Inflation — Perspectives from Two Centuries, 1800-2016

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Inflation — Perspectives from Two Centuries, 1800-2016

Post by SimpleGift » Sun Jul 22, 2018 6:52 pm

Why should investors care about inflation over the past 200 years? Two reasons come to mind. First, regarding the permanent loss of our capital, inflation is the most likely of deep risks to impact our portfolios (see William Bernstein, Deep Risk) — so "know thine enemy." Second, inflation has not had stable, unvarying behavior over the past two centuries, but rather has exhibited definite trends — which can help place our modern-day inflation expectations in perspective.

An instructive recent paper analyzed historical trends in both inflation itself (chart at left below) and in inflation uncertainty (at right) in the U.S. since 1800. For the 1801-1913 period, which were mostly gold standard years before the creation of the Federal Reserve, inflation averaged -0.3% annually — but inflation uncertainty was very high. For the 1914-2013 post-Fed period, inflation has averaged 3.3% per year, but its uncertainty has been reduced to a relatively low level today.
We also have data on historical inflation rates from other developed markets back to 1870 (chart below). Purposely excluded here are countries that experienced hyperinflation after World War II such as Germany, Japan and France (a separate topic!). During the 1870-1913 period, the behavior of inflation appears largely specific to individual countries — but since then has become an increasingly global phenomenon, moving more in sync among the developed markets.
  • Image
    Data source: Jorda-Schularick-Taylor database
Discussion: What might be the implications for investors today? Historical trends suggest that the uncertainty around inflation levels has been greatly reduced in the modern era, in exchange for steady positive rates of inflation. Also, inflation has become more of a global, rather than country-specific phenomenon, as central banks around the world have seemingly improved their ability in recent decades to coordinate in avoiding severe inflation/deflation shocks.

Perhaps inflation risk today isn't quite what it used to be? Your thoughts?

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by averagedude » Sun Jul 22, 2018 7:41 pm

I agree 100% with your assessment of inflation risks and the reasons behind it. Regardless of the gloom and doom that some people have espoused, the present and future seems less risky and more peaceful than the past. Investors who have been optimistic have been compensated well. With that being said, it is wise as an investor to not forget about inflation and the destruction it can cause. Being globally diversified can mitigate some of this risk.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by JBTX » Sun Jul 22, 2018 8:09 pm

Inflation has become relatively muted in much of the developed world. I would guess much of that has to do with various macro trend, demographic changes such as an aging population, technological advances, automation, globalization etc.

Various monetary agencies have become far more sophisticated. What concerns me is we are getting into new territory. Is there a limit to continually easing monetary policy? Also, tightening to fight inflation if needed, requires political resolve, which I'm not sure exists today.

I don't consider inflation in the near term likely, but that doesn't mean one shouldn't be prepared for it.

I'm hesitant to declare "this time it is different" and inflation is a slain beast never to be feared again.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by golfCaddy » Sun Jul 22, 2018 8:19 pm

From the perspective of deep risk, rolling 10-year inflation figures would provide a more meaningful number than annual inflation.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by JoMoney » Sun Jul 22, 2018 8:22 pm

SimpleGift wrote:
Sun Jul 22, 2018 6:52 pm
... Perhaps inflation risk today isn't quite what it used to be? Your thoughts?
It is different, regardless of how you define the risk. Inflation's relative volatility has changed over time, as well as the underlying goods and services it represents. People need to allocate much less of their income to basic needs like food and clothing, which are relatively abundant, but much more on things like healthcare and housing (depending on location).
The risk of inflation causing you starve is lower, but there is a higher risk of inflation preventing you from being able to take advantage of the latest medical or other technological advances.
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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by Rick Ferri » Sun Jul 22, 2018 8:50 pm

Assuming inflation has become more highly correlated globally and less volatile, it follows that Central Bank policy across developed markets would also become more highly correlated and less volatile. If that’s true, then non-US interest rates will start moving higher relatively soon.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by SimpleGift » Sun Jul 22, 2018 10:52 pm

