Deflation - cash is king

[Markor]

I'm budgeting $150K for my child's college education, for ten years from now. That's up from < $20K in 1985.

I bought some used electric space heaters. Should be cheaper than natural gas. While I can still afford the increased prices, in general I try to be as frugal as comfortably possible, so I can save as much as possible. Goodwill and craiglist are my friends for purchases. High quality used goods should become cheaper as people cast off their bubble purchases to raise cash for food, fuel, etc.

[rose-colored-coolaid]

[Robroy]

[lamont]

I've been waiting for deflation to win for some time now.

it seems like the inflation that we currently have is unsustainable, because wages are not rising to keep up. The housing market was fueling inflation in a vicious cycle because people were using their house appreciation as an ATM machine which then went out and created consumer demand. Now with housing falling that cycle should work in reverse and consumer demand should slow.

Also, assuming Obama is elected and the Iraq war winds down that will also be deflationary (or, the Iraq war has been inflationary).

Gold peaked at slightly over $1,000/oz and then broke down and looks to have now failed to rally back up to that level and looks to be failing. Oil is pulling back hard after failing to hit $150/bbl and domestic consumption of oil is actually pulling back.

Credit in general is also clearly pulling back, which is deflationary.

That all points towards further deflation to me. Although, clearly the Fed is going to try to re-inflate and congress will continue to bail out the system. At some point though their efforts may backfire and result in higher interest rates.

It isn't totally decided yet, though. I'm still strongly considering that I may be calling this several years too early, but most of the signs are pointing in a deflationary direction. Commodities would really need to pull back more sharply, unemployment would need to get worse, GDP would need to post actual losses, Iraq would need to wind down and the actions of the Fed to increase money supply and the Congress to bailout the system would need to start more clearly looking like 'pushing on a string'.

I'm also still kind of worried that Congress and Fed might actually manage to create a panic in the dollar, which would be hugely inflationary and might kick off a wage-price spiral. There is a lot of resiliency in our system so I'm very skeptical of the claims that this kind of hyperinflation is just around the corner, but there has to be a limit at some point to how far the dollar can be pushed.

[Markor]

[lamont]

[Robroy]

If we have slow push inflation with no rise in wages, we do get what used to be called stagflation, but what it amounts to is a reduction in the standard of living.

Imagine prices staying flat but everyones income is cut by 20%. Smaller homes, streets filled with bicycles, a-la Peking decades ago. One car families. Living on an actual food budget and rarely eating at restaurants.

Stuff like that.

[lamont]

That is a good point. With increasing global demand chasing too few commodities, the result may be a reduction in real standard of living for americans. If wages stay constant, prices may rise, giving a paycut to americans in 'real' terms.

That seems like a *very* long term, 10-20+ year effect, though.

Shorter term, I still tend to think that as american consumerism contracts that will lead to a recession in China as they will have an oversupply of goods that not enough people will be buying.

There seems to be a race between global deflation/recession and BRIC decoupling.

Ultimately, BRIC decoupling wins in the long run, but I don't think those economies are decoupled enough right now to deal with the deflation that I see on the more immediate (1-3 year) timeframe.

[Robroy]

Things went downhill pretty fast between 1929 and 1932. Ultimately, governments have to do what they can to avoid civil unrest. I used to read a guy at fredoneverything.net that spent a lot of time in cop cars in DC and south Chicago. His take about a decade ago was that if the economy ever tanks, there could be the actual race wars in the US that everyone was concerned about in the late 1960's. And that is just the US.

The last time something as dire as what we are looking at happened, it led to nations allowing folks like Hitler to rise to power, complete with an implied blessing on his crazyness.

Just sayin' mobs don't act like reasonable people, and sometimes an entire nation can be a mob. It really CAN happen here. And China. And anywhere else. More importantly, it is not as unlikely as many assume.

[rose-colored-coolaid]

[Robroy]

[biliruben]

Long-term care insurance. Buy it.

Insurance should be for catastrophe. Everything else should be paid by RobRoy.

[Robroy]

[lamont]

Based on the USD index, oil, gold and the CRB index it does kinda look like cash is king right now. The dollar is strengthening and everything else (commodities, cars, houses, stock market) is falling.

http://stockcharts.com/h-sc/ui?s=%24USD

I'm not convinced that its really deflation though and that its not just hot money in a panic looking for someplace else to land. The global economy hasn't quite gotten bad enough.

[Robroy]