# Historical inflation rates... our future?



## hotbmw (7 February 2009)

guys, below is the historical inflation rates, probably an average of over 10% p.a.
since 1990 we have probably averaged around 2% inflation p.a. 
im not old enough to remember those years but i remember stories where my dad told me he used to earn $50 a week or he bought his 1st house for $6000 etc.
we all hear high inflation is coming in the years to come.
do u think we are about to experience the same scenario our dads did back then? are wages about to double over the next 5 years? will property prices double along with wages. will bread cost double in 5 years?
sorry im not the best at explaining my thoughts but i guess you get my drift.
this happened in the past. it hasnt happened in my working life, wages on the average have not doubled in the past 10 years or so. but this was happening in the 80's and 90;s with high inflation.
is this whats in store for us in the coming years guys?
maybe someone can explain it better than me but i see this as a big possibility.
if in 6 months or so u were to buy a house (closer to the bottom) for $350,000 with a $300,000 loan fixed for 5 years at around 5.5%. In 5 years this asset could be worth double due to double digit inflation with a small loan.....
do u see high inflation year after year as per below historical figures?
thoughts.....? 

1990 -	7.2784%
1989 -	7.5482%
1988 -	7.2564%
1987 -	8.4906%
1986 -	9.0845%
1985 -	6.7424%
1984 -	3.9370%
1983 -	10.0520%
1982 -	11.2289%
1981 -	9.6144%
1980 -	10.1863%
1979 -	9.0794%
1978 -	7.9507%
1977 -	12.3172%
1976 -	13.3508%
1975 -	15.1759%
1974 -	15.2955%
1973 -	9.2405%


----------



## MR. (7 February 2009)

No, "I" don't.

If you deduct your figures from the following chart (Australian share prices)
http://www.asx.com.au/products/pdf/share_price_movements.pdf

You can see how the following chart makes some sense!  This chart is Australian shares with the inflation figures deducted. 



For some useless information notice that the boom in share prices between 1970 and 1990 on the asx link.  Inflation was high as per your post. But on the attached chart of share price less inflation the price dips.

In recent years the return on equity for listed companies has been fair. (not over the top)  So how is it that from 1990 onwards the price had risen so much on the attached chart?  As you pointed out "low inflation" would explain.  So if there was low inflation "low increases in prices" which includes wages.  We paid for these items via credit! 

So now we are in debt!  I have trouble working out how there can possibly be anywhere near double digit inflation in the near future.  
What are we building to make such demand?  Amazing higher inflation hasn't been on us already in the past years!
Where is the money coming from to pay for it?  (apart from Rudd)        

Either:
1) - inflation takes hold (how?) and pays back some debt.
2) - inflation takes hold while creating more debt.
or
3) - inflation stays low,  with little spending.  ummm  
   What will the gov' do?....  Not reduce interest rates further?  
     ok...  so then we just keep racking up debt? GOTO back to 2)

To answer your question:
If Inflation hit double digits, going interest rates will be similar.  So if you locked in your 5.5% interest for 5 years it sounds like a plan.
If inflation was double digits "everyone is making more money" the overall Australian debt may not be any different to today! (house price doubled as well as inflation has doubled) 

But house prices will have to double "again!"  Can't see it!


----------



## hotbmw (7 February 2009)

im just trying to relate it to what happened in the 70's and 80's.

why did we have consistant double digit inflation back then?

why did wages increase by over 1000% in 2 decades?

what would be the increase we had in wages in the last decade? 20%?

the govt is spending unprecedented levels of $ to get us out of this mess. 
i dont think we will get the 30-40% correction we should have had as the US and UK did.
we r on the front foot early and the govt will spend & will print their way out of this mess. 
no?

property may not double but surely in 6 yrs time if we have high inflation its not going to be less then now WITH high inflation?
maybe asset growth inline with inflation? 10%+ p.a. starting in 2010?

thoughts?


