Is the fear of actually LIVING through inflation overblown?

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Lynx310650
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Is the fear of actually LIVING through inflation overblown?

Post by Lynx310650 » Sat Aug 01, 2020 6:18 pm

First, to make this actionable, I would personally say that due to increasing gov't debt and stimulus, a fear of potential high inflation is having an impact on how I invest. I want to make sure I'm not overreacting or needlessly panicking.

I would say though the fear of inflation seems to have increased and there are more threads here on that topic and thus asking about hedges like gold, real estate, TIPS, etc.

But I do want to ask the opinion of those that lived/worked through a period of inflation like in the 70s/early 80s. Or maybe if there are folks that lived through and survived worse bouts of inflation like in Brazil or Argentina, I'd also ask - is it THAT bad?

The reason I'm kind of rethinking my fear of inflation is that I've spoken to folks that lived through that time, and while inflation was high, you were also getting double digit interest in things like CDs or bonds. So it's not like if inflation was to hit double digits again our savings would be wasting away at close to 0% interest, it seems like some people in the early 80s were actually getting positive real returns in CDs.

I could imagine inflation, or worse stagflation, being an absolute nightmare to someone that may lose their job and have little to no savings (which unfortunately is the position quite a few of our fellow citizens are in and I don't make light of that) and have to deal with quickly rising prices. But for your "average" BH that has a decent amount of savings that can be deployed in stocks, TIPS, etc., maybe inflation isn't quite the boogeyman it's being made out to be right now? At least that's what I'm hoping?

Another thing I wanted to point out was that people are expecting and fearing inflation because of this country's debt levels, but a lot of that debt is low-interest that would actually be helped by higher inflation. Could lead to a quick lowering of the debt as a percentage of GDP and of course the Fed has a lot of tools to try to bring inflation under control as well...

I feel like what people are really scared of is the type of insane hyperinflation that has happened fairly recently in Venezuela or Zimbabwe, but that seems extremely unlikely here, and I'm not sure if there is a real way to hedge against that kind of scenario unfolding in the USA of all places.

RocketShipTech
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Re: Is the fear of actually LIVING through inflation overblown?

Post by RocketShipTech » Sat Aug 01, 2020 6:20 pm

Only on Bogleheads do you have people in permanent fear of inflation, and at the same time, trying to pay off their 30-year fixed rate mortgages as quickly as possible.

:confused

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Re: Is the fear of actually LIVING through inflation overblown?

Post by willthrill81 » Sat Aug 01, 2020 6:23 pm

RocketShipTech wrote:
Sat Aug 01, 2020 6:20 pm
Only on Bogleheads do you have people in permanent fear of inflation, and at the same time, trying to pay off their 30-year fixed rate mortgages as quickly as possible.

:confused
Or holding a 30 year mortgage while continuing to stuff money into TBM because it worked well for the last ~40 years, without regard to how it performed in the 40 years prior to that.

At least on the fixed income side, addressing inflation concerns is easy: buy TIPS and I bonds.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Is the fear of actually LIVING through inflation overblown?

Post by RetiredAL » Sat Aug 01, 2020 6:31 pm

RocketShipTech wrote:
Sat Aug 01, 2020 6:20 pm
Only on Bogleheads do you have people in permanent fear of inflation, and at the same time, trying to pay off their 30-year fixed rate mortgages as quickly as possible.

:confused
+1

One should realize that having a programmed 2% inflation rate allows the government borrowing to be re-paid with discounted ( value wise ) $ in the future. 2% for 20 years results in a 35% haircut.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by UpperNwGuy » Sat Aug 01, 2020 6:45 pm

My working career extended through the late 1960s, the 1970s, and the early 1980s. It wasn't pretty, but I think the government has learned a few things that will avoid a repeat of that era.

Bogleheads have been fearing inflation for many years, long before the current COVID-19 crisis.

texanghost
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Re: Is the fear of actually LIVING through inflation overblown?

Post by texanghost » Sat Aug 01, 2020 6:49 pm

willthrill81 wrote:
Sat Aug 01, 2020 6:23 pm
Or holding a 30 year mortgage while continuing to stuff money into TBM because it worked well for the last ~40 years, without regard to how it performed in the 40 years prior to that.

At least on the fixed income side, addressing inflation concerns is easy: buy TIPS and I bonds.
Wow, I had no idea real returns for bonds were so depressed in that period you mentioned! It's pretty bad 1940s-1980s (see 3rd graph here): https://quantpedia.com/historical-retur ... ince-1793/

That sure is something to consider when thinking about the impact of inflationary periods.

That being said, I don't think it's irrational to buy TBM when you have a mortgage. Owning bonds, especially something like Total Bond, gives you liquidity that can be valuable if a stock market crash messes with your asset allocation. I personally am doing a little bit of both (paying extra mortgage + buying total bond). I don't expect bonds with their absurdly low yields to return much if anything in real terms, but they act as a ballast against equity downturns and will let me take advantage of them when they occur by rebalancing. And there's a chance they'll do better than cash.

To answer OP's question, though: I'm not too afraid of inflation for the reasons you mentioned *and* because I expect the equities side of the portfolio to eventually catch up, as a youngish investor. Yes, there could be a period of stagflation, but I doubt that stocks would never catch up if you own a very diversified portfolio and are holding for the long term. On the other hand, if I were in my early 60s and had a substantial bond allocation, lowering unexpected inflation risk through some TIPS would give me a little more peace.

The risk really just depend on what stage of investing you're in. I think of inflation sort of as another factor of sequence of return risk.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by Taylor Larimore » Sat Aug 01, 2020 6:50 pm

Lynx310650 wrote:
Sat Aug 01, 2020 6:18 pm
First, to make this actionable, I would personally say that due to increasing gov't debt and stimulus, a fear of potential high inflation is having an impact on how I invest. I want to make sure I'm not overreacting or needlessly panicking.

I would say though the fear of inflation seems to have increased and there are more threads here on that topic and thus asking about hedges like gold, real estate, TIPS, etc.

But I do want to ask the opinion of those that lived/worked through a period of inflation like in the 70s/early 80s. Or maybe if there are folks that lived through and survived worse bouts of inflation like in Brazil or Argentina, I'd also ask - is it THAT bad?

The reason I'm kind of rethinking my fear of inflation is that I've spoken to folks that lived through that time, and while inflation was high, you were also getting double digit interest in things like CDs or bonds. So it's not like if inflation was to hit double digits again our savings would be wasting away at close to 0% interest, it seems like some people in the early 80s were actually getting positive real returns in CDs.

I could imagine inflation, or worse stagflation, being an absolute nightmare to someone that may lose their job and have little to no savings (which unfortunately is the position quite a few of our fellow citizens are in and I don't make light of that) and have to deal with quickly rising prices. But for your "average" BH that has a decent amount of savings that can be deployed in stocks, TIPS, etc., maybe inflation isn't quite the boogeyman it's being made out to be right now? At least that's what I'm hoping?

Another thing I wanted to point out was that people are expecting and fearing inflation because of this country's debt levels, but a lot of that debt is low-interest that would actually be helped by higher inflation. Could lead to a quick lowering of the debt as a percentage of GDP and of course the Fed has a lot of tools to try to bring inflation under control as well...

