# Deflation vs Inflation - the current global debate



## james_57 (Jul 5, 2010)

I don't know about you folks but i am having a really hard time getting my mind around the concept of deflation, and yet its probably the number one economic debate for the last year in the blogospere. 

I'm starting a thread devoted to the issue, because i know there are sophisticated investor-minds here that understand this debate far more than i do, so i'm hoping to hear some opinions, and gain a better understanding of the issues.

Thanks in advance for sharing your opinions and knowledge!

(submitting exhibit A to kick off the discussion)
Drop in Inflation Expectations Has Gone Global


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## andrewf (Mar 1, 2010)

What are you confused about? What is it? What causes it? What its consequences are? How to avoid it?


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## Addy (Mar 12, 2010)

andrewf said:


> What are you confused about? What is it? What causes it? What its consequences are? How to avoid it?


How to embrace it?


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## james_57 (Jul 5, 2010)

andrewf said:


> What are you confused about? What is it? What causes it? What its consequences are? How to avoid it?


Ok, that's a fair question. Quantifying it, and qualifying deflation, first, as it pertains to the current global picture, (as this article above does with respect to inflation). Just exactly how the US credit market is deleveraging (the principle ways), and where that's going to lead, and what happens to the numbers overall when US RE comes off another 15% to 20% as many analysts are predicting, given there is 18 months supply in the pipeline (at least) and the anticipated fallout to our economy, (which does not operate in a fishbowl); and how deflation is liable to express itself in US equities markets. Those are just a few quandaries persisting in my mind.

Its more of a macro operational picture i am trying to grasp. Does that make sense? I feel like i understand bits and pieces of the global and regional picture, but i can't somehow frame it into a complete understanding of all the working parts. (emphasis on falling RE markets and impact of failing mortgages to credit-supply, liquidity-traps, asset class deflation, etc)


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## james_57 (Jul 5, 2010)

Exhibit B

By MarketWatch July 14, 2010, 3:11 p.m. EDT ·

WASHINGTON (MarketWatch) --_ It could take five to six years before the U.S. economy is fully healed from the Great Recession of 2008, officials at the Federal Reserve said Wednesday.

More years of high unemployment. More years of* skirting with deflation*. More years of ultra-low interest rates, and *more years of deleveraging.*

The Federal Open Market Committee released its economic forecast on Wednesday, and it was dismal. While the officials are relatively upbeat about growth, they don't see the unemployment rate falling very quickly, nor do they think inflation is going to be a problem any time soon. See full story on the FOMC minutes.

That means there is no rush to normalize interest rates any time in the foreseeable future._


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## Cal (Jun 17, 2009)

Technically couldn't we get both.

Asset deflation for RE and big ticket items.

And price inflation for gasoline, groceries and smaller everyday items.


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## HaroldCrump (Jun 10, 2009)

Cal said:


> Technically couldn't we get both.
> 
> Asset deflation for RE and big ticket items.
> 
> And price inflation for gasoline, groceries and smaller everyday items.


That is exactly what we are witnessing.
Also, IMO, this is the new "normal".
Inflation and deflation are relative to current price levels.
However, we may need to adjust our mindset and expectation to a new normal of current employment levels, current price levels and current rate of returns/growth of equity levels.
Japan has been dealing with this type of "new normal" for decades now.


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## james_57 (Jul 5, 2010)

HaroldCrump said:


> That is exactly what we are witnessing.
> Also, IMO, this is the new "normal".
> Inflation and deflation are relative to current price levels.
> However, we may need to adjust our mindset and expectation to a new normal of current employment levels, current price levels and current rate of returns/growth of equity levels.
> Japan has been dealing with this type of "new normal" for decades now.


I'm no expert in Japan's economy, but if JP's now two lost decades are the corollary, then should we be expecting 1,500 on the DOW anytime soon? 

Then there's the fact that JP had a functional, and for all intents and purposes healthy manufacturing industry pumping away exports underneath a dysfunctional financial layer and government monetary policy (right?). So that's different.

Japanese were savers, loaned to the Gov, then there was the carry trade business, etc etc. Many differences including the fact that this is the worlds base currency we are talking about, with gold reflecting the fact that all is not well in the kingdom. We could be comparing white swans with a sick black swan, (excuse the mixing of metaphors).


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## Belguy (May 24, 2010)

Does the old maxum, "invest during periods of maximum pessimism" apply in the current environment?

You don't make money by investing during periods of 'maximum euphoria'. That is how you lose money!!

It is a difficult and confusing time for investors--especially older ones like me with a diminishing time line.

Something else that I recall reading is "never invest money in the stock market that you cannot afford to lose".

What to do????

One solution might be to not look at our portfolios for the next ten years or so.


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## HaroldCrump (Jun 10, 2009)

james_57 said:


> Then there's the fact that JP had a functional, and for all intents and purposes healthy manufacturing industry pumping away exports underneath a dysfunctional financial layer and government monetary policy (right?). So that's different.
> 
> Japanese were savers, loaned to the Gov, then there was the carry trade business, etc etc. Many differences including the fact that this is the worlds base currency we are talking about, with gold reflecting the fact that all is not well in the kingdom. We could be comparing white swans with a sick black swan, (excuse the mixing of metaphors).


Yes, there are key differences between Japan and current state of the US (North America), as you have rightly pointed out.
My intent in using the example is that we may not experience significant inflation or deflation in the near future.
By its very nature, stagnation can last for decades.
The capitalist boom-and-bust cycle requires an external stimulus to break out of.
The US economy emerged from the recession of the 1980s (*** end of the Reagen era and the Bush Sr. era) through the dot com bubble.
Then we had a relatively small recession of about 3 years and the real estate boom lifted the economy.
Now that it has burst, we must wait for the next bubble.
Capital is waiting on the sidelines for deployment into the next big thing.
It could take only a couple of years or it could take decades for the next big thing to arrive.
For Japan, it was manufacturing and finance.
They are still waiting for their next big thing.

