If you knew that irreversible inflation was going to hit hard sometime in the next 6-12 months,... - Page 2

[amyamanda]

Originally Posted by Patrick's mummy

Would someone explain the basics of what the impact of mega inflation or deflation would be to the average person?

I'm not sure I'm the best person to explain inflation vs. deflation, but I will take a stab at it because I started this thread and I feel responsible! Here is what I (think I) know, and someone please correct me if I am wrong:

Deflation is when there is a decline in the total amount of money in an economic system because there are fewer loans being given out. Less money in the economy means prices drop but people can buy less, and more people are unemployed. Inflation is when the amount of money in the economy increases steadily or significantly, and prices rise, but not because things are worth any more than they were - rather, because the dollar is worth less. Inflation can be challenging when prices rise sooner or faster than salaries.

And I'm just guessing here, but I bet deflation followed by rapid inflation can mean that there are a lot of people out of work AND prices rise rapidly, which would be a very difficult combination for most people.

I am sure there is more to it than that, but that is what I understand.

Originally Posted by choli

What exactly is "irreversable" inflation?

From what I understand, deflation can end up really really really bad (if left unchecked), and the only way I have heard of to stop it is for the government to artificially induce inflation by pumping money into the system. Because we're experiencing deflation right now, I expect to see the government induce inflation...it's already starting...and for the effects of that to hit within the next year.

I am quite sure that there are economists out there who disagree with this prediction, and I've never been interested in the economy until recently, but I have an interest in these things and this is what I've gathered and what I've chosen to believe.

I also don't see any reason to panic, but I am interested in charting a prudent path for my family, taking into account all available information, and I know my own situation can improve in a number of ways. Unfortunately, I can't do everything all at once, and I'm really interested in reading about other people's perspectives and priorities.

Edited to actually address the "irreversible" part of your question: When inflation is caused by the expansion and contraction of credit (loan) activity in the system, it can stay sort of balanced and can go both ways. But when inflation is artificially induced by new money being added to the system, that money never contracts (the way that loans being paid off cause contraction), so the inflation it causes can't reverse. At least that is my understanding of it, and again, I'm not an economist of any sort, so I hope someone else will chime in as well.

[JTA Mom]

Amyamanda, you got most of it.

Deflation is what happens when the money supply is contracted. This can happen one of two ways: 1) the government starts to print less money (therefore each $ is worth more, since there are less of them) or 2) lots of people are unemployed/underemployed and therefore not really contributing to the sorts of things that increase money supplies (aka, less savings, so banks can't loan as much $$, not buying as much=less demand for products=less demand means lower prices, etc).

Deflation is bad because everyone is waiting to purchase stuff for the lowest price possible. If you see that the prices of items are decreasing (like gas is doing) you try to wait as long as possible so you can get it as cheap as possible. It's also bad because producers are forced to sell items for lower than expected. This cuts profit margins, sometimes to the point of being below cost. This happened in the Great Depression and this summer during the gas crisis. In both cases, farmers were unable to sell their products (ex. animals) for more than it cost them to produce them. So, rather than take the huge loss, they slaughtered all the animals/didn't buy/feed as many. With less money coming in, businesses are forced to make cuts to survive, and the first thing to go are workers.
Deflation can be good for strengthening the local money supply, so we can buy more imports for cheaper than before, since our money is stronger. It's also good for savers because their savings is now worth more. Suddenly the $3000 you've socked away can buy a whole lotta more things than before.

Inflation is due to an increase in the money supply. Each loan a bank makes increased the money supply, because they are, in essence, loaning out money that doesn't totally exist, except on paper. Hypothetically, let's say a bank has 30k in actual money in it's storehouses. It can loan out 2x that amount, with the expectation that, once paid back, they will have more money. It's a shaky system, because if too many people default, well then, the bank is done for. Inflation can also happen due to the government deciding to print more money to cover its debts (aka $700B bailout). This causes each $ to be worth less, since there are more $$s floating around. The bad part to inflation is that it almost always increases prices before it increases salaries. It also cuts into real wages. Say you make 10k a year. Inflation is 10% a year. That means if you wait one year, your buying power will be 9k a year, even though you are still making the 'same' 10k. Inflation also comes during a time of growth in the economy. So growth=inflation, since people's buying power is increasing. Unfortunately, in the 70s we had stagflation, which is inflation without an growth. So prices were rising but wages weren't. This can happen again.