I feel like what people are really scared of is the type of insane hyperinflation that has happened fairly recently in Venezuela or Zimbabwe, but that seems extremely unlikely here, and I'm not sure if there is a real way to hedge against that kind of scenario unfolding in the USA of all places.
lynx310650:

This may be the best answer to your question about future inflation: Below are the historical returns of funds in The Three-Fund Portfolio during the high U.S. inflation of the late 70s and early 80s:

YEAR--INFLATION--BOND INDEX--S&P 500 T.R. INDEX--MSCI EAFE T.R.INDEX
1976-------4.9%--------15.6%------------23.8%--------------------3.6%
1977-------6.7-----------3.0-------------(-7.2)-------------------17.5
1978-------9.0-----------1.4---------------6.6--------------------33.1
1979------13.3-----------1.9--------------18.4-------------------10.9 (Highest Annual Inflation Rate)
1980------12.5-----------2.7--------------32.4-------------------25.4
1981-------8.9-----------6.3-------------(-4.9)------------------(-2.5)
1982-------3.8----------32.6--------------21.6------------------(-0.3) (Highest Bond Index Return)
1983-------3.8-----------8.4--------------22.6-------------------24.8
1984-------3.9----------15.2---------------6.3--------------------3.5
1985-------3.8----------22.1--------------31.7-------------------51.4
1986-------1.1----------15.2--------------18.7-------------------65.8 (Vanguard Total Bond Market Inception )
1987-------4.4-----------2.8----------------5.2-------------------24.6
1988-------4.4-----------7.9---------------16.6-------------------27.8
1989-------4.6----------14.5---------------31.7------------------11.4
1990-------6.1-----------8.9---------------(-3.1)---------------(-22.8)
1991-------3.1----------16.0---------------30.5------------------12.4
1992-------2.9-----------7.4-----------------7.6----------------(-11.9) (Vanguard Total Stock Market Inception)
1993-------2.7-----------9.7----------------10.1------------------32.6
1994-------2.7---------(-2.9)----------------1.3--------------------7.6 (Lowest Bond Index Return)
1995-------2.5----------18.5---------------37.6-------------------11.8 (Highest S&P Index Return)
1996-------3.3-----------3.6----------------23.0--------------------7.2 (Vanguard Total International Stock Market Inception
1997-------1.7-----------9.7----------------33.4--------------------2.6
1998-------1.6-----------8.7----------------28.6-------------------19.1
1999-------2.7---------(-0.8)---------------21.0-------------------28.3
2000-------3.4----------11.6---------------(-9.1)----------------(-15.8)
2001-------1.6-----------8.4--------------(-11.9)----------------(-19.8)
2002-------2.4----------10.3-------------(-22.1)----------------(-15.3)
2003-------1.9-----------4.1----------------28.7-------------------40.4
2004-------3.3-----------4.3----------------10.9-------------------20.9
2005-------3.4-----------2.4-----------------4.9-------------------15.8
2006-------2.5-----------4.3----------------15.8------------------26.8
2007-------4.1-----------7.0-----------------5.5------------------11.6
2008-------0.1-----------5.2--------------(-37.0)---------------(-43.1) (Lowest U.S. and International Stock Returns)
2009-------2.7-----------5.9----------------26.5------------------32.5
2010-------1.5-----------6.5----------------15.1-------------------8.2
2011-------3.0-----------7.7-----------------2.1----------------(-11.7)
2012-------1.7-----------4.3----------------16.0------------------17.9
2013-------1.5---------(-2.0)---------------32.4------------------23.3
2014-------1.6-----------6.0----------------13.7-----------------(-4.5)
2015-------0.7-----------0.5-----------------1.4-----------------(-0.4)
2016-------2.1-----------2.6----------------12.0-------------------1.5
2017-------2.1-----------3.5----------------21.8------------------25.6
2018-------2.5---------(-0.1)--------------(-4.4)---------------(-13.4)
2019 ------2.3-----------8.7----------------31.5------------------22.7

Sources: U.S. Labor Department (CPI-U); Bloomberg Barclays Aggregate Bond Index; Standard & Poors; and dfturner

Lessons learned:

* Past performance does not forecast future performance.

* The Aggregate Bond Index (benchmark for Vanguard Total U.S.Bond Market Index Fund) had only four negative years (all small) reflecting very low risk.

* In 2008 the S&P 500 Stock Index plunged (-38.5%). During the next 2 years it gained +41.52% (stay-the-course).

* Foreign Stocks enjoyed the highest annual return (1986).

* Table demonstrates the futility of using past performance to forecast future performance.

* More money has been lost in the U.S. worrying about inflation than inflation itself.

* Diversification is important.

* Inflation climbed from 4.9% in 1976 to 13.3% in 1976. During that period a combination of Total Bond Market and stocks beat inflation.

* Think long-term.

Best wishes
Taylor
Jack Bogle's Words of Wisdom: “Time is your friend and impulse is your enemy. It’s the market return that’s going to be your best investment for a lifetime.”
Last edited by Taylor Larimore on Sat Aug 01, 2020 8:03 pm, edited 2 times in total.
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Is the fear of actually LIVING through inflation overblown?

Post by KlangFool » Sat Aug 01, 2020 6:57 pm

OP,

This is personal finance. It is personal. Inflation does not impact each individual equally.

Let's say that inflation is X%, it does not mean your annual expense increase by X%. It could be more or less. But, it is not likely to be X%.

A) For example, a large portion of inflation is the housing expense. If you buy an affordable house with a low-interest mortgage, your housing expense is fixed. So, how does the inflation affects you? It does not.

B) What is your portfolio size? If it is 50 or greater times your annual expense, your portfolio growth will exceed your annual withdrawal. Your portfolio will grow bigger regardless of inflation.

C) Your ability to control your annual expense is not totally related to inflation. You are not average.

KlangFool

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Re: Is the fear of actually LIVING through inflation overblown?

Post by nisiprius » Sat Aug 01, 2020 7:00 pm

1) High inflation, as in the US in 1976-1981, isn't like hyperinflation at all, and people trying to tell scare stories about inflation like to confuse the two.

2) Inflation in 1976-1981 was definitely disturbing. It averaged 10% annualized. That's a little less than 1% per month. What that means is that you don't just see some prices rising, you are constantly aware of every price rising.

In those days they still put physical price stickers on grocery items, and something with a long shelf life, like canned food, would have a stack of five or six price stickers on top of each other. It was sometimes possible to peel the top sticker off and expose a lower, older price. Amazingly, many cashiers' had good enough memories to catch this, but there were no barcode scanners and it was sometimes possible to get away with it.

If the family budget was like ours--not desperate, but a little tight--you could feel things constricting over the course of a year. You had the sense of constantly falling behind. Not "we'll starve," but an uneasy feeling of trying your best to live within your means but not quite doing it, and its getting harder and harder. A 10% cut in buying power is noticeable. Annual salary reviews were nerve-racking because you needed that raise. Now, to be fair, most ordinary workers got raises, salaries more or less pretty much kept up with inflation, but it was still disturbing.

For part of that time, the US government had imposed price controls to try to keep inflation under control. It didn't work very well--as shown by the CPI statistics, which to me is evidence of the integrity of the Bureau of Labor Statistics. Companies got around it in the obvious sneaky ways. I remember the vending machine in the company cafeteria keeping the price the same, but changing the size of the little containers of milk from 10 ounces to 8 ounces. That was illegal and wasn't supposed to happen, but there was a lot of that happening. More subtle, of course, was that the controls only applied to a specific product, and it was too easy just to change a product name. As it happens the one I remember was Digital Equipment Corporations operating system for their PDP-8 series, PS/8. During the price controls, the release that ought to be have been a new version number of PS/8 was renamed "OS/8," thus a new product, and the price was raised. Correction, they introduced a new product with a higher price and discontinued the old one.

3) The worst period of inflation in the United States since the CPI began being compiled occurred from 1915 to 1920, averaging 15.66% per year. I think it is very important to remember that this occurred even though the United States was on the gold standard and the dollar was literally as good as gold. Prices almost exactly doubled over this five-year period.