Rick Ferri wrote:
Sun Jul 22, 2018 8:50 pm
Assuming inflation has become more highly correlated globally and less volatile, it follows that Central Bank policy across developed markets would also become more highly correlated and less volatile. If that’s true, then non-US interest rates will start moving higher relatively soon.
Interesting observation. Can't speak to future interest rates, but it appears that inflation rates in the developed markets, at least the G-7 countries (Canada, France, Germany, Italy, Japan, U.K. and the U.S.), have already been trending higher more-or-less in unison since about mid-2016 (chart below).
More highly correlated global inflation and central bank policies seem somewhat reassuring. If the world should happen to experience a sudden potential inflation shock (e.g., Iran blocks the Strait of Hormuz, etc.), there's at least some confidence today that the crisis would be addressed in a quick, coordinated global effort.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by randomizer » Sun Jul 22, 2018 11:10 pm

I'm still pretty worried about inflation risk, but I don't think there is any clear basis for departing from the course that I'm currently on. I have a fixed-rate mortgage, which is a small inflation hedge, but not one that I will have forever. I am not convinced that things like TIPS provide a sufficient real return to keep up with the true cost of living (which may exceed the official inflation rate), which makes me think that going 100% stocks is the only way to really fight off inflation. Unfortunately, that comes with its own downsides, which is why I'm not doing it.
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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by baconavocado » Sun Jul 22, 2018 11:44 pm

What causes inflation exactly? In the 1970-80s (10-15% annual inflation) wasn't it related to petroleum prices? So shortages of a key resource, whether artificial or actual. And war. If so, I think inflation is still a very real risk today. The more important question might be how does a BH hedge this risk.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by CurlyDave » Mon Jul 23, 2018 12:22 am

SimpleGift wrote:
Sun Jul 22, 2018 6:52 pm

... For the 1914-2013 post-Fed period, inflation has averaged 3.3% per year, but its uncertainty has been reduced to a relatively low level today...

Perhaps inflation risk today isn't quite what it used to be? Your thoughts?
I think "inflation risk" is the wrong way to describe it. I look at the data and see "inflation certainty".

On this board, we look at financial advisors and can work ourselves into a lather over someone taking 1% of our assets every year, but when inflation takes 3.3%, we shrug and say: "not too bad."

IMHO inflation is like a ravenous wolf, circling my cabin and looking for the smallest chink in my armor.

I fight back by holding fixed rate mortgages on income property and using a very high equity allocation (97%). I think I like the prospect of deflation, along the lines of Japan, even less than I like inflation certainty, but I strongly believe that those who hold too high a fixed income allocation will come to grief later in life.

And to make it even worse, I know for certain that my personal inflation rate has been much higher than CPI-W over the past 10 years.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by Valuethinker » Mon Jul 23, 2018 3:14 am

baconavocado wrote:
Sun Jul 22, 2018 11:44 pm
What causes inflation exactly? In the 1970-80s (10-15% annual inflation) wasn't it related to petroleum prices? So shortages of a key resource, whether artificial or actual. And war. If so, I think inflation is still a very real risk today. The more important question might be how does a BH hedge this risk.
In a macro context, if the Central Bank targets a level of inflation such as 2% then if the price of oil doubles, consumers and businesses respond by:

- cutting consumption in other areas to fund their oil needs
- reducing demand for oil (for example ships can save 25% of oil consumption by sailing at a slower speed)
- using alternatives (if any)

Thus, there's no general increase in inflation unless monetary policy permits it. If the Central Bank adheres to its inflation target, then increases in prices of oil and oil related activities (plastics, airlines, etc.) are compensated for by reductions in prices of other production activities.

The microstructure of the economy then kicks in as producers and intermediaries (freight companies etc.) try to pass on the impact of the price increases to final consumers. Sometimes they can, sometimes they cannot. Unions then fight for wage increases to compensate-- but union power is far far weaker than it was in the 1970s in most western economies (something like 11% of US private sector workers are unionized). Conversely if the economy is near full employment, employers may have to raise wages to attract and retain workers.

(This is not the hoary old Milton Friedman line about "inflation is everywhere and always a monetary phenomenon". The problem with that is there is a quantity of money but there is also a velocity. They don't move up together, and they can move in opposite directions. Money is Demanded, not Supplied - increased demand for credit in the economy creates more demand for money, which the banking system can create.)