We may have to get used to single digit returns on investment, 2% or so inflation, relatively low interest rates, low employment growth, modest increases in salaries and standard of living for a long time to come.


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## the-royal-mail (Dec 11, 2009)

OK first of all there is an inherent flaw in this thread in that it pulls an alarm for something that simply isn't true or happening. Deflation has not been and is not a threat. In fact, I would argue that the inflation numbers being published are lies. 1-2%? C'mon. My gas, insurance, groceries, HOUSING, rent, legal, oil, postage, user fees, electricity, telephone and cable bills have ALL gone up SIGNIFICANTLY over the past 5-10 years, WAY more than 1-2%. For there to be any measurable deflation, you would need to see these sorts of numbers but on the negative side.

We're headed for a period of inflation folks, and the BOC is watching this carefully, ready to increase interest rates. Pity anyone who is maxed out on ridiculous mortgage payments. When they go to renew, the apartment life won't seem so bad after all. 

We're in an economic mess right now. Don't let anyone tell you that things are "Getting better" because it's simply not true. Governments around the world are in financial ruin after the billions they spent in bailout money and when they start to try and get their budgets balanced in the months and years ahead we're going to see more situations like Greece and California, where thousands of gov't workers and social programs are being cut, roads will crumble etc. Think the Paul Martin/Mike Harris cuts of the mid-1990s but 10x worse IMO.


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## dogcom (May 23, 2009)

Other then the stuff we really need like haroldcrump said then where is the money coming from to cause high inflation the-royal-mail. In Vancouver a lot of money comes from China to increase home prices. We are expecting China, India and the emerging markets as the driver of inflation and not the developed economies of the west.

Otherwise central banks in the west will have to give money away to people to cause inflation and right now no one wants it unless they don't have to pay it back. Everyone is in big debt the country included and that needs to be addressed before any problem with inflation can arise.


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## MoneyGal (Apr 24, 2009)

the-royal-mail said:


> In fact, I would argue that the inflation numbers being published are lies. 1-2%? C'mon. My gas, insurance, groceries, HOUSING, rent, legal, oil, postage, user fees, electricity, telephone and cable bills have ALL gone up SIGNIFICANTLY over the past 5-10 years, WAY more than 1-2%. .


The consumer price index represents average (weighted) general increases in prices based on an "average" consumer, who may not represent you at all. 

That is, a CPI of 2% does NOT mean that prices for individual items have risen 2%. It means that a "representative" (urban) household, purchasing a representative, standard basket of goods and services in particular portions and amounts, would experience the general price increase (or decrease) which the CPI expresses. 

So if avocados have risen in price but bananas have fallen, and you personally love bananas and shun avocados while the "representative" Canadian household not only loves avocados but has increased their consumption of them, the CPI will rise - but it won't represent your spending or the impact of price moves on your total spending. 

There's lots of (academic) discussion about how representative (or not) the general CPI is for North Americans. The US has a couple of different CPIs, including one that is specific to the elderly. There's even a website which allows you to track your own personal CPI.


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## kcowan (Jul 1, 2010)

Asset deflation and consumables inflation. That is what I see. Unfortunately, the assets include stock prices and fixed income. Not a good place for retirees.


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## andrewf (Mar 1, 2010)

kcowan said:


> Asset deflation and consumables inflation. That is what I see. Unfortunately, the assets include stock prices and fixed income. Not a good place for retirees.


Then buy consumer staples and commodities companies. These would be inflation sensitive.


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## Belguy (May 24, 2010)

It looks like after many good years of huge stock gains for investors, that we are in for a cooling off period.

Yes, of course I am being sarcastic!!


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## james_57 (Jul 5, 2010)

HaroldCrump said:


> Yes, there are key differences between Japan and current state of the US (North America), as you have rightly pointed out.
> My intent in using the example is that we may not experience significant inflation or deflation in the near future.


Japan has experienced significant deflation, i think the average is 1.7% (negative inflation) decline in prices since '92, excepting only two years. JP banks keep those pretend-loans on their books; non-performing loans which they won't write-off, even lending the defaulted more money to pay the interest. (so i have read). 

Debt is money. If we do experience debt deflation, it will probably follow depression-era economist Irving Fisher's formulation:



> *Fisher's Formulation*
> 
> In Fisher's formulation of debt deflation when the debt bubble bursts the following sequence of events occurs:
> 
> ...


Morgan Stanley issued a report stating there are 8 million houses in the default pipeline in the US, and it will take about 47 months to move them through the system, and that the market bottom would occur 'about the same time'. 

A month ago banking analyst Meredith Whitney reported they expect another 20% 'price deflation' to the price of housing. 

I don't believe the market has priced this chain of events in (yet), but barring some miracle it's going to unfold as Morgan Stanley, and Whitney both forecast. 

Plus the RE industry represents a significant chunk of the small business economy, so broad negative fallout to that sector will result, higher unemployment, dropping wages and so on. 

Even if the asset write-down just on the foreclosures mentioned is 20%, the loss to the economy is 500 billion. The write-off of the mortgages in default will be at least 4 times that number. (Fed reports suggest the real number of bad securitised bank debt floating on the books is more like 5 trillion)

Does this scenario look anything like Fisher's Formulation? I think it's almost a match.