Of course (!) I didn't live through that, but it makes for an interesting detail in the history of the Ford Motor Company and labor relations. In 1914, Henry Ford doubled his workers' wages to $5 a day, which astonished literally the whole world and made Ford the idol of left and right alike. I think this is what is behind Aldous Huxley making Ford a religious figure in Brave New World. But over the next five years prices doubled, too, taking the high wages right back out of workers' pockets and leading to labor disappointment and dissatisfaction.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by Trader Joe » Sat Aug 01, 2020 7:19 pm

Lynx310650 wrote:
Sat Aug 01, 2020 6:18 pm
First, to make this actionable, I would personally say that due to increasing gov't debt and stimulus, a fear of potential high inflation is having an impact on how I invest. I want to make sure I'm not overreacting or needlessly panicking.

I would say though the fear of inflation seems to have increased and there are more threads here on that topic and thus asking about hedges like gold, real estate, TIPS, etc.

But I do want to ask the opinion of those that lived/worked through a period of inflation like in the 70s/early 80s. Or maybe if there are folks that lived through and survived worse bouts of inflation like in Brazil or Argentina, I'd also ask - is it THAT bad?

The reason I'm kind of rethinking my fear of inflation is that I've spoken to folks that lived through that time, and while inflation was high, you were also getting double digit interest in things like CDs or bonds. So it's not like if inflation was to hit double digits again our savings would be wasting away at close to 0% interest, it seems like some people in the early 80s were actually getting positive real returns in CDs.

I could imagine inflation, or worse stagflation, being an absolute nightmare to someone that may lose their job and have little to no savings (which unfortunately is the position quite a few of our fellow citizens are in and I don't make light of that) and have to deal with quickly rising prices. But for your "average" BH that has a decent amount of savings that can be deployed in stocks, TIPS, etc., maybe inflation isn't quite the boogeyman it's being made out to be right now? At least that's what I'm hoping?

Another thing I wanted to point out was that people are expecting and fearing inflation because of this country's debt levels, but a lot of that debt is low-interest that would actually be helped by higher inflation. Could lead to a quick lowering of the debt as a percentage of GDP and of course the Fed has a lot of tools to try to bring inflation under control as well...

I feel like what people are really scared of is the type of insane hyperinflation that has happened fairly recently in Venezuela or Zimbabwe, but that seems extremely unlikely here, and I'm not sure if there is a real way to hedge against that kind of scenario unfolding in the USA of all places.
Yes it is.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by arcticpineapplecorp. » Sat Aug 01, 2020 7:20 pm

it doesn't matter if your cd is paying 13.48% (as it would have in Jan 1980) if inflation was 13.9% (as it was in Jan 1980).

this happened:

inflation rates:
https://www.usinflationcalculator.com/i ... ion-rates/

cd rates:
https://www.forecast-chart.com/rate-cd-interest.html

cds paid 8.73% in July 1980. Unfortunately, inflation was 13.1%.

You're losing money that way, aren't you?

The problem also is if wages don't go up fast enough to keep pace with inflation. Say you get a raise of 4% but inflation goes up 6%. You're now 2% poorer than you were even after getting a raise.

it doesn't matter that you have savings and investment. If your income doesn't buy you what it used to, you feel poorer because you either don't have enough anymore (and you used to) or you don't have as much to invest as you used to.

over time stocks do fine with inflation, but this is over longer periods of time. Sometimes stocks don't do well with inflation shocks in the short term.

I've noticed prices have gone up. My grocery bill has definitely gone up over the past few months. That may not be due to inflation, but to more supply/demand issues due to the pandemic, but it hurts just the same. Fortunately, I'm spending less on gas and other activities, so the budget hasn't been busted, but still, if prices don't revert and raises don't keep pace, standards of living decline.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: Is the fear of actually LIVING through inflation overblown?

Post by whomever » Sat Aug 01, 2020 7:25 pm

" you were also getting double digit interest in things like CDs or bonds."

1)That kind of depends on term. If you bought a long term bond or CD paying 5% just before things took off, yes, you took a permanent haircut.

2)I was a young'un, and my money was in a savings account paying the usual 5.5% ... I was acutely aware of the shrinkage.

3)If you had some kind of not-CPI-adjusted pension or annuity, you took the haircut. My better half, for example, has a pension that is capped at a 3% COLA. That's great in normal times, but with double digit inflation you take a haircut you don't recover from in your lifetime.

4)As Nisi aptly states, suppose inflation is 10%, and you get a 10% raise annually. While you wait for the raise, prices are going up. It's effectively a 5% pay cut over time.

5)If you have a fixed rate mortgage, you're laughing all the way to the bank, unless you have to move (do they still have assumable mortgages?).

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Re: Is the fear of actually LIVING through inflation overblown?

Post by Broken Man 1999 » Sat Aug 01, 2020 7:31 pm

I was employed in the 70ties, so my wages blunted the effects.

And, double-digit CDs were available.

The effect on retirees was probably much greater, as would be the case today, as well, I think.

Broken Man 1999
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Re: Is the fear of actually LIVING through inflation overblown?

Post by 000 » Sat Aug 01, 2020 7:44 pm

Broken Man 1999 wrote:
Sat Aug 01, 2020 7:31 pm
I was employed in the 70ties, so my wages blunted the effects.
How closely do you think your wages tracked? Did employers start doing out-of-band (not for good performance) raises more than yearly?

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Re: Is the fear of actually LIVING through inflation overblown?

Post by Broken Man 1999 » Sat Aug 01, 2020 7:58 pm

000 wrote:
Sat Aug 01, 2020 7:44 pm
Broken Man 1999 wrote:
Sat Aug 01, 2020 7:31 pm
I was employed in the 70ties, so my wages blunted the effects.
How closely do you think your wages tracked? Did employers start doing out-of-band (not for good performance) raises more than yearly?
I was earning some good promotions, so I honestly don't know. I don't remember being particulary stressed. I know one promotion grabbed me about a 18% raise, I do remember that one. DW and I were both working, and the children didn't start arriving until the late 70ties. So, we were living pretty well. Low expenses, and we were stashing savings. We had no car payments in the 70ties. My first car payment was on our '82 Grand Prix, and I disliked the payments and paid it off rapidly. Most of the subsequent cars were via loans, paid off rapidly. For the last 20 years+ we have paid cash.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain

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Re: Is the fear of actually LIVING through inflation overblown?

Post by Triple digit golfer » Sat Aug 01, 2020 8:01 pm

nisiprius wrote:
Sat Aug 01, 2020 7:00 pm
1) High inflation, as in the US in 1976-1981, isn't like hyperinflation at all, and people trying to tell scare stories about inflation like to confuse the two.

2) Inflation in 1976-1981 was definitely disturbing. It averaged 10% annualized. That's a little less than 1% per month. What that means is that you don't just see some prices rising, you are constantly aware of every price rising.

In those days they still put physical price stickers on grocery items, and something with a long shelf life, like canned food, would have a stack of five or six price stickers on top of each other. It was sometimes possible to peel the top sticker off and expose a lower, older price. Amazingly, many cashiers' had good enough memories to catch this, but there were no barcode scanners and it was sometimes possible to get away with it.

If the family budget was like ours--not desperate, but a little tight--you could feel things constricting over the course of a year. You had the sense of constantly falling behind. Not "we'll starve," but an uneasy feeling of trying your best to live within your means but not quite doing it, and its getting harder and harder. A 10% cut in buying power is noticeable. Annual salary reviews were nerve-racking because you needed that raise. Now, to be fair, most ordinary workers got raises, salaries more or less pretty much kept up with inflation, but it was still disturbing.