The US Central Bank is targeting an inflation rate of CPI-U of 2.0% and that is as good a long run forecast of inflation as anyone is going to get.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by packer16 » Mon Jul 23, 2018 5:35 am

Inflation is caused by shortages & deflation by surpluses. War, famine & epidemic creates shortages of food, goods & people thus inflation. Technological advancement is very deflationary & since the entire world has now for the most part embraced a market based system these advances can be distributed around the world. Inflation in a given country is based upon that countries market basket of goods & services. So in developed countries you have more finished goods with value-added components much higher than the commodities that are inputs. Since technology has reduced the costs associated with these value-added services (including sales & distribution), there has been downward pressure on prices in goods and services in developed countries. Free trade has distributed these low prices around the world. In some emerging markets (Turkey, India & Brazil) the market basket includes more commodity & less value added goods (also there is relatively less trade in places with protected markets to transmit lower prices) so there inflation is more driven by commodity prices versus technology deflation.

The only other time a similar situation has occurred is in the 19th century between the Napoleonic Wars and WWI. You had relative peace & the three horseman (war, famine & epidemic) were not for the most part present versus the previous 200 years. At that time, there was a gold standard so there was no offsetting the deflation that was happening with goods and services except with new gold discoveries. Now you have monetary policy to offset these declines. IMO the monetary policy did not create inflation but prevented deflation. Going forward the same forces that created deflation are still here so I do not see a change in the situation of inflation.

Where the central banks have influence, short-term interest rates, have already increased to almost the point of inversion. Given this I do not see the central banks causing an inverted yield curve so I would expect a stoppage of increases unless the long end of the curve increases. The 30 year has had a hard time increasing above 3%. IMO this has to do with excess capital looking for a place to be invested. So until a capital destroying event occurs from one of the three horseman, I do not see the excess capital being destroyed. Since the fruits of the technology advancement are being realized via equities I am more optimistic about the ERP remaining in the 4 to 6% range versus the lower range predicted by others. Just my 2 cents.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by Valuethinker » Mon Jul 23, 2018 8:06 am

packer16 wrote:
Mon Jul 23, 2018 5:35 am
Inflation is caused by shortages & deflation by surpluses. War, famine & epidemic creates shortages of food, goods & people thus inflation. Technological advancement is very deflationary & since the entire world has now for the most part embraced a market based system these advances can be distributed around the world. Inflation in a given country is based upon that countries market basket of goods & services. So in developed countries you have more finished goods with value-added components much higher than the commodities that are inputs. Since technology has reduced the costs associated with these value-added services (including sales & distribution), there has been downward pressure on prices in goods and services in developed countries. Free trade has distributed these low prices around the world. In some emerging markets (Turkey, India & Brazil) the market basket includes more commodity & less value added goods (also there is relatively less trade in places with protected markets to transmit lower prices) so there inflation is more driven by commodity prices versus technology deflation.

The only other time a similar situation has occurred is in the 19th century between the Napoleonic Wars and WWI. You had relative peace & the three horseman (war, famine & epidemic) were not for the most part present versus the previous 200 years. At that time, there was a gold standard so there was no offsetting the deflation that was happening with goods and services except with new gold discoveries. Now you have monetary policy to offset these declines. IMO the monetary policy did not create inflation but prevented deflation. Going forward the same forces that created deflation are still here so I do not see a change in the situation of inflation.

Where the central banks have influence, short-term interest rates, have already increased to almost the point of inversion. Given this I do not see the central banks causing an inverted yield curve so I would expect a stoppage of increases unless the long end of the curve increases. The 30 year has had a hard time increasing above 3%. IMO this has to do with excess capital looking for a place to be invested. So until a capital destroying event occurs from one of the three horseman, I do not see the excess capital being destroyed. Since the fruits of the technology advancement are being realized via equities I am more optimistic about the ERP remaining in the 4 to 6% range versus the lower range predicted by others. Just my 2 cents.

Packer
The cause of inflation is demand for goods and services above the economy's ability to produce them. Then, suppliers, and eventually wage earners, get market power to raise their prices.

Monetary policy kicks in here, too, because MP can be used (and is used, by modern Central Banks) to set an overall level of inflation which is permitted.

I agree that there were forces of internationalization in trade in the 1990s and 2000s that lowered inflation risks - huge amounts of production outsourced to low cost countries.

I think that process has probably come to an end, at least on that scale. We have the prospect of renewed trade barriers & tariff wars, and we have Chinese demographics and urbanization - there's not a huge new labour force to mobilize from agriculture into industry.

There are other countries like Vietnam, Philippines, India, Pakistan, Bangladesh, Indonesia that may fill the low cost labour gap. However they lack China's infrastructural and political advantages (VIetnam probably the best favoured, India Pakistan Bangladesh the worst).

