I ask this because we have had 10 years of economic expansion, with fairly low inflation-something has to give. Well, now we are looking at oil prices shooting up, power shortages (the Gov. of California just signed a bill allowing his state to buy power from canada), and all kinds of strange things happeneing. One ominous thing-the index of consumer confidence just registered a major drop. And, where I live (metro Boston area), for the first time in over 10 years, I am starting to see real estate foreclosures in the newspapers! So, are we headed for a Jimmy carter-early 1970’s style recession, with hyperinflation? I am wondering if I should liquidate all of my stocks, and go deeply into debt-seems like the people who made out in the 1970’s , were the ones who took on a lot of mortgage debt-their property appreciated, and their equity zoomed!
What’s your take on this?
You asked two different questions. Will there be a recession? and Will there be inflation? I would say the answer to the first is maybe, it depends on many factors. The answer to the second is probably not. The money supply is relatively tight after six consecutive rate increases and though the recent rate reduction may have loosen it some it is probably not near enough to be inflationary especially if productivity continues to increase.
If productivity continues to increase then by definition, no we will not have a recesion. A recession is defined as a period of two or more successive quarters of decreasing production. It is indicated by a drop in real GDP (Gross Domestic Product, adjusted for price indesx increases from a given base year). It is not a decrease in double digit stock market growth coupled by a reduction in dot-com millionares.
As for hyperinflation, that is very unlikely (since this isn’t pre-WWI Germany). Normal inflation runs around 1-10% per year and has been about 2% over the past several years. Hyperinflation is measured in 100%s and 1000%s per year. It is characterized by people carrying around wheelbarrels of cash to pay for stuff before the cash is devalued that afternoon. It was a big problem in Germany in the 20’s, in Argentina, Brazil, and the Ukraine in the 90’s. Since the US economy and government is not on the verge of collapse and since we figured out that printing more and more money to pay our bills dosn’t work, I wouldn’t expect to see this level of inflation.
I’m also in Boston. I would guess that a lot of those foreclosers are due to people leveraging their dot-com stock options to buy big expensive houses. A lot of people became very wealthy on paper, bought expensive houses, and then lost their wealth when their stocks crashed. I’m sure many of them are now stuck with a house they can’t pay for.
The real way to prepare for financial disaster is through diversification, not figuring out what’s going to happen and putting all your funds in one investment to make a killing.
Sure, we could have a return of inflation. But a devastating round of deflation is just as likely. The stock market could collapse, or it could rebound. We could have a recession or a continued expansion. Oil prices could skyrocket or plummet.
The point is that no one knows the future, so betting your nest egg on one thing that you KNOW is going to happen is very foolish. Yes, we’re going to have another recession. But will it be next week or next year or next decade? No one knows, and acting as if you know is going to get you in trouble. Diversification means that you will have some safe investments no matter what the economy does.
FWIW, current thinking in financial sectors is that inflation will behave itself. We’ve substituted quite successfully away from oil since the 1970s (did you know that a new tidal power unit is opening very shortly that will provide power for the whole of Wales?) and since the recent oil price rises started, inflation has actually remained fairly low.
If you want to know where current betting is on future inflation look at the gap between long-term index-linked and fixed interest government bonds. You’ll see that its remaining well below 10%.
And finally here’s a working definition of hyperinflation that I quite like: you buy two pints of lager. By the time you’ve drunk one, you could still sell the second for more than you paid for it, even though it has got warm.
pan
I think we had the same economics textbook.
That is the exact same illustration I think of when I visualize hyper-inflation.
When I am talking about hyperinflation, I do mean 100-1000% price increases/year, and this certainly happened under Carter-gas went from $0.25/gal. to over $1.00 (temporarily)-that is a 300% increase. I am very concerned because I do read the reports that the government puts out, and they are seriously understating the rate of inflation. For example-last year the US govt. put overall inflation at around 2.4%-yet, in my area, results look like:
-gasoline $0.95 to $1.65 = +79%
-heating oil: 0.95 to $1.59 = +67%
-car insurance (for me about 14% increase)
-my weekly grocry bill: up about 22%
So I don’t believe the government, I think the underlying rate of inflation is substantially higher than what the CPI reports. The questionis: is this a leading indicator?
Okay, egkelly, what was last year’s rate increase in your area for:[ul][li]telephone service[/li][li]electricity[/li][li]natural gas[/li][li]laundromats[/li][li]movie admission[/li][li]video rental[/li][li]identical articles of clothing[/li][li]power tools[/li]books[/ul]? Did any of these go up by more than the government-reported rate of inflation?