Inflation is good for borrowers. Say you have a loan for $3000 for a car. That car, due to inflation, is now worth $5000. If you were to sell the car, you will have made $2000. This is also why the prices for things seem to be so much cheaper 'in the past.' Thanks to inflation, the same movie you paid 15cents to go to in 1946 is now worth the $10 it is today. Inflation is bad for savers though, of any sort. That's why you have to save a ton for retirement. Part of it is because you will live longer, and another is that the $5000 you sock away today will be worth much, much less in 30 years, thanks to inflation.

There is no such thing as irreversible inflation. Inflation can spiral out of control (google Weimar Germany or Zimbabwe today), but it's reversible--force a deflation, aka cut the money supply. The government can do this by raising interest rates and cutting how much it prints. Put it this way, if you have hyperinflation, it's really, really bad. The only way out hurts, but since you've hit bottom, well, there's only one way out.

Ami

[Denvergirlie]

http://www.chrismartenson.com/crashc...r-10-inflation

Above is a link to a 7 minute video about inflation and what it means to you the individual in terms of cost of living.

Chris Martenson has a very easy manner of understanding economics. His entire "crash course" is a video presentation broken into numerous chapters, and I would whole heartly recommend taking some time over the next few days to become a bit more educated.

http://www.chrismartenson.com/crashcourse

How long will it take?
Chapters are between 3 and 20 minutes in length. All 20 sections take 3 hours and 23 minutes to watch in full.

You will learn about:
Intro
Chapter 1: Three Beliefs (Time: 1:46)
Chapter 2: The Three "E"s (Time: 1:38)
Chapter 3: Exponential Growth (Time: 6:20)
Chapter 4: Compounding is the Problem (Time: 3:06)
Chapter 5: Growth vs. Prosperity (Time: 3:40)
Chapter 6: What is Money? (Time: 5:55)
Chapter 7: Money Creation (Time: 4:19)
Chapter 8: The Fed - Money Creation (Time: 7:13)
Chapter 9: A Brief History of US Money (Time: 7:14)
Chapter 10: Inflation (Time: 11:48)
Chapter 11: How Much Is A Trillion? (Time: 3:28)
Chapter 12: Debt (Time: 12:32)
Chapter 13: A National Failure To Save (Time: 12:06)
Chapter 14: Assets & Demographics (Time: 13:41)
Chapter 15: Bubbles (Time: 14:10)
Chapter 16: Fuzzy Numbers (Time: 15:52)
Chapter 17: PART A: Peak Oil (Time: 17:52)
Chapter 17: PART B: Energy Budgeting (Time: 12:15)
Chapter 17: PART C: Energy And The Economy (Time: 7:05)
Chapter 18: Environmental Data (Time: 16:22)
Chapter 19: Future Shock (Time: 8:02)
Chapter 20: What Should I Do? (Time: 19:48)

[slsurface]

Originally Posted by ~Megan~

Like so many families living basically paycheck to paycheck I guess we would just muddle through. There are few options for many, many families in
America.

: This is pretty much were I stand right now. But unemployment is 21 percent in my town. My job ends in three weeks.

[slsurface]

Originally Posted by velochic

I agree with Shaggy Daddy. But I really don't think hyperinflation is something we'll be seeing soon. Certainly you can't eat, drink, or heat with silver. I look at it as a hedge against somewhat aggressively increasing inflation in a long-term diversified portfolio. I just can't get on board with the tin-foil hats that bury their cash in the back yard and put all their investments into gold and silver. Balance is key... even during hyperinflation.

Actually, I think that spiraling deflation is more probable in the near future, and more frightening to me... that will signal a very protracted and deep recession... if not depression.

I won't change a thing that I am doing.

Yep! I completely agree!

[Violet2]

I agree that we will have inflation sometime in '09. Two things will stave it off, Obama's inauguration will likely carry the market through the first quarter and also it depends, I think, on how fast people are laid off. I think lay offs have a deflationary effect on the economy that can offset inflation via falling demand. By the second quarter, I suspect the reckoning will begin and third and fourth quarter will be very bad.

As for how we are preparing to handle it...

I am going back to work to try and make some additional money for food storage and other preparations. Our worst case scenario is that we are out of work for a year and that we will lose our house or that others move in with us--so that is what we are attempting to prepare for.