Services are much less liable to deflation-- in particular healthcare services. Although healthcare tourism is probably one of the stories of the next 25 years, it's still going to be hard to export a lot of service industry work.

Japan is the interesting case where the asset bubble was so large, and the demographics 20 years ahead of the rest of the developed world, that they seem to be locked into a deflationary cycle. There were some signs of this in the Eurozone but for the moment have backed off.

AI & robotics have as yet unknowable effects on the demand for labour of all types. But somebody still has to help us to go to the bathroom as we age. Raw materials shortages might still drive those prices up.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by SimpleGift » Mon Jul 23, 2018 8:39 am

CurlyDave wrote:
Mon Jul 23, 2018 12:22 am
I think "inflation risk" is the wrong way to describe it. I look at the data and see "inflation certainty".
Yes, inflation certainty is a better way to look at it. Our portfolios are now best designed to counter persistent steady inflation, I believe, and not so much the wide swings of inflation/deflation shocks that were the norm in past history.

packer16 wrote:
Mon Jul 23, 2018 5:35 am
Technological advancement is very deflationary & since the entire world has now for the most part embraced a market based system these advances can be distributed around the world.
A good perspective. To your point, it's worth noting that, not only have inflation rates become more highly correlated among developed markets in recent decades, but there's been significant convergence in inflation rates between emerging markets (in blue below) and the developed markets (in gray).
Inflation is now much more globally-correlated today, and much less country-specific as in the past.
Last edited by SimpleGift on Mon Jul 23, 2018 8:49 am, edited 1 time in total.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by Angst » Mon Jul 23, 2018 8:48 am

SimpleGift wrote:
Sun Jul 22, 2018 6:52 pm
Why should investors care about inflation over the past 200 years?

[Snip...]
We also have data on historical inflation rates from other developed markets back to 1870 (chart below). Purposely excluded here are countries that experienced hyperinflation after World War II such as Germany, Japan and France (a separate topic!). During the 1870-1913 period, the behavior of inflation appears largely specific to individual countries — but since then has become an increasingly global phenomenon, moving more in sync among the developed markets.
  • Image
    Data source: Jorda-Schularick-Taylor database
Discussion: What might be the implications for investors today? Historical trends suggest that the uncertainty around inflation levels has been greatly reduced in the modern era, in exchange for steady positive rates of inflation. Also, inflation has become more of a global, rather than country-specific phenomenon, as central banks around the world have seemingly improved their ability in recent decades to coordinate in avoiding severe inflation/deflation shocks.

Perhaps inflation risk today isn't quite what it used to be? Your thoughts?

Thanks Todd for another interesting post. (My bolding above.) From the perspective of someone yet to retire looking at the above graph of international inflation, if we try to imagine out to 2050, 2060 and beyond, how far out can we justifiably extrapolate? Yes I agree, perhaps inflation risk today isn't what it used to be, but will the economies of the "modern era" continue to see inflation constrained to <5% far out into the future? It's nice to imagine, but I have little confidence in expecting the future to conform to recent history. I find "risk" and "uncertainty" highly difficult to measure. (Obviously someone came up with something for the graph on uncertainty.) Surely though, at least I ought to be able to quantify my own personal assessment of these concepts, but even that's difficult! Suffice to say, I'm very uncertain about the future although I hold out hope for continuing low levels and low volatility of inflation. Suffice to also say that my personal uncertainty is enough to drive me to want to address this "risk".

Beyond holding a good portion of one's wealth in diversified US/Int'l equity, I believe it's prudent for anyone who is 30 or less years out from retirement to consider addressing this long-term inflation risk by incrementally building a small LMP (liability matching portfolio) of 30 year TIPS to match anywhere from 5-20% of their anticipated minimum required annual income in retirement. Obviously there's a lot of uncertainty in figuring out these numbers too, but perhaps less than there is about the potential for high levels of future inflation.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by greg24 » Mon Jul 23, 2018 9:11 am

My conclusion to the charts is that deflation risk is much lower than it used to be.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by Oicuryy » Mon Jul 23, 2018 10:50 am

Inflation is the result of monetary policy.

Inflation is an increase in prices caused by a decrease in the value of money. The price of a thing is the ratio of the value of the thing to the value of a dollar. When the value of dollars goes down prices go up.

The value of dollars, like the value of everything else, is determined by supply and demand. These days the Federal Reserve influences the supply of dollars by creating and uncreating them. They influence the demand for credit that is used as money by influencing interest rates.