----------



## MR. (7 February 2009)

MR. said:


> 3) - inflation stays low,  with little spending.  ummm
> What will the gov' do?....  Not reduce interest rates further?




Ofcoarse the gov' doesn't set the interest rates. 
The RBA does.  
I hope they stay at or near their 3%.

I'll have to come back to your second post or someone else. 
Need to get some work done.


----------



## hotbmw (7 February 2009)

no worries.
im not saying im right, im just trying to create discussion on this. i think its worth exploring...


----------



## knocker (7 February 2009)

hotbmw said:


> no worries.
> im not saying im right, im just trying to create discussion on this. i think its worth exploring...




Who knows where rates will go. POO is going up so maybe inflation will, but on the flip side the world is so stuffed at the moment that maybe RBAetc will be scared to raise rates for some years. 

What were rates like in the depression? did they have any?


----------



## MR. (7 February 2009)

hotbmw said:


> im just trying to relate it to what happened in the 70's and 80's.
> 
> why did we have consistant double digit inflation back then?
> 
> ...



"if we have high inflation" 
Why will we have high inflation again soon?  What is it that you have read or what makes you think this?    



hotbmw said:


> no worries.
> im not saying im right, im just trying to create discussion on this. i think its worth exploring...



It's maybe worth exploring if there is no doubt of "high inflation" and property prices would need some falling to also make it attractive as well!

Can you convince me that there is going to be high inflation?


----------



## drsmith (7 February 2009)

An interesting question here is whether economic policy within large debt nations such as the US has turned to inflation as a means of managing (reducing) the real value of their debt over time.


----------



## hotbmw (7 February 2009)

drsmith said:


> An interesting question here is whether economic policy within large debt nations such as the US has turned to inflation as a means of managing (reducing) the real value of their debt over time.




thats exactly where im heading.
print the $ and inflate prices to cover/pay debts.
keep interest rates low for as long as possible so they avert a property crash here in oz and eventually prices will inflate and interest rates will rise as sharply as they fell to curb an out of control inflation situation.

does anyone else have some input???


----------



## Smurf1976 (7 February 2009)

hotbmw said:


> thats exactly where im heading.
> print the $ and inflate prices to cover/pay debts.
> keep interest rates low for as long as possible so they avert a property crash here in oz and eventually prices will inflate and interest rates will rise as sharply as they fell to curb an out of control inflation situation.
> 
> does anyone else have some input???



I've been expecting this for some time (years) now and totally agree with the notion that much higher inflation and interest rates are at some point ahead. What other option is there in the face of such massive debt? Outright default?

Only thing I'm not so convinced about is the timing. I'd say 3 - 4 years before things start going up but I have a habit of getting the timing seriously wrong so maybe a decade.


----------



## So_Cynical (8 February 2009)

hotbmw said:


> thats exactly where im heading.
> print the $ and inflate prices to cover/pay debts.
> 
> 
> does anyone else have some input???




I watched a great interview with Former PM Keating, and he has some similar views
RE: the inflation to cover the debt

Ill quote and link

http://www.abc.net.au/lateline/conte...8/s2480345.htm
_
We've always lived in a position where the United States Budget could reflate the world, this is not going
to happen now. The Budget this year was going to be $850-billion, now look President Obama is talking
about another trillion, so $1.8-trillion, their GDP is 13-trillion, so they'll be running a Budget deficit this
year of 15 per cent of GDP, they'll have to do this for three or four years.
*
Sixty per cent of American GDP, who is going to buy the bonds? Now every serious American policy maker
knows that they are not going to be returning value, in the end they'll inflate their way out. So in other
words, you'll buy American Treasury bond, but what you get back in return will be an inflated dollar*, so
you'll get back 50 per cent of real value, or something, in other words the debt will be so overwhelming
that it cannot be repaid.