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## james_57 (Jul 5, 2010)

the-royal-mail said:


> OK first of all there is an inherent flaw in this thread in that it pulls an alarm for something that simply isn't true or happening. Deflation has not been and is not a threat. In fact, I would argue that the inflation numbers being published are lies. 1-2%? C'mon. My gas, insurance, groceries, HOUSING, rent, legal, oil, postage, user fees, electricity, telephone and cable bills have ALL gone up SIGNIFICANTLY over the past 5-10 years, WAY more than 1-2%. For there to be any measurable deflation, you would need to see these sorts of numbers but on the negative side.
> 
> We're headed for a period of inflation folks, and the BOC is watching this carefully, ready to increase interest rates. Pity anyone who is maxed out on ridiculous mortgage payments. When they go to renew, the apartment life won't seem so bad after all.
> 
> We're in an economic mess right now. Don't let anyone tell you that things are "Getting better" because it's simply not true. Governments around the world are in financial ruin after the billions they spent in bailout money and when they start to try and get their budgets balanced in the months and years ahead we're going to see more situations like Greece and California, where thousands of gov't workers and social programs are being cut, roads will crumble etc. Think the Paul Martin/Mike Harris cuts of the mid-1990s but 10x worse IMO.


Read your post again. First you cry out it can't be happening, and then you go on to describe the moving parts, especially falling wages. 

This stuff is tricky. World class economists are evermore divided and opposed on how to deal with this crisis, and therefore at least half will prove out wrong. As for your notion, that deflation is impossible, the reality is, we are already in it. But your taxes will still go up. 

Here's my scenario, take it for what its worth. 
Debt is money, and debt is deflating. Some trillions in dead and dying non performing mortgages exist hidden in the shadows, in the US gov closet. Over time they will be slowly brought onto the books and written off. That's a few trillion in debt that goes to zero, while assets are fire-saled carefully to any taxpayer that will have them. Wounded, non-performing assets needing an owner, sold by banks to the highest bidder. (nothing new)

RE sector in retraction, takes down with it the small business sector, and the SB sector is the one sector that produces the most job growth. (sad, isn't it) 

With unemployment rising, the multiplier effect of money circulating, the velocity of money drops. As that happens, slack demand brings prices down, that squeezes jobs, and the spiral continues. 

The wild card is energy costs. We live in a time of the energy dollar. Asia is growing and the demand is strong and getting stronger. Peak oil has occurred, even in this deflationary scenario, energy costs should continue an orderly increase. Wages are going to continue to lose ground, its the guaranteed outcome of high unemployment, the effect of supply and demand on the price of labour. Anything energy related should will increase in price. Gas will inflate, durables like autos will deflate. How long could that last? To me it sounds like 4 or 5 years. It won't be the end of the world, and we could dip in and out of it for 10 or more years.

Those are my thoughts, and I'm probably buying BP tomorrow. Flipping a coin.


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## Belguy (May 24, 2010)

The Dow at 5000 in about 2 1/2 years?????

Does anyone out there see that happening??

http://www.prisonplanet.com/charles-nenner-long-term-investors-should-wait-until-dow-hits-5000.html

Google 'Dow at 5000' for other fun reading on this subject.

These are scary times for investors. Be careful! Be very careful!! Protect your life's savings.

What defensive moves are you making?


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## kcowan (Jul 1, 2010)

andrewf said:


> Then buy consumer staples and commodities companies. These would be inflation sensitive.


Commodities and consumer staples it is! Actually commodities includes energy and that includes BP!


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## kcowan (Jul 1, 2010)

Belguy said:


> The Dow at 5000 in about 2 1/2 years?????
> 
> Does anyone out there see that happening??


Forecasting the Dow makes about as much sense as forecasting the weather. You have to be lucky to be right. But as long as the banks are allowed to inflate their earnings by reducing loan loss provisions, the Dow will be artificially propped up. Then the ARM resets bubble in 2011 will be treated like another big surprise!


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## HaroldCrump (Jun 10, 2009)

I don't see that happening (famous last words 
The DJIA is sitting at over 10,000 today.
So that would be a drop of over 50% in 2 years.
The DJIA at 5,000 would represent a drastic reduction in wealth and economic capacity, essentially setting us back 15 years.

I don't consider is likely not because there aren't real, serious underlying issues, but because governments in the USA and around the world will resort to whatever possible means to sustain the current economic system.
As governments keep running out of classical economics options such as monetary and fiscal policies, they will search for and implement more and more creative options.
The developed world is already at the end of the monetary policy tether.
Fiscal policy options are being exhausted fast as well.
I believe Europe is already at the end of the fiscal policy limits (witness recent events in UK, France, etc.), but the US still has a little more head room with fiscal policy.

It is hard to say exactly what policies and instruments will be used to prevent a complete meltdown of the economic system, but necessity is the mother of invention.
It could take the form of creating a new global curency, extreme levels of taxes (> 90%), large scale forced nationalization of key industries & corporations, war, re-colonization of the developing countries, and whatnot.
But measures will be taken, and the measures will work.

The unique feature of modern capitalism is that unlike previous systems, there is no complete collapse - just a journey from one recession to another, from one boom to another.


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## kcowan (Jul 1, 2010)

It is a "confidence game"! As long as the buyers have confidence, the markets will hold up. But if people wake up to the confidence game, they might just bail. Plus the unemployed have few options.


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## HaroldCrump (Jun 10, 2009)

kcowan said:


> It is a "confidence game"! As long as the buyers have confidence, the markets will hold up. But if people wake up to the confidence game, they might just bail.


The buyers _are_ the game.
You and I don't matter (with all due respect).
The folks moving the markets are the large institutional investors and companies investing into other companies.
The financial crisis was created by these very folks, consciously or not.
If they lose confidence, there's no place to hide.
So the govt. will do anything and everything to keep these guys in the game.
They are the house, the dealer and the top players.


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## james_57 (Jul 5, 2010)

HaroldCrump said:


> The buyers _are_ the game.
> You and I don't matter (with all due respect).
> The folks moving the markets are the large institutional investors and companies investing into other companies.
> The financial crisis was created by these very folks, consciously or not.
> ...