The left graph in the opening post shows large spikes in inflation during major wars; the War of 1812, the Civil War, World War I and World War II. Gold was the unit of value during the first three of those but greenbacks where a medium of exchange. The government created lots of greenbacks to pay for the wars. The value of greenbacks dropped and prices rose. Deflation occurred after those wars as greenback creation slowed and the value of greenbacks rose.

World War II was slightly different. By then dollars in the U.S. were no longer backed by gold. But the Federal Reserve agreed to create as many dollars as needed to keep interest rates on Treasuries low. This let the government fund the war at low interest rates. This caused an increase in the supply of money and a decline in its value. The agreement was ended in 1951. Follow the links in this Wikipedia article for more information https://en.wikipedia.org/wiki/1951_Accord

The high inflation of the 1970's is an anomaly. The Vietnam War was not of the same scale as those previous wars. The prevailing view of many economists at that time was that inflation was not caused by monetary policy. That was the view of Arthur Burns who was chairman of the Fed for much of the 1970's. Please read this essay by Robert Hetzel Arthur Burns and Inflation

Paul Volker became chairman of the Fed in 1979 and used monetary policy to end the high inflation. Since then the Fed has kept inflation relatively low. In 2012 the Fed announced a monetary policy goal of 2% inflation over the long run.

My takeaway from the history of U.S. inflation it that high inflation is only a risk during times of major war or times of misguided monetary policy.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by alfaspider » Mon Jul 23, 2018 11:10 am

Most historical examples of very high inflation have occurred when a government tries to use local currency to pay foreign-currency denominated debts or to import goods it cannot obtain domestically.

One thing the U.S. does not have is foreign-denominated debt. It has the luxury of borrowing in dollars and paying in dollars. It is dependent on oil imports to some extent, but world oil markets are helpfully transacted in dollars. By contrast for example, Venezuela is forced to borrow and pay for many things in dollars- attempts to use their local currency to buy dollars quickly results in the local currency becoming ever more worthless.

Therefore, I agree that the risk of very high inflation in the U.S. is relatively low. However, even 5-10% inflation can wreak havoc on investments- you don't need hyper-inflation for it to become a serious problem. Also, there is no guarantee the U.S. will always have its favored position- such position is predicated on its economic dominance relative to the rest of the world- which there is no guarantee it will always enjoy.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by SimpleGift » Mon Jul 23, 2018 11:14 am

greg24 wrote:
Mon Jul 23, 2018 9:11 am
My conclusion to the charts is that deflation risk is much lower than it used to be.
Right, I believe this is a direct result of the inflation-targeting adopted by many countries around the world in recent decades. The bargain has been to reduce the risk of serious deflation in exchange for mild, steady and targeted rates of inflation.
  • • Major developed countries that have explicitly adopted inflation-targeting: United Kingdom (1992), Canada (1991), Australia (1993), Sweden (1993), South Korea (2001), the U.S. (2012) and Japan (2013).

    • Emerging markets with inflation-targeting today: Brazil (1999), South Africa (2000), Thailand (2000), Mexico (2001), Philippines (2002), Indonesia (2005) and India (2016).
So today there is a more-or-less coordinated effort across the globe to keep inflation in check and to avoid the wide swings of deflation/high inflation of the past. As a result, inflation has become more moderate, and severe deflation is less likely a portfolio risk than it used to be, in my view.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by garlandwhizzer » Mon Jul 23, 2018 12:14 pm

Great post, Todd, and great comments from all.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by cj2018 » Mon Jul 23, 2018 12:32 pm

alfaspider wrote:
Mon Jul 23, 2018 11:10 am
Most historical examples of very high inflation have occurred when a government tries to use local currency to pay foreign-currency denominated debts or to import goods it cannot obtain domestically.

One thing the U.S. does not have is foreign-denominated debt. It has the luxury of borrowing in dollars and paying in dollars. It is dependent on oil imports to some extent, but world oil markets are helpfully transacted in dollars. By contrast for example, Venezuela is forced to borrow and pay for many things in dollars- attempts to use their local currency to buy dollars quickly results in the local currency becoming ever more worthless.

Therefore, I agree that the risk of very high inflation in the U.S. is relatively low. However, even 5-10% inflation can wreak havoc on investments- you don't need hyper-inflation for it to become a serious problem. Also, there is no guarantee the U.S. will always have its favored position- such position is predicated on its economic dominance relative to the rest of the world- which there is no guarantee it will always enjoy.
This +1.

