast levels for free, after all. I can't imagine he's not on their payroll at this point, given the absurd rationale of this article.
That is okay. We will just cut our spending even more to adjust for rising prices everywhere except in the paycheck. I wonder if the CEO's are cutting back their personal spending, yet?
"Inflation gives us the illusion that we're making progress in our work lives." The ILLUSION is right! You are NOT richer, you are poorer! But you can "feel better". This is a joke, right?
If you buy into "We should open our arms and hug it to our chest like a long-lost friend." you are completely insane. Inflation is just making it hard to afford things. When gas is $5 a gallon that will mean LESS purchasing! Try hugging your EMPTY wallet after a trip to the gas station and grocery store!
Then there's the part where "Inflation makes consumers feel richer, so they buy more. " I hope not! This will make people go FURTHER into DEBT by spending more money when they are NOT making any more. If you paid any attention in school, when you subtract the cost of living increase from your raise you will find you make less with inflation and CAN'T afford things!
I love how inflation DOESN'T include FOOD AND ENERGY. That is where the inflation is and hurts us the most. When gas is $5 a gallon along with milk, juice, and bread then you give Jim Jubak a great big hug and say thanks, I love inflation!
And how is any of this inflation via the fed printing more dollars good for the INVESTOR? I thought Jubak was an investor.
Even if you invest and come out even with TRUE inflation, the IRS is going to consider those gains "profits" and take a big share of it, so you still LOSE. The cards are stacked against the individual investor and the government always wins!!!
All of these fantastic attributes are predicated on wages keeping up with inflation. Wages are NOT keeping up with inflation. My favorite thing about reporting on inflation is that they always say, "Excluding food, energy and housing, inflation was only 2%." Who gets to exclude those things? Inflation is a sow's ear; deflation may be worse, but inflation ain't good.
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