Well said. For some reason I hear Hotel California playing in the background.. _ you can check out anytime you like, but you can never leave
_


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## james_57 (Jul 5, 2010)

kcowan said:


> Forecasting the Dow makes about as much sense as forecasting the weather. You have to be lucky to be right. But as long as the banks are allowed to inflate their earnings by reducing loan loss provisions, the Dow will be artificially propped up. Then the ARM resets bubble in 2011 will be treated like another big surprise!


I agree, and we are getting pretty good at the weather these days, at least five days in advance. The DOW for me is about the same. Its real easy to predict how the DOW will behave these days, on a 1 to 3 day horizon, because its charging off in the direction of the BIG news story of the day, then charging off in some other direction, because the story changes again a day later. 

This article of yesterday, by Ambrose Prichard is VERY interesting. Take a read, see what you think. Here's an excerpt:

_The worm is turning," said David Bloom, currency chief at HSBC. "We're in a world of rotating sovereign crises. The market seems to become obsessed with one idea at a time, then violently swings towards another. People thought the euro would break-up. Now we're moving into a new phase because we're hearing alarm bells of a US double dip."

Mr Bloom said a deep change is under way in investor psychology as funds and central banks respond to the blizzard of shocking US data and again focus on the fragility of an economy where public debt is surging towards 100pc of GDP, not helped by the malaise enveloping the Obama White House. "The Europeans have aired their dirty debt in public and taken some measures to address it, whilst the US has not," he said. _


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## james_57 (Jul 5, 2010)

> Fisher's Formulation
> 3. A fall in the level of prices
> 
> 7. pessimism and loss of confidence



Exhibit 'C' and Exhibit 'D'

 US Consumer Price Index - June 2010
_The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1
percent in June on a seasonally adjusted basis, the U.S. Bureau of
Labor Statistics reported today._

Consumer Sentiment Sinks To Lowest Level in 11 Months


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## james_57 (Jul 5, 2010)

And lastly, Roubini speaks. (Com'on Nouriel, just says the words..stop mincing them... 'DOUBLE DIP' )

If it walks like a duck, talks like a duck.. its not a U shaped recovery.

Double-Dip Days
Nouriel Roubini


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## Belguy (May 24, 2010)

An interesting article from tomorrow's Globe and Mail:

http://www.theglobeandmail.com/glob...ds-new-strategy-for-investors/article1643189/

Any thoughts or comments??


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## james_57 (Jul 5, 2010)

Belguy said:


> An interesting article from tomorrow's Globe and Mail:
> 
> http://www.theglobeandmail.com/glob...ds-new-strategy-for-investors/article1643189/
> 
> Any thoughts or comments??


Yes, why do all media-quoted Canadian economists always work for the banks.

(and) there's that 25% probability number thrown around one more time. These guys have no imagination.


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## james_57 (Jul 5, 2010)

Exhibit 'E'

Consumer Metric Institute's Contraction Watch



> Key Notes:
> 
> 1. US Consumer credit has contracted during 15 of the past 16 reported months, and it is down a record total $148 billion over that time span.
> 
> ...


_"The key point to notice in the above chart is that if the current 2010 curve continues its current course, in about 20 days the 2010 slowdown will be more severe on a day-to-day basis than the 2008 ‘Great Recession’ was at the same point in its respective evolution. "_

Read the full article here.


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## kcowan (Jul 1, 2010)

I think the key common message from these articles is that cash is king once again. Being liquid in times of uncertainty is always a safe approach. And we KNOW that credit is contracting.


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## Belguy (May 24, 2010)

And so, what to do?

I am currently fully invested in the equity portion of my portfolio--mainly in Canadian value and small cap ETF's (and notice that the small caps are performing worse lately), U.S. S&P 500 and Russell 2000 ETF's, the Vanguard Europe Pacific ETF, a U.S. dividend ETF, an emerging markets ETF, and the RBC Global Precious Metals Fund.

I have always read not to try to time the markets because it is a mug's game and it is "time in the market" that really counts.

Back in 2008 and early 2009, during the worst of the recession, I remained fully invested and rode the markets down but then, by remaining fully invested, I didn't have to try to time the recovery and took full advantage of it throughout 2009. The result is that, although I haven't made all of my losses back, I am not down all that much either compared to many who panicked and sold in 2008 and missed much of the recovery in 2009.

In other words, it is difficult to know not only when to get out but also when to get back in. Even most professional money managers often don't get that part right.

All of that said, I find that I am fearful of the economy going forward and it is often said that fear is the worst enemy of unsophisticated and inexperienced investors. In fact, many have argued that investors need an advisor precisely at times like this to protect them from themselves and their fears.

On the other hand, many on these forums have suggested that "cash is king" in economic times like we are now experiencing.

And so, with all of this in mind, what should investors like me do? After having set up an asset allocation (in my case, the classic 60/40 equity to fixed income allocation) with the mind to 'buy and hold' through all market conditions, and considering that my age is currently 67, and that I plan to use my investments for retirement income after turning 71 because I have no private pension, DO I NOW SELL SOME OF MY ETF'S AND CONVERT THEM TO CASH OR DO I REMAIN FULLY INVESTED REMEMBERING MY EXPERIENCE FROM THE RECESSION OF 2008?

Sorry for the length of this post but it is a dilemna for many of us.


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## james_57 (Jul 5, 2010)

Belguy said:


> And so, what to do?
> 
> All of that said, I find that I am fearful of the economy going forward and it is often said that fear is the worst enemy of unsophisticated and inexperienced investors. In fact, many have argued that investors need an advisor precisely at times like this to protect them from themselves and their fears.


I don't think you need an adviser Belguy for a couple of reasons, one this economy is not that hard to figure out, and two most likely you will know as much as any adviser you can find (if not more) about the big economic forces.