For part of that time, the US government had imposed price controls to try to keep inflation under control. It didn't work very well--as shown by the CPI statistics, which to me is evidence of the integrity of the Bureau of Labor Statistics. Companies got around it in the obvious sneaky ways. I remember the vending machine in the company cafeteria keeping the price the same, but changing the size of the little containers of milk from 10 ounces to 8 ounces. That was illegal and wasn't supposed to happen, but there was a lot of that happening. More subtle, of course, was that the controls only applied to a specific product, and it was too easy just to change a product name. As it happens the one I remember was Digital Equipment Corporations operating system for their PDP-8 series, PS/8. During the price controls, the release that ought to be have been a new version number of PS/8 was renamed "OS/8," thus a new product, and the price was raised. Correction, they introduced a new product with a higher price and discontinued the old one.

3) The worst period of inflation in the United States since the CPI began being compiled occurred from 1915 to 1920, averaging 15.66% per year. I think it is very important to remember that this occurred even though the United States was on the gold standard and the dollar was literally as good as gold. Prices almost exactly doubled over this five-year period.

Of course (!) I didn't live through that, but it makes for an interesting detail in the history of the Ford Motor Company and labor relations. In 1914, Henry Ford doubled his workers' wages to $5 a day, which astonished literally the whole world and made Ford the idol of left and right alike. I think this is what is behind Aldous Huxley making Ford a religious figure in Brave New World. But over the next five years prices doubled, too, taking the high wages right back out of workers' pockets and leading to labor disappointment and dissatisfaction.
What an interesting post! Thank you for sharing! I thoroughly enjoy your posts and have for years.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by 000 » Sat Aug 01, 2020 8:01 pm

Broken Man 1999 wrote:
Sat Aug 01, 2020 7:58 pm
000 wrote:
Sat Aug 01, 2020 7:44 pm
Broken Man 1999 wrote:
Sat Aug 01, 2020 7:31 pm
I was employed in the 70ties, so my wages blunted the effects.
How closely do you think your wages tracked? Did employers start doing out-of-band (not for good performance) raises more than yearly?
I was earning some good promotions, so I honestly don't know. I don't remember being particulary stressed. I know one promotion grabbed me about a 18% raise, I do remember that one. DW and I were both working, and the children didn't start arriving until the late 70ties. So, we were living pretty well. Low expenses, and we were stashing savings. We had no car payments in the 70ties. My first car payment was on our '82 Grand Prix, and I disliked the payments and paid it off rapidly. Most of the subsequent cars were via loans, paid off rapidly. For the last 20 years+ we have paid cash.

Broken Man 1999
Thanks for sharing your experiences.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by jarjarM » Sat Aug 01, 2020 8:08 pm

RetiredAL wrote:
Sat Aug 01, 2020 6:31 pm
RocketShipTech wrote:
Sat Aug 01, 2020 6:20 pm
Only on Bogleheads do you have people in permanent fear of inflation, and at the same time, trying to pay off their 30-year fixed rate mortgages as quickly as possible.

:confused
+1

One should realize that having a programmed 2% inflation rate allows the government borrowing to be re-paid with discounted ( value wise ) $ in the future. 2% for 20 years results in a 35% haircut.
+2, save Some gold coins for doomsday and invest the $$$ instead of paying down a fixed rate mortgage

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Re: Is the fear of actually LIVING through inflation overblown?

Post by JBTX » Sat Aug 01, 2020 8:31 pm

I was only in later grade school, so I didnt experience it as a worker, but nonetheless remember it. Overall quality of life was good, but constant inflation kind of contributed to an overall feeling of helplessness, or just overall economic or societal slow decay. In was just a small amount of constant instability and unpredictability built in.

Where is can make a difference is with savers. Equities got hit pretty hard on a real inflation adjusted basis. For a period of 4-5 years bonds did too. Taylor's numbers are interesting and they show how international in theory could have helped, but access to international stocks were limited, and a mere 20% allocation only helps a little.

For years I've always looked at guys like Peter Schiff as crackpots. But what we are going through now is something completely different. Buying trillions of our own debt, routinely running multitrilkion dollar deficits. People were screaming end of the world in 2008, when we were doing this stuff at a fraction of what we are doing now. Now people just shrug their shoulders like it is normal, and we have a new theory called MMT which is being interpreted as print and spend as much as you want and worry about inflation later. Couple all of that with future obligations and it makes your head spin.

Having said all that, I don't know how it all plays out. By all indications inflation is now different. There is less consumer price inflation, and more inflation in assets, which technically isn't inflation. The structure of the economy is different now, globalization, wealth inequality, automation, technology which tend to keep a lid on price inflation. But more and more money printing/borrowing/etc logically has to have an effect of some sort.

I suspect you will see stocks continue to inflate to higher PES. We could reach 1999 levels, or higher. I'm not a fan of gold/silver as an investment, but I suspect it will continue to go up.

Who knows. To me it calls for diversification. Don't get out of stocks, but don't go overboard. Have some international. Minimize conventional bonds. It is hard to see a scenario where rates go up because at some point the federal debt service would be crushing. TIPS. IBONDS. And maybe even some gold and silver. It drives me nuts that I'm even typing that.

Small stocks and REITS did better than average with inflation also.

One difference is if we do have inflation, I'm not sure what will stop it. I see no scenario where we embrace a Paul Volcker soul crushing series of interest rate hikes to squash it.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by JBTX » Sat Aug 01, 2020 8:42 pm

RocketShipTech wrote:
Sat Aug 01, 2020 6:20 pm
Only on Bogleheads do you have people in permanent fear of inflation, and at the same time, trying to pay off their 30-year fixed rate mortgages as quickly as possible.

:confused
Theres the rub. We end up with ongoing 5% inflation with 1-2% interest rates.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by willthrill81 » Sat Aug 01, 2020 9:03 pm

texanghost wrote:
Sat Aug 01, 2020 6:49 pm
That being said, I don't think it's irrational to buy TBM when you have a mortgage. Owning bonds, especially something like Total Bond, gives you liquidity that can be valuable if a stock market crash messes with your asset allocation. I personally am doing a little bit of both (paying extra mortgage + buying total bond). I don't expect bonds with their absurdly low yields to return much if anything in real terms, but they act as a ballast against equity downturns and will let me take advantage of them when they occur by rebalancing. And there's a chance they'll do better than cash.
Yes, buying bonds yielding significantly less than one's mortgage makes sense if one really needs the liquidity that the bonds provide. And if those bonds provide enough ballast to allow an investor to not panic sell during a market downturn, it can make sense then too. But the so-called 'rebalancing bonus' is a myth; bonds reduce a portfolio's expected return, period. And yes, bonds may outperform cash (i.e. a high-yield savings account, T-bills, CDs, etc.), but they may underperform cash for a long time. We know this because it's already happened before.
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Re: Is the fear of actually LIVING through inflation overblown?

Post by flaccidsteele » Sat Aug 01, 2020 9:44 pm

Fear is always overblown because it’s a simulation of the future run by your brain in the present
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Re: Is the fear of actually LIVING through inflation overblown?

Post by flaccidsteele » Sat Aug 01, 2020 9:46 pm

RocketShipTech wrote:
Sat Aug 01, 2020 6:20 pm
Only on Bogleheads do you have people in permanent fear of inflation, and at the same time, trying to pay off their 30-year fixed rate mortgages as quickly as possible.

:confused
+1 very true!

🤣
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Re: Is the fear of actually LIVING through inflation overblown?