Only thing i'd add is that 5%-10% inflation wouldn't wreak havoc on investments unless you are heavily in fixed-income. Equities and REs should do well in the long run under the inflationary system we currently have.

In my mind, inflation is bad news if you fall under the following categories:
  • Receive fixed income or depend largely on income from fixed income securities
  • Wage earner who have no control over your the change of earned income
  • Own no/minimal appreciating assets such as stocks, REs etc. that control means of productions
When inflation happens, at least in theory corporations would pass down the cost increase to consumers, landlords will increase rent on tenants so make sure you are on the right side of the equation.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by cj2018 » Mon Jul 23, 2018 12:35 pm

SimpleGift wrote:
Mon Jul 23, 2018 11:14 am
greg24 wrote:
Mon Jul 23, 2018 9:11 am
My conclusion to the charts is that deflation risk is much lower than it used to be.
Right, I believe this is a direct result of the inflation-targeting adopted by many countries around the world in recent decades. The bargain has been to reduce the risk of serious deflation in exchange for mild, steady and targeted rates of inflation.
  • • Major developed countries that have explicitly adopted inflation-targeting: United Kingdom (1992), Canada (1991), Australia (1993), Sweden (1993), South Korea (2001), the U.S. (2012) and Japan (2013).

    • Emerging markets with inflation-targeting today: Brazil (1999), South Africa (2000), Thailand (2000), Mexico (2001), Philippines (2002), Indonesia (2005) and India (2016).
So today there is a more-or-less coordinated effort across the globe to keep inflation in check and to avoid the wide swings of deflation/high inflation of the past. As a result, inflation has become more moderate, and severe deflation is less likely a portfolio risk than it used to be, in my view.
Deflation risk is none sense under the system we are in since 1971 when we get off gold standard. Might happen very temporary when central banks tighten currency supply but overall, expect consistent inflation in the long run unless we switch to some other system.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by Valuethinker » Tue Jul 24, 2018 12:03 pm

cj2018 wrote:
Mon Jul 23, 2018 12:35 pm

Deflation risk is none sense under the system we are in since 1971 when we get off gold standard. Might happen very temporary when central banks tighten currency supply but overall, expect consistent inflation in the long run unless we switch to some other system.
And is Japan still on the Gold Standard? How about Greece? Italy? Portugal?

I think you underestimate deflation risk. Big asset-debt bubble busts are associated with deflationary periods. No matter what Central Banks do.

So. Question. Do we see any signs of asset bubbles out there? Vancouver housing? Bitcoin and its ilk? Chinese real estate?

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by Valuethinker » Tue Jul 24, 2018 12:05 pm

SimpleGift wrote:
Mon Jul 23, 2018 11:14 am
greg24 wrote:
Mon Jul 23, 2018 9:11 am


So today there is a more-or-less coordinated effort across the globe to keep inflation in check
Yes.
and to avoid the wide swings of deflation/high inflation of the past. As a result, inflation has become more moderate, and severe deflation is less likely a portfolio risk than it used to be, in my view.
[/quote]

We live in hope. We did not worry at all about deflation pre 2008. Japan was seen as a unique anomaly.

Now we have various parts of the Eurozone. And China which could be the asset bubble of all time. They were in a very bad position with their banking in the early 2000s, and they traded and grew their way out of it. Can they repeat the trick?

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by SimpleGift » Tue Jul 24, 2018 1:25 pm

Valuethinker wrote:
Tue Jul 24, 2018 12:03 pm
I think you underestimate deflation risk. Big asset-debt bubble busts are associated with deflationary periods. No matter what Central Banks do.
Agree. Although the probability of deflationary shocks is much reduced in the modern era, the consequences for stock investors have historically been rather severe (table below).
As a defensive investor, I certainly haven't reduced my allocation to high-quality bonds, both nominal and TIPS. Somewhat surprisingly, in the table above, Treasury bills also held up quite well during deflationary episodes, averaging 5.6% return over the six periods compared with 7.3% for the 10-year Treasuries.

AnotherSandwich
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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by AnotherSandwich » Tue Jul 24, 2018 3:53 pm

@CurlyDave
On this board, we look at financial advisors and can work ourselves into a lather over someone taking 1% of our assets every year, but when inflation takes 3.3%, we shrug and say: "not too bad."