The job now for us old (its a term of respect) guys is to figure out how the macro picture is working, and then employ common sense of the basic kind, ( i.e., you put your hand in the fire, its going to burn).

There's only a few people participating in this thread, but they are some pretty smart dudes here (and dudettes). Collectively, we should have enough brains to stay on top of this crisis and avoid a tree falling on our Canuck heads. Ya think?


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## james_57 (Jul 5, 2010)

For example Belguy, take a look at all the equities you are invested in, and chart them from Oct '08 thru to Apr '10. 

Looking at three blue chip Canadian stocks , RY, FTS and BCE, these are all bell weather stocks for our market, notice that they all behaved the same way thru the last recession, each gave up about 25% to 30% in price, and then regained Oct ' 08 previous levels in April of this year. So, if you had sold these stocks in Oct 08, and rebought in April '09, you would have gained about 25% in those assets over the 13 month bear rally cycle. 

It seems quite obvious to me, that we are on the crest of another leg down, which has probably already started, but might hold until Aug. Being cautious i already liquidated in June (missed the April top).


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## Belguy (May 24, 2010)

I suspect that it generally comes down to which camp one is in--either the 'buy and hold' side or the 'timing the market' side.

During the last recession, I elected to 'buy and hold' and, although the ride was gut-wrenching, I didn't do all that badly in the end.

However, it is just my feeling that, this time, the damage might be longer lasting and so the time to recoup losses could take a matter of years.

Or, are we over-reacting to what will end up being a brief period of uncertainty?

I have noticed that market sentiment can often turn on a dime. Just a few short months ago, the consensus seemed to be that, while the first half of the year might be sluggish, that things would likely pick up in the autumn.

How the worm turns!!!


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## james_57 (Jul 5, 2010)

Belguy said:


> Or, are we over-reacting to what will end up being a brief period of uncertainty?


If you think this is going to be a brief period of uncertainty, you are not processing the data properly. The fundamentals are all indicating its time to run for cover and the information is all in plain view. If you choose to ignore it, that's another matter. If one is in cash, its pretty simple, one waits to see where this is going.


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## james_57 (Jul 5, 2010)

There is only one major question left, what to do with the gold. Because I do not ever sell gold, only buy, there is no issue for me. If i owned paper-gold, i would sell it.


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## Belguy (May 24, 2010)

And so, I would be interested in finding out what everyone else out there reading this thread is doing!

Is everybody selling and heading for the hills or are some of you planning to stay invested and let the chips fall where they may?

Are the majority of professional money managers currently holding record amounts of cash or are they staying basically fully invested?

For example, I have heard many pundits say that there is about a 20 percent chance of a double dip. 

Does that mean that the recessionary drop in stock values in 2008 is not likely to repeat itself?

Even if the worst is behind us would that be something at least to hang our hats on.

What exactly might we be facing as it pertains to equity values say within the next couple of years.

I could handle a dip of say 20 percent but a Dow at 5000 within 2 1/2 years is much more disconcerting. Then, we are talking about another potential loss of 50 PERCENT (5-0%!!!!!) in our portfolios.


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## Mike59 (May 22, 2010)

james_57 said:


> There is only one major question left, what to do with the gold. Because I do not ever sell gold, only buy, there is no issue for me. If i owned paper-gold, i would sell it.


I assume you'll be putting in some hours to bury that treasure in the backyard this weekend  I think it's a good time to hold on to "paper gold" as it runs upward...

If equities do indeed tumble this fall, gold may go downhill with everything else temporarily... but in the face of a currency/debt crisis, low interest rates, and slumping equities, when the dust settles where else could investors sink their money? 

Given an increase of world money supply, resulting inflationary pressures on cash, and a relatively short supply of gold, what would hold back the metals from a serious run if/when the markets turn down?

What are your thoughts about the past behavior of the dow/gold ratio and where it sits now?


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## james_57 (Jul 5, 2010)

Mike59 said:


> What are your thoughts about the past behavior of the dow/gold ratio and where it sits now?


This is a bit long.. but gold is special. 

Gold is in the process of monetizing. According to my rough calculations, that value fully realized is $2,400 Oz. (today). And that's without any helicopter bombs of currency debasement figured in. Whether gold becomes fully monetised (or not) is a good question. I'm betting that it will, because i think this economic correction will surpass the GD1 in its magnitude of depth of asset destruction. 

If i didn't just lose you with that idea as too radical, consider the case where the S&L crisis was classed, let's say a 3 on the destruction scale, then the GD1 was 7.0, and the crash of 1873-96 was a 7.4, then this one will be a 7.9 on the same scale. The worst one yet. I think it's a generational crash. The bottom is say 10 years away. 

Before we reach the bottom, the DOW is expected by a cadre of traders to test Oct. 08 lows. Where will gold be then? If it behaved like precious metal commodity, the answer could be $750. But will all other things hold equal? Maybe on paper, but let's look at the real world. 

The world is in chaos, in the throes of a global banking crisis which has begun to bring down nations, and we have quickly in the space of two years, adjusted to it as the 'new normal'. Note this is just starting, and that we have years of it ahead. Eastern Europe is collapsing hard, the sovereign defaults are just starting. These countries will be back in the news soon, nations destroyed by inflation and high unemployment and by the IMF who is determined to take over as the world bank, a regime that is empowered to enslave populations, because that's just how it works, capitalism (banking control world wide). If the Hungarians don't get it, just ask Argentina, or Chile. But don't ask Iceland, those beggars. 

China just stuck a middle finger directly in the face of the Western financial complex, by rating sovereign treasuries independently on its own. This is the shape of things to come. Ignoring the fact that Canada was generously awarded a Triple AAA rating, notice what China is up to. They're rating the currencies of the world, the framework for taking over the rest of the job, control of the base currency. They can do that over time by getting control of gold, and waiting for the fiat currencies to degrade, which they are presently doing. 