Post by Svensk Anga » Sat Aug 01, 2020 9:50 pm

arcticpineapplecorp. wrote:
Sat Aug 01, 2020 7:20 pm
it doesn't matter if your cd is paying 13.48% (as it would have in Jan 1980) if inflation was 13.9% (as it was in Jan 1980).
Oh, but it does matter. That 13.48% CD is pre-tax. I was in the 29% bracket as a starting engineer about this time. (Taxes were steeper then.) So 13.48% gross yield would become 9.57% after tax and one would definitely be losing purchasing power by saving. High inflation encourages people to spend it all NOW.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by 000 » Sat Aug 01, 2020 10:12 pm

I think the bigger issue (at least regarding hyperinflation) isn't necessarily the inflation itself, it's whatever caused it to occur. Of course a discussion of that might be off topic for this forum.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by ResearchMed » Sat Aug 01, 2020 10:15 pm

Lynx310650 wrote:
Sat Aug 01, 2020 6:18 pm
First, to make this actionable, I would personally say that due to increasing gov't debt and stimulus, a fear of potential high inflation is having an impact on how I invest. I want to make sure I'm not overreacting or needlessly panicking.

I would say though the fear of inflation seems to have increased and there are more threads here on that topic and thus asking about hedges like gold, real estate, TIPS, etc.

But I do want to ask the opinion of those that lived/worked through a period of inflation like in the 70s/early 80s. Or maybe if there are folks that lived through and survived worse bouts of inflation like in Brazil or Argentina, I'd also ask - is it THAT bad?

The reason I'm kind of rethinking my fear of inflation is that I've spoken to folks that lived through that time, and while inflation was high, you were also getting double digit interest in things like CDs or bonds. So it's not like if inflation was to hit double digits again our savings would be wasting away at close to 0% interest, it seems like some people in the early 80s were actually getting positive real returns in CDs.

I could imagine inflation, or worse stagflation, being an absolute nightmare to someone that may lose their job and have little to no savings (which unfortunately is the position quite a few of our fellow citizens are in and I don't make light of that) and have to deal with quickly rising prices. But for your "average" BH that has a decent amount of savings that can be deployed in stocks, TIPS, etc., maybe inflation isn't quite the boogeyman it's being made out to be right now? At least that's what I'm hoping?

Another thing I wanted to point out was that people are expecting and fearing inflation because of this country's debt levels, but a lot of that debt is low-interest that would actually be helped by higher inflation. Could lead to a quick lowering of the debt as a percentage of GDP and of course the Fed has a lot of tools to try to bring inflation under control as well...

I feel like what people are really scared of is the type of insane hyperinflation that has happened fairly recently in Venezuela or Zimbabwe, but that seems extremely unlikely here, and I'm not sure if there is a real way to hedge against that kind of scenario unfolding in the USA of all places.
[emphasis added]

About that bit highlighted above, "while inflation was high, you were also getting double digit interest in things like CDs or bonds" ... not everyone actually had those "CDs or bonds" or other assets that would be *receiving* the spoils of those high rate. But many of them would, nevertheless, be paying those high rates on loans and credit card debt, etc. Whether that was/is wise is separate; that was the reality for them.
Just think of the frequently discussed (here on BH anyway) comment about how many people/families/households/? would not be able to cover a $400 (or $1k) emergency expense. (Let's not quibble here about how accurate that is. Clearly there are plenty of people who are indeed living paycheck to paycheck, fighting very hard to pay expenses, etc.)
Many of these people, and others somewhat better off, have lots of consumer debt.

I lived/worked through the early 1980's, with those high rates.
I remember it very well, but at the time, I did not understand how unusual or dramatic it was.
My first mortgage was something like 17.5%, but it was "all I knew". That's what was available for mortgages, and that's what I got. Keep in mind that things started changing quite rapidly, so it was not nearly as bad as it would have been if those rates had continued for a decade or several decades. I quickly refinanced to about 13%, and then again to about 10.5%, and given the comparison, I thought those lowers rates were "terrific".

But I definitely did NOT benefit from high returns on "CDs or bonds" back then because I didn't yet have any.
And unfortunately, many people never get past that stage, of course.

Mortgage rates in low single digits still seem *crazy* to me, given my early experiences.

We here on Bogleheads are an unusual group, and it's easy (too easy, it sometimes seems) to think that our experiences or situations are somewhat the norm.

RM
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Re: Is the fear of actually LIVING through inflation overblown?

Post by WolfgangPauli » Sat Aug 01, 2020 10:48 pm

RocketShipTech wrote:
Sat Aug 01, 2020 6:20 pm
Only on Bogleheads do you have people in permanent fear of inflation, and at the same time, trying to pay off their 30-year fixed rate mortgages as quickly as possible.

:confused
LOL.. funny. :)
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Re: Is the fear of actually LIVING through inflation overblown?

Post by WolfgangPauli » Sat Aug 01, 2020 10:52 pm

UpperNwGuy wrote:
Sat Aug 01, 2020 6:45 pm
My working career extended through the late 1960s, the 1970s, and the early 1980s. It wasn't pretty, but I think the government has learned a few things that will avoid a repeat of that era.

Bogleheads have been fearing inflation for many years, long before the current COVID-19 crisis.
A lot of regulations have changed since then. Interest rates were regulated much heavier than they are now and by law you had some banks (Savings and Loans) paying higher interest rates then they could get on loans. There was no self correcting mechanism really until Volker came in. We also had a feeling if we just put "caps" on prices by regulation, somehow that would stop inflation (I wore a WIN button - Whip Inflation Now - I think that was Nixon era).

Again, with a lot of the deregulation, Nixon taking us off of Gold and Volker showing the way to crush inflation I think there are so many different things now that inflation is tamped down.

In fact, the biggest issue for central banks in the last 10 years has been DEFLATION. That is the killer right now. Remember, earlier this year we (The USA) intervened on behalf of the OPEC+ to actually limit production to get prices up! Who would have thought it.

I am far more fearful of deflation than inflation.
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Re: Is the fear of actually LIVING through inflation overblown?

Post by Christine_NM » Sat Aug 01, 2020 11:31 pm

Macro inflation rates don't tell you much about LIVING thru it.

I remember the fifties, sixties and early seventies as a time when most items in a grocery store cost less than 59 cents. Meat was less than a dollar a pound. You could buy a house outright with a cash gift from an older relative's savings account. A new car cost $2000. Buying on time or layaway was for slackers. Once in 1974 I remember stocking a new apartment kitchen with all staples for $15 at KMart. (My 1974 salary was about $9000 a year.)

There were no consumer electronics and cable TV so you didn't waste a lot of money on subscription services, duplicative devices, or other junk that wasted your time. Life was pretty simple and cheap. Jobs were full time, with a pension.

Now we have zero rates but so much more new stuff is considered essential that the cost of living is way higher. Some consumer stuff is worth it, some not.
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Re: Is the fear of actually LIVING through inflation overblown?

Post by SB1234 » Sat Aug 01, 2020 11:57 pm

Deleted. off topic.
Last edited by SB1234 on Sun Aug 02, 2020 12:06 am, edited 1 time in total.
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Re: Is the fear of actually LIVING through inflation overblown?

Post by WoodSpinner » Sun Aug 02, 2020 12:00 am

OP,

To be clear, I am much more worried about Deflation in the near term (1-3 years) than inflation.

I started my working career in 1978 and remember the psychological effects of inflation way more than the economics. Since I was just starting out, my focus was on the job, growing my skills, gaining experience and learning to be on my own.

I don’t believe the inflation we experienced in the late 70’s was due to government deficits and printing too much money. It was a reaction to the huge shock of the Oil Embargos and HUGE increases in the costs of energy. It forced a wholesale rethinking and reengineering of the economy.

I do remember being paid double-time ($6.40/hour) to get up at 4 in the morning, walk 2 miles to the service station, get in line for at least an hour, to fill up 4 extra 5 gallon cans of gas for the Deli I worked at. They had deliveries to make and you could only fill up every other day.