And you'll start to see in the price of gold, if this goes on for a couple more years, the real serious question
of an American default, a default by the United States Treasury. So this is what we are dealing with now._

It all makes sence...so how do we make money out of coming inflation? :dunno:


----------



## MR. (8 February 2009)

Smurf1976 said:


> I've been expecting this for some time (years) now and totally agree with the notion that much higher inflation and interest rates are at some point ahead. What other option is there in the face of such massive debt? Outright default?




If there is higher interest rates wouldn't this just cause more defaults?



So_Cynical said:


> I watched a great interview with Former PM Keating, and he has some similar views
> RE: the inflation to cover the debt
> 
> Ill quote and link
> ...



_

Can't find the interview.  The link does not seem to work. Can you help here?



hotbmw said:



			thats exactly where im heading.
print the $ and inflate prices to cover/pay debts.
keep interest rates low for as long as possible so they avert a property crash here in oz and eventually prices will inflate and interest rates will rise as sharply as they fell to curb an out of control inflation situation.
		
Click to expand...



So, the RBA decreases interest rates and holds them there while the government has heavy spending.
This will result in inflation, yes ....
So some years go by.  Cash rate is still at 2%, inflation is at 6%.  ???????
Do you really think this would happen?
The RBA is balancing rates so inflation does not take off. Dropping rates just enough for people to keep spending. As soon as inflation starts increasing too much they will lift interest rates so it does not get out of control like “the 70’s and 80’s!” As you have pointed out.
So:
You have a loan now of 300k on a house.  Interest calculated at 6% is $21,000 
If inflation goes up to 6%,  interest rates will climb. At 10% interest on the house is now $30,000.  Makes that 300k loan harder to repay. Wage rises don’t cover it and the day to day expenses are increasing!

What would high inflation do to our exports?  They will be less attractive!

How long would the RBA have to leave interest rates lower than inflation to make a real difference in peoples debt?  But then isn't debt going to just keep increasing?  So many questions!

By the actions of the governments printing money. Does this cause inflation any other way apart from creating lots of work that I have overlooked?_


----------



## GumbyLearner (8 February 2009)

MR. said:


> If there is higher interest rates wouldn't this just cause more defaults?
> 
> 
> 
> ...





Not trying to knock you MR.
Your post is pretty much spot on
except for the inflation deal.
Its going to smash out like you wouldn't believe.
Maybe 2010 or 2011. JMO


----------



## MR. (8 February 2009)

GumbyLearner said:


> Not trying to knock you MR.
> Your post is pretty much spot on
> except for the inflation deal.
> Its going to smash out like you wouldn't believe.
> Maybe 2010 or 2011. JMO




Ahhh but when this inflation takes hold (at some point) the RBA is not going to sit back now is it?


----------



## robots (8 February 2009)

MR. said:


> Ahhh but when this inflation takes hold (at some point) the RBA is not going to sit back now is it?




hello,

will they give us high interest rates MR?

and on it all goes

thankyou
robots


----------



## MR. (8 February 2009)

robots said:


> hello,
> 
> will they give us high interest rates MR?
> 
> ...




morning,

Why is the RBA then treating further cuts to interest rates with caution?


----------



## robots (8 February 2009)

hello,

dont know MR, maybe just want to settle down everything

see what happens for a while

let people know life is rolling on fine here in Australia

thankyou
robots


----------



## hotbmw (8 February 2009)

MR. said:


> morning,
> 
> Why is the RBA then treating further cuts to interest rates with caution?




MR as u know they are smashing interest rates down to save us! to ensure we dont have a SEVERE recession. AND to save our property market. its working. i have a beach front apartment for sale (put it on just before christmas). im now thinking if there is another 1.25% cut in rates ill keep it and lock her in for a 5yr fixed rate for 5.5%.
i dont care if the value drops for a year or 2 more as the value will be more in 5 yrs. its cheap money. they r almost giving it away.
but rates could go down even lower so i may be able to lock in an even cheaper rate.
if so ill buy another house in a year and locker her in for 5%.
will i be the only 1 thinking this way in a year? i doubt it.
cheap and easy credit is what got us in this mess and cheaper credit is gonna save the property market from a crash.
and if we print our way from this debt (as the whole world will) asset prices, cost of living and wages will all increase.
just my 2 cents


----------



## lioness (8 February 2009)

Hotbmw,

Start learning about *DEFLATION* and forget about inflation.