We try to conserve water and electricity.

We canceled cable and live as frugally as possible.

We are trying to garden.

V

[Patrick's mummy]

Thanks Mamas for the explanations!

Well now that I understand it, I am wondering whether to get some work that I need done on the house done now. Our roof is leaking badly. We had some temporary repairs done on it a few months ago but it needs doing properly. We have water coming in spoiling the walls. The outhouse our boiler is in (outside oil boiler) is letting in water and needs rebuilding.
We have our house on the market and repainting the exterior would make a big difference.

I have a small amount of savings and I am wondering if I should just spend them now, while the money is actually worth something. Once these savings are gone, there won't be any opportunity to save again as I now SAH and my DH makes enough to cover our essentials. But if we might get to a situation where my hard saved cash is worth nothing, I won't be in a better situation for hanging on will I?
What d'ya think?

[SuzanneDeAz]

Originally Posted by amyamanda

What would you plan, do, prioritize, purchase, not purchase? How would you change your current spending/savings or the way you currently handle money? Would it change the way you do things at all - or not? I'm assuming, for this exercise, that inflation would affect prices first and salaries much later.

I think I would try to acquire any more-expensive durable goods that I knew I'd be wanting in the next few years. I'd be afraid that inflation would make it hard to afford those things. I am not sure what I would do about investments/savings. If I had money to invest (not that I do), I would probably want to buy gold, but I hear gold is pretty much impossible to buy now anyway - does anyone have experience to support or counter this?

I would worry about cash savings losing its value.

I might stock up on consumables and food as much as possible, as a kind of investment (buy at cheap prices now, not buy at expensive prices later...at least until we ran out of whatever it was, LOL). I might also consider buying things like socks and underwear in bigger sizes for my kids, etc. I wonder if that sounds crazy.

Anyone have other ideas? I am very interested in exploring this possible scenario. I believe it's where the US economy is headed and I want to puzzle it out so I can make confident choices. Even if it doesn't happen, it's an interesting exercise.

Edited to add, please explain your reasoning for those of us who are new to this sort of idea. Thanks.

The most important thing is to pay off credit cards, car loans and put as much possible on the mortgage. Once all the cc are paid off try to pay off the car loans and when they are done put the extra into your mortgage.

[Staceyy]

I would learn to garden (I'm learning to garden both inside and outdoors)

Save as much cash as possible

Stockpile as much food, toiletries, paper products, otc meds and firewood as possible

Become super frugal

Start building a second income from home that doesn't cost much to start but has a lot of potential to grow, especially during tough times

Pay off as much debt as possible

[gothnurse3]

I got some money for Christmas. I have stocked up. I have multiple reasons besides the fact that zombies could come at anytime

I am thinking about purchasing a few commercial grade stainless pots/pans from a restraunt supply for approximately $200.00. We currently have cheap ss and some cast iron. Seafood tastes wierd in iron pots....I live in the deep south and seafood is my meat of choice. Is this a wise purchase? (I have a commerical kitchen.)

[Belleweather]

Have an abso-sodding-lutely enormous party. :

I know it's horrible and selfish, but huge inflation would be the best thing that could possibly happen to our family. We have very little savings apart from our emergency fund and a metric ton of student loan debt. My job has a union contract which requires them to pay Cost of Living raises pegged to the federal inflation rate. So since my income would increase with inflation, the main effect on our family would be to let us pay down our debt with dollars that are worth less than the ones we're using now.

I do know that inflation would be horrible for people who are older or on fixed incomes, and I'd worry about my mom who is retired. But seriously, inflation would make enough of a positive difference over the long term for our family that I could afford to help her out more actively than we are now.

[kittynurse]

Originally Posted by gothnurse3

I have multiple reasons besides the fact that zombies could come at anytime

This is *exactly* why I have been stockpiling

It's not like you can run from the undead.

[kittynurse]

Originally Posted by Belleweather

Have an abso-sodding-lutely enormous party. :

I know it's horrible and selfish, but huge inflation would be the best thing that could possibly happen to our family.

Don't feel guilty, I know exactly how you feel. My DH gets paid in American dollars (we are in Canada) and when our dollar is at par with yours he makes less money. When our dollar dropped this Fall, we were super happy even though it isn't necessarily a great thing for everyone else.