My fervent hope is we find a way out of this crisis — I would hate to repeat the malaise and hopeless feeling we went through. Of course I was one of the lucky ones, I had a job in IT and was doing something I loved.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by flaccidsteele » Sun Aug 02, 2020 12:08 am

SB1234 wrote:
Sat Aug 01, 2020 11:57 pm
flaccidsteele wrote:
Sat Aug 01, 2020 11:13 pm
WolfgangPauli wrote:
Sat Aug 01, 2020 10:58 pm
For a completely different perspective, I suggest you read The Deficit Myth by Stephanie Kelton. A fascinating book and a complete different look on deficits and what is acceptable and why we have literally no inflation.

Not saying I fully agree with it but it does open the mind to some interesting counter economic theories.
This review by the WSJ doesn’t make the book sound very well thought out...
I think it's well known fact that WSJ has atleast a slight neo con tilt. Do you have any other inputs about the book itself.
After reading the review, I’m certain that I wouldn’t have been able to find the discrepancies in the author’s writing cited by the WSJ
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Re: Is the fear of actually LIVING through inflation overblown?

Post by SB1234 » Sun Aug 02, 2020 12:32 am

There was a topic recently about MMT about a video by Kelton. You can check it if you are interested.
viewtopic.php?t=310962
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Re: Is the fear of actually LIVING through inflation overblown?

Post by Watty » Sun Aug 02, 2020 1:11 am

WoodSpinner wrote:
Sun Aug 02, 2020 12:00 am
To be clear, I am much more worried about Deflation in the near term (1-3 years) than inflation.
In addition to people being laid off there have also been people who have posted about things like 401k matches being suspended, hours being reduced, and across the board pay cuts. With that going on I don't see any signs of wage inflation.

There are also several types of inflation that you need to consider. Wage inflation where wages go up so people have more to spend, monatary inflation where the money supply increases, and price inflation where prices increase. There are probably others too.

There are usually interrelated but sometimes they will not go in lockstep. In the 1970s there was "stagflation" where wages were stagnant but prices were increasing.

If I had to guess I would think that stagflation is a real possibility.

That basically translates to a lower standard of living.

Unemployment is also a factor and there is also a misery index which is the total of unemployment and inflation.

https://en.wikipedia.org/wiki/Misery_index_(economics)

One concern that I have is that disruptions in the supply chain may cause prices to increase and there are already several threads which are talking about what products are in short supply.

viewtopic.php?f=11&t=320340

Some of these are not things like toilet paper which people may just be buying more of. I ran into this a few weeks ago when I wanted to replace a washing machine. It turned out many stores were out of many models so I was shopping just to find one and not so much looking for a good price.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by celia » Sun Aug 02, 2020 4:52 am

OP, There's been inflation since you were born. Were you fearful all those past years?

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Re: Is the fear of actually LIVING through inflation overblown?

Post by Seasonal » Sun Aug 02, 2020 5:18 am

Where do people think the extra money from higher costs is going? For every dollar extra you pay, someone is receiving an extra dollar.

If the inflation is expected, people can adjust. The problem is unexpected inflation, which raises distributional issues. Companies can raise prices quickly, but wages tend to adjust slowly (an empirical issue, not something inherent in inflation). This is exacerbated by policies to fight inflation, which tend to slow the economy, giving workers less bargaining power. Investors who own assets that don't adjust are hurt, but the lenders are helped. TIPS adjust for inflation. Stocks probably adjust for inflation.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by dodecahedron » Sun Aug 02, 2020 6:03 am

nisiprius wrote:
Sat Aug 01, 2020 7:00 pm


2) Inflation in 1976-1981 was definitely disturbing. It averaged 10% annualized. That's a little less than 1% per month. What that means is that you don't just see some prices rising, you are constantly aware of every price rising.

In those days they still put physical price stickers on grocery items, and something with a long shelf life, like canned food, would have a stack of five or six price stickers on top of each other. It was sometimes possible to peel the top sticker off and expose a lower, older price. Amazingly, many cashiers' had good enough memories to catch this, but there were no barcode scanners and it was sometimes possible to get away with it.

If the family budget was like ours--not desperate, but a little tight--you could feel things constricting over the course of a year. You had the sense of constantly falling behind. Not "we'll starve," but an uneasy feeling of trying your best to live within your means but not quite doing it, and its getting harder and harder. A 10% cut in buying power is noticeable. Annual salary reviews were nerve-racking because you needed that raise. Now, to be fair, most ordinary workers got raises, salaries more or less pretty much kept up with inflation, but it was still disturbing.
Yes, it was definitely disturbing, as nisi says.

And far more so for retired folks on fixed incomes than for working age folks. Defined-benefit pensions were far more prevalent in those days (401k plans were only just starting up), they rarely had COLAs, and it must have been very scary for retired folks to see their purchasing power and lifestyles shrivel up year after year, with no apparent end in sight. (Paul Volcker was widely hailed as a miracle-worker for greatly reducing inflation in the early 80s, but it required him to take actions that forced a painful recession in order to squelch inflation.)

Also, bear in mind that taxes were not indexed for inflation until 1981, and so-called ¨bracket creep¨ was quite painful. If you got a 10% raise when inflation was also 10%, your aftertax income went down because some of your ¨raise¨ might end up in the next bracket. To add insult to injury, tax rates were considerably higher then than they are now (though admittedly less than they had been in the 1950s and early 60s.) The top bracket rate was 70% (though capped at 50% for earned income.)

And the effects of taxflation were especially hard on investment income because illusory phantom income was taxed. Often nominal interest rates lagged behind inflation so your pretax real return was negative. But since taxes are based on your nominal interest rate, you had to pay tax on your phantom income, making your aftertax real return even more negative, again adding insult to injury.

Aside: I have to wonder how much the phenomenon of hoarding traces back to the day when one of the best ¨investments¨ you could make was buying cases of nonperishables like tuna or paper towels on sale and storing it under your bed or in your garage. Guaranteed zero real return and no income taxes, certainly better than passbook savings accounts.

When an elderly relative on a modest fixed income died 20 years ago, her two-car garage was stuffed to the rafters with paper towels and toilet paper.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by dodecahedron » Sun Aug 02, 2020 6:16 am

WolfgangPauli wrote:
Sat Aug 01, 2020 10:52 pm
We also had a feeling if we just put "caps" on prices by regulation, somehow that would stop inflation (I wore a WIN button - Whip Inflation Now - I think that was Nixon era).
WIN was actually Gerald Fordś idea, just a few months after Nixon´s resignation. He launched the WIN campaign with a memorable press conference in October 1974 at which he declared that inflation was ¨Public Enemy #1.¨ I was studying macroeconomics at the time and remember my prof´s skepticism.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by nisiprius » Sun Aug 02, 2020 6:35 am

Few other points.

1) The inflation of 1976-1980 was not a epoch-defining event; when you remember those times, you remember other things first--Three Mile Island, Iranian hostage crisis, the beginning of personal computers (the first computer shows and faires, the Commodore PET, Atari 400, Apple ][, mens' fashions. Inflation was part of "the times" but not the handle you would use to describe the era. We don't talk about The Great Inflation.

2) From an investing point of view, the big thing about the inflation of the era is that it was big enough to completely kill real returns from the stock market. The real return of 1966-1982 inclusive was very slightly less than zero, and of course much less than zero after taxes. People completely miss the point of the famous 1979 BusinessWeek article, "The Death of Equities," when they quote only the first four words and treat it as a ludicrous failed prediction. The full title was "The Death of Equities: How Inflation is Destroying the Stock Market." The entire point was that stock investing had fallen out of favor and people were flailing around for what we now call "alternatives."
The one rule whose demise did the stock market in could be summed up thus: By buying stocks, investors could beat inflation. Stocks were a reasonable hedge when inflation was low. But they proved helpless against the awesome inflation of the past decade. "People no longer think of stocks as an inflation hedge, and based on experience, that's a reasonable conclusion for them to have reached."
An interesting remark was "Only the elderly remain:"
Younger investors, in particular, are avoiding stocks. Between 1970 and 1975, the number of investors declined in every age group but one: individuals 65 and older. While the number of investors under 65 dropped by about 25%, the number of investors over 65 jumped by more than 30%. Only the elderly who have not understood the changes in the nation's financial markets, or who are unable to adjust to them, are sticking with stocks.
The appropriate optimistic retort to the article at the time would not have been anything like "the stock market will bounce back, like it always has," but "inflation will be curtailed, like it always has been."