IMHO inflation is like a ravenous wolf, circling my cabin and looking for the smallest chink in my armor.
Could not agree more. Keep costs low® and Minimize taxes® tenets and not much on inflation or real returns. It doesn't help that 'Personal' return reported by financial institutions are always nominal. At least for time-weighted performance vanguard could have included real return, similar to how they estimate fund performance after taxes (eg Returns after taxes on distributions and sales of fund shares).

On top of that, inflation is very often talked about in terms US CPI. So the number may be accurate for a Kentuckian who eats flat screen TVs for dinner and not so much for someone who is trying to save for a down payment in HCOL.

GAAP
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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by GAAP » Tue Jul 24, 2018 4:18 pm

packer16 wrote:
Mon Jul 23, 2018 5:35 am
You had relative peace & the three horseman (war, famine & epidemic) were not for the most part present versus the previous 200 years.
Emphasis added. I've seen little discussion of these potential issues. Yet, crop failures or climate-related disasters like the Oregon fires or a major drought could easily lead to famine. Antibiotic-resistant infections are growing faster than our ability to combat them. I personally know someone that is still recovering from a flesh-eating bacteria infection -- really nasty. These are factors outside the control of the central banks. At best, those banks will be able to react to the consequences.

When there is famine, food inflation will occur. When there is an epidemic, healthcare inflation will occur. In both cases, productivity is likely to drop along with GDP. Global diversification may help -- as long as these don't become a global problem.

trystero
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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by trystero » Tue Jul 24, 2018 5:16 pm

alfaspider wrote:
Mon Jul 23, 2018 11:10 am
One thing the U.S. does not have is foreign-denominated debt. It has the luxury of borrowing in dollars and paying in dollars. It is dependent on oil imports to some extent, but world oil markets are helpfully transacted in dollars. By contrast for example, Venezuela is forced to borrow and pay for many things in dollars- attempts to use their local currency to buy dollars quickly results in the local currency becoming ever more worthless.
Curious if any of you have considered what happens if (when??) the US Dollar is no longer the currency in which the majority of the world's oil trade is done, or, indeed, is no longer the world's reserve currency.

I'm very much an incipient student here, so I do not have an answer (nor even sure I'm on the right train of thought here!), but am beginning to think that this is one of the major risks to the dollar, and hence our investments, over the next 30-50 years. Total nonsense? Or do you any of you think this might be a real concern? And if so, care to propose any ideas on how to deal with it?

Trystero

cj2018
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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by cj2018 » Tue Jul 24, 2018 5:35 pm

SimpleGift wrote:
Tue Jul 24, 2018 1:25 pm
Valuethinker wrote:
Tue Jul 24, 2018 12:03 pm
I think you underestimate deflation risk. Big asset-debt bubble busts are associated with deflationary periods. No matter what Central Banks do.
Agree. Although the probability of deflationary shocks is much reduced in the modern era, the consequences for stock investors have historically been rather severe (table below).
As a defensive investor, I certainly haven't reduced my allocation to high-quality bonds, both nominal and TIPS. Somewhat surprisingly, in the table above, Treasury bills also held up quite well during deflationary episodes, averaging 5.6% return over the six periods compared with 7.3% for the 10-year Treasuries.
I acknowledge the existence and occurrence of deflationary risk. Deflation occurs by design when the US economy deleverages and that's the bust-phase of our economic cycle.

However, my point is we shouldn't sweat over it or take any extra/unnecessary steps in hedging against this risk since inflation is the name of the game under the current system. Having a healthy 6-18m cash EF in high-yield and AA in VBTLX already does the trick and both are good money habit in general regardless of deflation or not.

cj2018
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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by cj2018 » Tue Jul 24, 2018 5:46 pm

trystero wrote:
Tue Jul 24, 2018 5:16 pm
alfaspider wrote:
Mon Jul 23, 2018 11:10 am
One thing the U.S. does not have is foreign-denominated debt. It has the luxury of borrowing in dollars and paying in dollars. It is dependent on oil imports to some extent, but world oil markets are helpfully transacted in dollars. By contrast for example, Venezuela is forced to borrow and pay for many things in dollars- attempts to use their local currency to buy dollars quickly results in the local currency becoming ever more worthless.
Curious if any of you have considered what happens if (when??) the US Dollar is no longer the currency in which the majority of the world's oil trade is done, or, indeed, is no longer the world's reserve currency.