China is now the world's leading gold producer, South Africa ceding the title last year. That's a big part of why i think gold is monetising. It's a political process building, suddenly there will be swing in control of the helm, but not until all hell has broken lose. As it happened the last time, 1946/47 with the Marshall Plan, and the crash of the pound, when the old boss hit the dust. This will present challenges far exceeding preserving wealth in the stock market. 

The war with Iran is in the same picture, the probability is high, to near certain. This cannot be argued rationally, because its insane, but that never stopped others before, and it's what the complex wants. It's good for business, the war business. Canada, doing its part, just bought 65 new stealth fighters (slower but better to be sure) to defend ourselves with, the price of belonging to the Empire Club and where one's dues are paid with a blank check. Meet the new boss. 

A gold chart, borrowed from a website. 



> The following chart is the month end price of gold from the early 1970's onward. Of course we have drawn in the official periods of US recession with the red bars. Notice anything?


Gold is currently moving sideways for the past few weeks. There is support at $1,200. There is also volatility, because the put/call high activity is signalling a downward move. That is why i say sell the ETF, because the market's leaning down, an equity balloon deflating overall, in search of lower PE ratios, to reflect the forward realisation that earnings (not profits) have a bleak future. When money leaves the market, it affects all classes these days.

Gold will take some downward pressure to be sure, but will it break below 1,200? If so, it becomes a buying opportunity for anyone who thinks things are destabilising. I think we are going to see a series of shocks, one after the other. Gold will go higher with each shock. What do YOU think is the question. It's the group-think that controls the gold price in the end.

The article that goes with that above chart is here.


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## kcowan (Jul 1, 2010)

Belguy said:


> Back in 2008 and early 2009, during the worst of the recession, I remained fully invested and rode the markets down but then, by remaining fully invested, I didn't have to try to time the recovery and took full advantage of it throughout 2009. The result is that, although I haven't made all of my losses back, I am not down all that much either compared to many who panicked and sold in 2008 and missed much of the recovery in 2009.


This confuses me somewhat. You talk about "buy and hold" but you make no mention of asset rebalancing. Surely your holdings changed several times during these swings. e.g. March 2009 would have forced selling fixed income and buying equities. By October 2009 a rebalance back would have been required. This action would have increased your couch potato returns substantially.

But now you are asking whether to continue to hold? How about rebalancing? I think anyone would recommend rebalancing regularly.


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## Belguy (May 24, 2010)

When rebalancing, what is the definition of 'regularly'?


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## andrewf (Mar 1, 2010)

There's evidence that once a year is sufficient to get most of the benefit of rebalancing.


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## kcowan (Jul 1, 2010)

Belguy said:


> When rebalancing, what is the definition of 'regularly'?





andrewf said:


> There's evidence that once a year is sufficient to get most of the benefit of rebalancing.


In fact, the studies point to little variability between quarterly and once every every 3 years. 

However, in highly volatile times, using a variance from target seems to be recommended. So if you have a 60/40 target and it reaches 55/45 then you rebalance. For the more anal, a tighter spread can be used e.g. 58/42. It is a tradeoff between your risk tolerance, and the transaction fees. If there were no transactions fee, more frequent would be recommended.

For example, quarterly would have done well during the last 18 months but variance from target would also have achieved that. And it has the benefit that no action is generated when it is not needed.


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## andrewf (Mar 1, 2010)

^Agreed. Variance from target is how professional money managers (endowments/pensions) do it. However, it requires constant attention. If you don't want to check every day, then even annual rebalancing should be fine.


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## james_57 (Jul 5, 2010)

Loblaw seeing price deflation
http://www.cbc.ca/money/story/2010/07/22/loblaw-earnings-fall.html

"In the second quarter for Loblaw Companies we deflated at a faster rate versus the first quarter, and we were deflating at a deeper rate as we exited the quarter than as we entered it.. 
We see this (deflation) trend continuing well into the third quarter, and it's more difficult to predict when inflation will return to the market," Leighton said.


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## andrewf (Mar 1, 2010)

I saw that, too. I am mildly concerned. I wonder whether it is wise for the BoC to be hiking rates rapidly with deflation still working through the economy. A rise in the CAD:USD exchange would only exacerbate deflationary pressure.

Overall, I see the threat of deflation being worse than inflation in the medium term.


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## HaroldCrump (Jun 10, 2009)

james_57 said:


> Loblaw seeing price deflation
> http://www.cbc.ca/money/story/2010/07/22/loblaw-earnings-fall.html
> 
> "In the second quarter for Loblaw Companies we deflated at a faster rate versus the first quarter, and we were deflating at a deeper rate as we exited the quarter than as we entered it..
> We see this (deflation) trend continuing well into the third quarter, and it's more difficult to predict when inflation will return to the market," Leighton said.


hmm....is that why they have been increasing their prices?
yeah it makes sense...there is deflation in the economy so let's increase our prices to help correct the situation.
What a load of roobish....


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## james_57 (Jul 5, 2010)

HaroldCrump said:


> hmm....is that why they have been increasing their prices?
> yeah it makes sense...there is deflation in the economy so let's increase our prices to help correct the situation.
> What a load of roobish....


yep, you might closer to the truth.

Thoughtful editorial by Pritchard in the Telegraph on how velocity can kick in after a period of QE, in the historical context of Wiemar Germany.

The Death of Paper Money


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## andrewf (Mar 1, 2010)

HaroldCrump said:


> hmm....is that why they have been increasing their prices?
> yeah it makes sense...there is deflation in the economy so let's increase our prices to help correct the situation.
> What a load of roobish....