The result was that brokerages failed, exposing all kinds of irregularities in "back office" operations--missing stock certificates--and led to the creation of SIPC protection and much greater attention to security.

3) The elephant in the room is that of, while the collapse of a financial system in hyperinflation is bad for (almost?) everyone, ordinary inflation is not. There are winners and losers. Inflation is bad for creditors and good for debtors. That was the point of William Jennings Bryan's "Cross of Gold" speech, although they certainly didn't explain that in high school. Farmers were hurting because of debts owed to bankers, and Bryan wanted a policy of controlled inflation to help them out, and the metallic stuff came in because the farmers lived in the parts of the US where most of the silver mines were. It was a debate about expansion of the money supply.
Last edited by nisiprius on Sun Aug 02, 2020 11:55 am, edited 2 times in total.
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Re: Is the fear of actually LIVING through inflation overblown?

Post by dknightd » Sun Aug 02, 2020 6:50 am

I retired last year. So I lived and worked through several periods when inflation was higher than it is now. We adjusted, things were fine.

I do not live in fear of inflation, but it is one of my concerns. I fully expect that inflation will be higher than it was in 2019, or it will be in 2020, for at least some period of my retirement. I can not predict the future, but that seems like a pretty safe prediction.

My retirement plan works fine if inflation is 3% and investments earn 4% (i.e. 1% real).
But if inflation is double that for several years, or earnings are half that, or both, I'll likely have to adjust my spending.

I do not think the USA will have double digit inflation again, but It could happen. If it did I'd probably have to tighten my belt, unless investment earnings more than kept up. The back of my envelope says if inflation is 10% I need about a 3% real return to not have to adjust spending much.
I do not think the USA will have inflation rates over 100%. But if it did I'd probably be living in the bread line ;(

I suspect that working through periods of high inflation is easier than when being retired. But I could be wrong. In part it depends on how SS adjustments actually reflect my cost of living increases. When I claim SS is part of my flexibility plan - delay as long as possible. Take it when I need it, or when I turn 70, whichever comes first. My guess is SS will not keep up, so I'm predicting a slow decline in spending, which seems to reflect what most elderly people do. Perhaps because they have no choice . . .

As long as I'm living I will try my best to be a happy camper. A famous person once said “Only Thing We Have to Fear Is Fear Itself”
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Re: Is the fear of actually LIVING through inflation overblown?

Post by Robert T » Sun Aug 02, 2020 7:02 am

.
Here is an interesting comparison and outlook from Bridgewater.
https://www.bridgewater.com/research-an ... warp-speed

Financial asset price inflation: Financial asset prices increased in 1930s, 2008-9, and now 2020 in response to increased money supply (printing money). The time between the stock market ‘crash’ to money printing reduced considerably from 43 months in 1930s, to 18 months in 2008-9, to 1 month in 2020, resulting in quicker and quicker subsequent financial asset price reflation.
  • “As soon as policy makers step in to print and spend, there is an immediate reflation across asset markets. The stimulus puts a floor on equity declines, kicking off a new rally”…”…credit spreads begin to compress” …”long rates drift down”.

Consumer price inflation: For the first six months of 2020, the US CPI declined -0.1% (marginal deflation). This was largely driven by the sharp oil price declines as demand evaporated with lockdowns. Year-on-year consumer inflation to June 2020 was slightly higher at 0.6%. https://www.bls.gov/charts/consumer-pri ... -chart.htm

Why the disconnect between the two?
Demand. Increased money supply, and subsequent purchases of financial assets, which has been unprecedented in speed and scale, have helped reflate asset prices. Record high unemployment and salary losses have depressed consumer demand and consumer prices (even with cash transfers to households).

How long will it take to close the gap between financial asset price inflation and consumer price inflation?
Depends on the evolution of the coronavirus and policy responses and the impact on both the demand and supply of goods and services. There is a huge hole to fill in lost incomes to rejuvenate consumer demand. Filling this hole will not happen overnight. The Bridgewater article’s view is policy response (fiscal and monetary co-ordination) will bring [financial] markets and economies together (reconcile) – e.g. April to June was fastest quarterly US GDP contraction on record, yet the US stock market increased 22%? Consumer inflation will likely only increase once this hole in consumer demand (income losses) is filled, and this demand exceeds the supply of goods and services. To be sure, there has been rapid inflation already in some goods. E.g. gym equipment. With gym closures, there was suddenly a huge demand for home gym equipment, which could only be provided through existing inventories as business/factories/ foundries producing this equipment had also closed. With demand far exceeding supply, prices increased dramatically. This has not happened across the board as production of ‘essential good and services’ have faced less restrictions.

What does it mean for investors?
I think the smartest thing Dalio has said is that what we know about the future is we don’t know. This includes the extent, speeding and timing of inflation. Personally, I prefer some longer-term inflation protection through an equity orientation, value tilt, and global diversification. If there is deflation, then household expenses may be lower. For consumption of items where there is significant production disruptions – try to be early (more existing inventory).

Obviously no guarantees.

Robert
.

Chicken Little
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Re: Is the fear of actually LIVING through inflation overblown?

Post by Chicken Little » Sun Aug 02, 2020 7:22 am

SB1234 wrote:
Sun Aug 02, 2020 12:32 am
There was a topic recently about MMT about a video by Kelton. You can check it if you are interested.
viewtopic.php?t=310962
Thanks for link.

My main question would be how the remedy of the late 1970's would play out now, or how applicable it even is? Can we simply raise rates now, like turning up the dial on a radio?

Debt/GDP was relatively low back then, and the overall environment is quite different now as well. Don't the tools available to fight inflation kind of portend what living through another episode would be like? From a purely textbook standpoint, the tools to offset inflation would simply be the opposite of what we've experienced in general trend over the last couple decades; unwinding QE, raising interest rates, raising taxes.

These tools are precisely the types of things that throw a monkey wrench into the economy? If economic strength genuinely rebounded to very strong, or even running-too-hot, there would be capacity to absorb the dampening effects of these anti-inflationary tools. However, if the underlying economic strength only returned to something like marginal, and unexpected inflation arrived, the tools to fight that inflation would surely send the economy into a tailspin? Did the rate raise into 2019 reverse on changing conditions or did it create the conditions mandating reversal?

If the tools to fight inflation tanked the economy, would we then be in the next financial crisis? Then, as now, and as in 2008, there would be no concern for the future in the face of a dire present? The exigent circumstances, say unemployment, would demand the opposite; lower rates, lower taxes, more QE?

That's kind of where I'm stuck. How could we fight inflation if it arrives?

On a positive front, I'm not at all concerned about the status of the reserve currency. Every major country has high debt, not just public, but private as well, so what are the alternatives? Even if something like a basket of currencies tied to gold was created in some tradable unit, there still has to be trust in the purveyors. I think the only viable basket right now would be the entire rest of the world, and that seems not likely and not warranted. I take that as reassuring that things can muddle along, but suspect there has to be some level of normalization at some point?

Appreciate any explanation.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by dknightd » Sun Aug 02, 2020 7:30 am

Robert T wrote:
Sun Aug 02, 2020 7:02 am
what we know about the future is we don’t know.
I agree!
edit: which makes planning for the future difficult ;)
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Re: Is the fear of actually LIVING through inflation overblown?