Hyperinflation:
-gasoline $1.50/gal to $75.00/gal
-car insurance $2,000/yr to $150,000/yr
-loaf of bread $1.00 to $120.00
Actually, during really bad hyperinflation, you would have a hard time getting drunk. The alchohol content of your beer would fall so quickly that you would have to keep shotgunnings beers in order to get a buzz.
I read one example where people could buy a bottle of wine becasue they could sell the EMPTY bottle the next day for more than they bought it.
During the post-war period, the US has never experienced anything remotely similar to hyperinflation, which is typically defined with respect to a measure of all prices, not one price in particular.
The peak in the year-to-year inflation rate occurred in March 1980, when it was 14.8%.
Here are some December-to-December inflation figures (CPI: BLS)
Dec 1965 1.9%
Dec 1970 5.6%
Dec 1975 6.9%
Dec 1980 12.5%
Dec 1985 3.8%
Dec 1990 6.1%
Dec 1995 2.5%
Dec 2000, about 3.6%.
Ignoring food and energy, the current inflation rate is about 2.5%.
The consensus forecast for 2001 is about 1.9%, although that seems a little low to me. (Source: the Economist backpages)
Sounds like heaven. A bottle of wine a day, in perpetuity. MMMMmmmmmmmmmmmmm.
Puts me in mind of a story of a guy who went to Argentina to visit his wife’s relatives, came back and had this conversation:
Guy 1: So what’s Argentina like?
Guy 2: Well, it’s a strange country. The clothing is expensive but the wine is cheap.
Guy 1: I’ll take drunk and naked over clothed and sober any day!
Which, I suppose, describes what life would be like under hyperinflation?
The national figures put Boston’s 1 year inflation rate (as of November 2000) at 4.6%, higher than the national average.
Gas prices, FWIW follow:
…Dec 99…Dec 2000…% ch
US… $1.30 … $1.49 … 14.7%
Boston… $1.33 … $1.58 … 18.2%
Boston last had 95 cent gas in March 1999.
(Source: again, BLS)
Final fun fact: about 40% of the CPI is composed of housing costs.
Don’t forget that you don’t really have hyperinflation unless you have flight-from-money. This is where transactions take place at a faster and faster rate, which spirals inflation still higher and higher*. In the end transactions happen too often for comfort and people give up on money totally, reverting to bartering instead. The USA has certainly not had this circumstance!
FWIW, from memory in 1993 Serbia had inflation of something like 140% per day, or about 10[sup]50[/sup]% per year!
pan
*simply, the quantity theory of money: MV = PY where V is volume of transactions, M is supply of money, P is level of prices and Y is national output. If V increases without a corresponding drop in the money supply then in the absence of an external stimulus to increase long-run Y, P will increase, giving inflation.
This is just a thought and observation.
During this time of economic expansion that we’ve had in the recent past, lots of folks have taken advantage of the easy credit opportunities rolling into their mailboxes everyday and their phones every night and have begun living way beyond their means. My brother-in-law works in the mortgage industry and he says they get people in their office getting loans that really have no business getting a mortgage loan (incredibly bad credit, poor loan-to-debt ratios, bankruptcies); but, banks are still anxious to lend and it seems your credit cannot be bad enough that it would prevent you from getting some kind of loan now-a-days.
My feeling is that when we do come into a market turndown, which is inevitable to some extent, we will begin to see bankruptcies rise grossly, along with the sell off of assets from people who can no longer make those monthly payments. My husband and I have been using the last few years to dig ourselves out of debt, something that’s been hard but very rewarding.
Any opinions on the high levels of consumer credit and spending we’ve been seeing, in relation to an economic down turn?
I just read that link. Who is that wacko!? Geez, he sounds like some paramilitary, fundie, nut!
dal_timgar wrote:
sigh Yet another article written by a gloom-and-doom economic prophet. Doomsayers like this one have predicted, oh, about 150 of the last 3 recessions.
Every time I read an article like that, I turn to a book called Bankruptcy 1995, in which the auther predicted that the U.S. Federal budget deficit would reach $800 billion in Fiscal 1995, and that the Federal government would soon afterward declare bankruptcy.
I’ll file this away with my Y2K disaster supplies…
Too late, you should have bought into internet stocks in around august. Microsoft has gone about 48% up then.