I'm very much an incipient student here, so I do not have an answer (nor even sure I'm on the right train of thought here!), but am beginning to think that this is one of the major risks to the dollar, and hence our investments, over the next 30-50 years. Total nonsense? Or do you any of you think this might be a real concern? And if so, care to propose any ideas on how to deal with it?

Trystero
Good question and i will bite. Without breaking certain forum policy, ill keep my response short lol.

Just like the saying goes - empires rise and fall. I believe the reserve status of USD will go at some point but nobody knows when. I hope when it does, it will be a smooth transition of power from US to whoever the next major economic power is (e.g. UK -> US in the late 20th century, smooth transition but largely due to the same value and cultural background) but if history teaches us anything, it will most likely cause huge disruption for average joes like us.

How to deal with it you ask? Not much other than save more, accelerate your FI timeline, transition from labor to owner so you always have more options. Also having international AA and hold world-wide index fund certainly doesn't hurt :sharebeer

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SimpleGift
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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by SimpleGift » Tue Jul 24, 2018 5:51 pm

cj2018 wrote:
Tue Jul 24, 2018 5:35 pm
However, my point is we shouldn't sweat over it or take any extra/unnecessary steps in hedging against this risk since inflation is the name of the game under the current system. Having a healthy 6-18m cash EF in high-yield and AA in VBTLX already does the trick and both are good money habit in general regardless of deflation or not.
My view as well. Most Boglehead portfolios, with allocations to high-quality bonds, have some built-in deflation protection.

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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by SimpleGift » Tue Jul 24, 2018 6:08 pm

trystero wrote:
Tue Jul 24, 2018 5:16 pm
Curious if any of you have considered what happens if (when??) the US Dollar is no longer the currency in which the majority of the world's oil trade is done, or, indeed, is no longer the world's reserve currency.
Just to make the point that world reserve currency is not necessarily a winner-take-all arrangement. During the interwar period of 1918-1939, the U.K. pound sterling and the U.S. dollar more-or-less shared reserve currency status, along with a few other European currencies — though the dollar certainly went on to dominate thereafter.

What's a likely future for global currencies today? From what I've read, many foresee a shared arrangement, where the global financial system rests upon three pillars — the dollar, the euro and the renminbi. This would likely be the most optimistic and least disruptive outcome, in my view.

Cookie Dough
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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by Cookie Dough » Tue Jul 24, 2018 8:18 pm

greg24 wrote:
Mon Jul 23, 2018 9:11 am
My conclusion to the charts is that deflation risk is much lower than it used to be.
Shhh...the Central Bank police are gonna get you for leaking their secrets 8-) .

alfaspider
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Re: Inflation — Perspectives from Two Centuries, 1800-2016

Post by alfaspider » Wed Jul 25, 2018 8:06 am

trystero wrote:
Tue Jul 24, 2018 5:16 pm
alfaspider wrote:
Mon Jul 23, 2018 11:10 am
One thing the U.S. does not have is foreign-denominated debt. It has the luxury of borrowing in dollars and paying in dollars. It is dependent on oil imports to some extent, but world oil markets are helpfully transacted in dollars. By contrast for example, Venezuela is forced to borrow and pay for many things in dollars- attempts to use their local currency to buy dollars quickly results in the local currency becoming ever more worthless.
Curious if any of you have considered what happens if (when??) the US Dollar is no longer the currency in which the majority of the world's oil trade is done, or, indeed, is no longer the world's reserve currency.

I'm very much an incipient student here, so I do not have an answer (nor even sure I'm on the right train of thought here!), but am beginning to think that this is one of the major risks to the dollar, and hence our investments, over the next 30-50 years. Total nonsense? Or do you any of you think this might be a real concern? And if so, care to propose any ideas on how to deal with it?

Trystero
Probably the best thing the dollar has going for it is the lack of great alternatives. The Euro is looking fragile in light of Brexit and other internal divisions. Other currencies aren't in wide enough circulation or are too unstable to be great for "world reserve" status. Perhaps that could change, but it would take some really big geopolitical events.

One thing that I think will help protect the dollar as the currency for oil transaction is the fact that the U.S. is becoming more and more important as a producer. Texas alone now would be the world's third largest oil producer if it were it's own country. China is trying to establish RMB denominated oil markets, but I think they have a long road before it gains more widespread acceptance.

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