Post by arcticpineapplecorp. » Sun Aug 02, 2020 8:05 am

Svensk Anga wrote:
Sat Aug 01, 2020 9:50 pm
arcticpineapplecorp. wrote:
Sat Aug 01, 2020 7:20 pm
it doesn't matter if your cd is paying 13.48% (as it would have in Jan 1980) if inflation was 13.9% (as it was in Jan 1980).
Oh, but it does matter. That 13.48% CD is pre-tax. I was in the 29% bracket as a starting engineer about this time. (Taxes were steeper then.) So 13.48% gross yield would become 9.57% after tax and one would definitely be losing purchasing power by saving. High inflation encourages people to spend it all NOW.
right, i should have added that even that high cd rate doesn't look so attractive if inflation is even higher than the cd rate AND AFTER SUBTRACTING OUT TAXES ON GAINS FROM THE CD.

the OP's quote is:
it seems like some people in the early 80s were actually getting positive real returns in CDs.
So the point of high cd rates not really being "high" because of relativity (to inflation, taxes, etc) is the point. And the OP shouldn't just be wow'd by high CD rates if s/he's not taking the other factors into account.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: Is the fear of actually LIVING through inflation overblown?

Post by Clever_Username » Sun Aug 02, 2020 8:08 am

I think my fear isn't that inflation would kill me, but that I wouldn't adjust well to prices and would go without on many things.

Here's a low-inflation example. When I was an undergraduate, I would often buy soda for $2.50 per twelve pack. Sometimes, it'd be $3. But more than that, I'd not make the purchase.

I commented to a friend of mine a few years ago, who I have been friends with since the end of my first year of undergraduate, that now the standard price seems more often to be closer to $4 for a twelve pack. She remembered the days where I thought $3 was the priciest I'd buy, and she asked me how much the $3 I was fine spending then was, inflation-adjusted, now, not to mention that I earn far more money now than when I was an undergraduate (and was primarily working for minimum wage to offset taking student loans).

I checked, and chose the end of my second year of undergraduate as the year to compare to the then-current year. A $3 purchase in the student year was $4 at the then-current year. Maybe I made the wrong comparison, but I have since been more willing to buy the sodas I want, but I also look for the multi-pack sales and store them at home.

So I suppose I worry that something I enjoy would go up in price, I'd balk initially at the higher price, it would stay and I would continue to balk even though it isn't much different from the previous price. This doesn't seem to be the worst fear to have.

An aside: thank you to everyone who shared their stories of living through inflationary periods very different from the ones I experienced. It was both interesting and enlightening reading for me.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by Mr.BB » Sun Aug 02, 2020 8:17 am

I think the best way to judge inflation is on non-perishable food items. A couple weeks ago peppers were running $3.00-$3.50 a pound. I walk in the grocery store yesterday and they were half that price, obviously supply and demand /seasonal etc. Items like pop, Band-Aids etc will tell you a little bit more about inflation pictures relatively low right now.
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Re: Is the fear of actually LIVING through inflation overblown?

Post by Robot Monster » Sun Aug 02, 2020 8:52 am

Chicken Little wrote:
Sun Aug 02, 2020 7:22 am
...However, if the underlying economic strength only returned to something like marginal, and unexpected inflation arrived, the tools to fight that inflation would surely send the economy into a tailspin? Did the rate raise into 2019 reverse on changing conditions or did it create the conditions mandating reversal?

If the tools to fight inflation tanked the economy, would we then be in the next financial crisis? Then, as now, and as in 2008, there would be no concern for the future in the face of a dire present? The exigent circumstances, say unemployment, would demand the opposite; lower rates, lower taxes, more QE?

That's kind of where I'm stuck. How could we fight inflation if it arrives?
Your question seems to boil down to, "How would the Fed react if we entered into a stagflationary environment (which is characterized by both high unemployment and high inflation)? If the Fed raised rates to combat inflation it could exacerbate unemployment, and if the Fed kept rates low to fight unemployment that could worsen inflation."

The answer is, as always: nobody knows.

We shouldn't invest according to our predictions of what the Fed will do. However, we can invest according to what the Fed might do, i.e. either it raises rates or doesn't. Hedge your investments between those.
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: Is the fear of actually LIVING through inflation overblown?

Post by Watty » Sun Aug 02, 2020 9:12 am

nisiprius wrote:
Sun Aug 02, 2020 6:35 am
The elephant in the room is that of, while the collapse of a financial system in hyperinflation is bad for everyone, ordinary inflation is not. There are winners and losers. Inflation is bad for creditors and good for debtors.
There were also times when you were not sure if you were really a winner or a loser.

During the high inflation years it was not uncommon for someone to buy a car, especially a used car, and use it for a few years, then sell it for more than they paid for it. That would happen when the inflation rate was higher than the depreciation rate.

The selling price was in inflated dollars so it was less in real terms but when that happened it was a painful reminder of how odd things were. When you saw that happening that also discouraged you from saving or investing.

One other quirk was that it also common to wait until the first day of your credit card billing cycle to make a large purchase. The reason was that it would be about 45 days before it would need to be paid so you could keep your money in the bank earning interest and get a few extra dollars before you paid the credit card bill.

Inflation was only really good for you if you had old debt but it was also bad for you if you needed a new loan.

My parents had a 30 year mortgage at about 3.25% so they did very well when inflation was high and their mortgage payment ended up being less than their utility bills. The downside is that there was no way that they could move since they would lose their great mortgage interest rate. They ended up staying in the house and paying off the mortgage after the full 30 years.

It was not all rosy for people with debt though since new loans were not only at high interest rates but they were also hard to get since lenders were very selective in who they would loan money too. Instead of being eager to lend money at double digit interest rates lenders were cautious and credit was tight.

When I was buying my first house in the mid 1980s inflation was past its peak but still high and mortgage rates were around 10%. My salary and other details were good enough that I knew that I should be able to get approved for a loan but it was not at all certain until it got through the underwriting process and it was not uncommon for loan applications to be be declined for no apparent reason just because some underwriter saw something in your loan application that they were not comfortable with. When my loan was approved and my rate was lock mortgage rates had dipped that day and I got a mortgage at 9.75% and I was elated that I had actually gotten a loan at less that 10% since they had been even higher a few years before.

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Re: Is the fear of actually LIVING through inflation overblown?

Post by willthrill81 » Sun Aug 02, 2020 10:01 am

WolfgangPauli wrote:
Sat Aug 01, 2020 10:52 pm
I am far more fearful of deflation than inflation.
Apparently, so is the Fed. The primary reason they shoot for 2% inflation rather than 0% is in order to stay as far away from deflation as they comfortably can. It can easily lead to an economy going into a death spiral.
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Re: Is the fear of actually LIVING through inflation overblown?

Post by randomguy » Sun Aug 02, 2020 10:45 am

Lynx310650 wrote:
Sat Aug 01, 2020 6:18 pm

The reason I'm kind of rethinking my fear of inflation is that I've spoken to folks that lived through that time, and while inflation was high, you were also getting double digit interest in things like CDs or bonds. So it's not like if inflation was to hit double digits again our savings would be wasting away at close to 0% interest, it seems like some people in the early 80s were actually getting positive real returns in CDs.

And some were getting negative. You buy a CD paying 10% and get hit with 14% inflation, you lose money. The CDs bought as interest rates were rising did poorly. The ones bought at the peaks did fine. The thing with inflation was the uncertainty. If I offered you a 5 year at 10%, you had no clue if you were going to do well (inflation goes back to the 5% that it had been 5 years earlier for a short period) or poorly (inflation was going to be 14% that it was 6 months before). Compare that to the past 30 years where inflation has basically sat in the 2%+-2% range for almost the whole time period.

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