Most of the price increases came a year ago, so there are some base effects (comparing against a high year ago number). Remember early 2009 when food inflation was running ~9%? You can scream up and down about how their prices are rising, but I listen to the CPI numbers.


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## kcowan (Jul 1, 2010)

CPI except for the fictitious food basket. No one buys that stuff because no one is average.


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## andrewf (Mar 1, 2010)

No one is exactly average, yet averages are strangely useful for making generalizations and the economy. Perhaps if your diet consisted entirely of truffle oil, and that quadrupled in the past year, you'd have a point about inflation for your food prices. But on average, there is no evidence of strong food inflation at the moment other than anecdotal evidence. Most of the price increases people are griping about happened a year or more ago.


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## Sampson (Apr 3, 2009)

andrewf said:


> But on average, there is no evidence of strong food inflation at the moment other than anecdotal evidence. Most of the price increases people are griping about happened a year or more ago.


Agreed! People often remember the pain of inflationary increase, but completely disregard when prices go down. (e.g. all the 'artificial' inflation spurred by gasoline prices in 2007-2008). It is a perfect example of memory bias.

While I have my own gripes with the CPI calculation I am certainly not one of those people who think the government is using these metrics to pull a fast one over our eyes.


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## HaroldCrump (Jun 10, 2009)

Sampson said:


> Agreed! People often remember the pain of inflationary increase, but completely disregard when prices go down. (e.g. all the 'artificial' inflation spurred by gasoline prices in 2007-2008).


What artificial inflation? We are still paying at the pumps close to whatever we were paying back in 2007 - 2008.
Price of crude oil has dropped from $150 all the way down to $40 and now at $80 but the price at the pumps hasn't changed much.
Any miniscule drop has been wiped clean by the HST.
And I don't recall any prices dropping due to fall in price of gasoline.
Oh wait, a big flat screen, LCD, HD, rear-projection, plasma, gamma ray TV now costs less than in 2007.


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## Sampson (Apr 3, 2009)

We don't pay the same for gasoline here now as compared to the peak.

I've tracked every tank of gas I have bought since 2008 and the price per litre spiked back in the Summer of 2008 ($1.40/litre), vs. Summer 2010 ($0.90/litre). - maybe not reflective of the situation everywhere though 

Another example is automobiles. The car I bought in 2008 is now $1500-$2000 (sticker price) lower now that before. I know the Prius sells at a similar if not greater discount.

Last example: housing. Sure prices have crept up over the past year, but compared to 2007-2008, we are still some 10% below the peak.

Consider how CPI is calculated, it is heavily weighted towards these three products, energy, motor vehicles and housing. It doesn't surprise me that StatsCan shows negative inflation numbers.

'Artificial' was not necessarily the right word. All I meant by that was there was a bit of anomalous spike in energy related costs a couple of years back which has since subsided. Remember when a bag of rice jumped from $15-$20 per 40lbs to a high of about $50/bag, now it has settled somewhere in between at $25-$30.

It is easy to feel that prices are increasing or decreasing, but do any of us actually log the changes? Does anyone every scream at the tv when they report (and they don't) of price decreases (aside from housing and other assets). Walmart's pricing, as well as other discount retailers has been dropping on many items (largely due to their policy), but that never seems to be reflected in people's reactions.

I don't know if there is or is not inflation, all I know is that people react strongly when prices move in one direction, but often disregard when they move in the opposite direction.


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## HaroldCrump (Jun 10, 2009)

Sampson said:


> I've tracked every tank of gas I have bought since 2008 and the price per litre spiked back in the Summer of 2008 ($1.40/litre), vs. Summer 2010 ($0.90/litre).


You and I must be lost brothers.
I have likewise recorded every single gasoline purchase in the last 7 years.
Looking back into my expense sheets, I see gas purchases at $0.65 
Going a little further back, I have records of having filled up in the US during my road trips at 65c./_gallon_.
That was just before the 2003 Iraq war.
At that time, gas was in the 75c/_litre_ range here!

Anyhow, a quick scan of my expense sheets since 2007 shows a peak of $1.33/litre (summer of '08).
My receipt from this afternoon shows $1.035/litre.
So, yes, it has reduced since the peak, but in the meantime crude oil has enjoyed a roller coaster from $150 to $40 and average back to $80.


> Another example is automobiles. The car I bought in 2008 is now $1500-$2000 (sticker price) lower now that before. I know the Prius sells at a similar if not greater discount.


Yes, conspicious consumption has become cheaper for sure.
Thus my example of the super flat TV above.


> Remember when a bag of rice jumped from $15-$20 per 40lbs to a high of about $50/bag, now it has settled somewhere in between at $25-$30.


oh yes, I think about it every day 


> It is easy to feel that prices are increasing or decreasing, but do any of us actually log the changes?


I can't claim that I have logged the price of every single item purchased in the last 10 years, but I do record the prices of some key items (by own personal CPI, which I can't imagine is too different from a typical single family household). Things like vegetables, grains, utilities, taxes, gasoline, cleaners, etc.
Right now, a quick scan shows me more items have increased rather than reduced.
I'm not disputing the CPI numbers, as you rightly said, it's heavily weighted towards housing, automobiles and gasoline.
I'm simply saying that the prices of essential, daily goods and services have been steadily increasing since the start of the "recession" in late 2008.
I'd think most households today are spending more on essentials and probably able to save less due to that reason (given that wage increases have stalled as well for many people).


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## Sampson (Apr 3, 2009)

HaroldCrump said:


> You and I must be lost brothers.
> I have likewise recorded every single gasoline purchase in the last 7 years.


How else can we track how much we are saving by implementing hypermiling driving strategies 



HaroldCrump said:


> I'm simply saying that the prices of essential, daily goods and services have been steadily increasing since the start of the "recession" in late 2008. I'd think most households today are spending more on essentials and probably able to save less due to that reason (given that wage increases have stalled as well for many people).


This may be true, one of the problems is determining whether this will have a positive or negative effect. If companies start earning more, the job market begins to grow again, and consumers feel confident to spend again - moderate inflation could help us out of the recession (even if personal debt levels rise).

What I think remains to be seen is whether those personal debt levels will continue to rise - I don't think consumerism has or ever will die, even with all the fear out there.


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## Belguy (May 24, 2010)

Consumerism will suffer, sooner or later, if the various levels of government keep extracting more and more in taxes from us!!

Enough already!!!!


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## HaroldCrump (Jun 10, 2009)

Belguy said:


> Consumerism will suffer, sooner or later, if the various levels of government keep extracting more and more in taxes from us!!
> (


I don't think so - it doesn't seem to have during the last 2 years of the worst "recession" in modern times.
Manufacturers have simply lowered the prices, increased discounts, etc.
They already have the leverages to keep or even lower their manufacturing cost without taking a hit to the profit margins.
Borrowing costs have reduced dramatically for manufacturers in last 2 years.
Labor is cheaper.
Transportation costs are cheaper.

Conspicious consumption items are what drives the market these days.
No company gets rich selling laundary detergent or apples.
Just look at the craze around the Apple, Sony and Nintendo products.


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## dilbert789 (Apr 20, 2010)

Count me in on the 'brothers of gas consumption tracking'.

I've tracked since I got my current car in Aug 2008(tossed everything with the previous car). I range from 0.67c in December of 2008 to $1.36 in September of 2008. Everything else is between that massive range. Average over the 2189L of fuel I've used is $0.94.


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## HaroldCrump (Jun 10, 2009)

dilbert789 said:


> I range from 0.67c in December of 2008 to $1.36 in September of 2008.


67c. in Dec 2008? Where do you live?


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## HaroldCrump (Jun 10, 2009)

I think we can settle this debate from last year now.
I don't think there is any doubt any longer which way we are headed:

http://www.680news.com/news/national/article/194512--food-prices-going-up

_Economists are warning by this time next year, Canadians will be paying 5 to 7 per cent more from groceries, "from your coffee store to your grocery store to your restaurant", as the costs creep up slowly over the next 12 months.

A family that spends about $400 a month on groceries will see that price rise by about $28, an increase of $340 a year._

It is ironical that even with our much stronger dollar, we can afford less of everything.
And the govt. continues to deny the rampant inflation and continues to insist that inflation is under the target of 2%.


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## Cal (Jun 17, 2009)

Yeah...the heard the show host on CP24 mention yesterday that there is a website he was checking, that you could enter your salary from 1984 (for example) and it would compare it to today's buying power.

He used 1984 in his example and even though he has gotten raises over the years, it bought 120% of what his paycheck currently does.


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## el oro (Jun 16, 2009)

The government saves mucho money by understating inflation at the people's expense.


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## HaroldCrump (Jun 10, 2009)

I can pat myself on the back that I called this correctly.
I recall discussing this issue back in early 2009 both here as well as on the CBO forum.
I was concerned of precisely this scenario - I didn't for one second believe all the "experts" that were forecasting 1930s style deflation.
I think I'd made this forecast on dogcom's forecasting thread back in 2009 and 2010.
Of course there were other "experts" that were forecasting massive inflation as well.
Both camps were on one extreme or the other.

Not that it has helped me in any way.
I'm paying the same prices for food, gas and utilities that everyone else is.
In general inflation puts downward pressure on stocks as well and some of my stocks are down with the TSX index as well.


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## Mike59 (May 22, 2010)

*To play Devil's Advocate: is inflation actually less than 2%?*

Statscan overestimating inflation rate, study suggests (Globe and Mail)

"The C.D. Howe study singles out a particular flaw in the data gathering: The CPI does not take notice of consumers’ natural tendency to substitute cheaper alternatives for products rising in price – known as substitution bias. So the official inflation estimate accords too much weight to products whose prices are rising. This makes the rate of increase higher than what is actually experienced by the average consumer in the marketplace"


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## HaroldCrump (Jun 10, 2009)

Yet, at the same time, the same organization is recommending lowering the inflation target by a huge 0.5% to 1%.

http://www.theglobeandmail.com/repo...lation-targets-cd-howe-argues/article1918620/

Therefore, it all works out in the same direction, namely, inflation is higher than what is desired and action is required.

Regarding the methodology criticism, I personally don't think it is too significant.
After all, if a consumer is replacing an item, whose price went up, by a cheaper item simply to stay within their budget, then it can be argued that there is something about the second item that was undesirable earlier - most likely, feature and quality.
Therefore, the consumers have reduced their quality of consumption and thus it's not a fair comparison.

Secondly, the composition of the CPI itself opens it up for understating true inflation especially in times like this when essential goods and services prices are going up (where demand is relatively inelastic), while conspicious consumer goods prices are going down in many cases (cars, junk electronics, etc.), where demand is relatively elastic.

For example, the substantial fall in new car prices between 2008 and 2010 more than offset the substantial rise in utilities, grocery and other inelastic goods.
Ditto for other consumer goods like furniture, electronics, etc.


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## Argonaut (Dec 7, 2010)

I don't mind inflation as long as wages keep up. They haven't. Relatively high unemployment means employers can give workers whatever low salary they want. I'm making half of what I expected to make coming out of university but am damn happy to get it.


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## HaroldCrump (Jun 10, 2009)

Correct. Wages get the short end of the stick both in and out of a recession.
It's the first thing to get cut during a recession and the last to recover, if at all.
And since we appear to be stumbling from one recession to another in the last 30 years, like a drunk stumbling from one pillar to the next post, wages have never really kept pace with the cost of living.


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