Otherwise, you will be burnt.

You cannot make inflation out of 30 years of debt. The US dollar will collapse if they try to.


----------



## lioness (8 February 2009)

hotbmw said:


> MR as u know they are smashing interest rates down to save us! to ensure we dont have a SEVERE recession. AND to save our property market. its working. i have a beach front apartment for sale (put it on just before christmas). im now thinking if there is another 1.25% cut in rates ill keep it and lock her in for a 5yr fixed rate for 5.5%.
> i dont care if the value drops for a year or 2 more as the value will be more in 5 yrs. its cheap money. they r almost giving it away.
> but rates could go down even lower so i may be able to lock in an even cheaper rate.
> if so ill buy another house in a year and locker her in for 5%.
> ...





HELLO, you can lock rates in the US for 30 years now at 5.25%, BUT capital values have fallen 50%.

GO ahead, borrow more and lock it in Eddie, but don't complain when the property falls 50%. PS Do some homework on the correlation between unemployment and property prices, it trumps interest rates every time.


----------



## hotbmw (8 February 2009)

lioness said:


> HELLO, you can lock rates in the US for 30 years now at 5.25%, BUT capital values have fallen 50%.
> 
> GO ahead, borrow more and lock it in Eddie, but don't complain when the property falls 50%. PS Do some homework on the correlation between unemployment and property prices, it trumps interest rates every time.




lioness as i recall just recently u didnt have these views.

READ WHAT IM SAYING.

in 1 year or so the property market would have dropped a bit.
ur never going to pick the bottom so it may be close enough in a year.
interest rates will not be historical lows forever.
time the purchase of a home together with a low fixed interest rate.
I KNOW ALL ABOUT DEFLATION and INFLATION.
I didnt say we have inflation now.
im saying its inevitable that we will have it in a couple of years.
BUY IN A YEAR AND LOCK THE INTEREST RATE IN EDDIE!!!!!!!!!!!!


----------



## lioness (8 February 2009)

hotbmw said:


> lioness as i recall just recently u didnt have these views.
> 
> READ WHAT IM SAYING.
> 
> ...




Ok, so explain to me how inflation will beat deflation and don't just state printing money will cause it. Can't you see US unmployment??, it has now reached levels of 1974 and rising. 7.8% uneployed and expected o hit 15% byt the time it is finished. How will inflation beat that??


----------



## hotbmw (8 February 2009)

lioness said:


> Ok, so explain to me how inflation will beat deflation and don't just state printing money will cause it. Can't you see US unmployment??, it has now reached levels of 1974 and rising. 7.8% uneployed and expected o hit 15% byt the time it is finished. How will inflation beat that??




where did u get 15% from???
everything i am reading is estimating around 10%
u think australia will see 15% unemployment rates also?
if its 15% here we may as well shut up shop!

my thoughts are based on unemployment rising by a mere 2% in 2009 and 2010 will see some stability, a floor in deflation in asset prices due to artificially LOW interest rates will prop up all assets, cheap credit will spur on lending again in 6 to 12 mths, savers will enter into the property market or share market to acquire tax friendly dividend returns as interest rates will be so low for savers. also the govt stimulus packages would have kicked in, there will be a massive increase in the money supply, govt will print print and print.....

i dont see how we can have deflation in 2011+


----------



## GumbyLearner (8 February 2009)

I appreciate the fact you started this thread HotBMW.

If you think deflation is imminent, then invest in physical assets.

Otherwise, buy bullion and gold stocks!

This is all very generalized ****!

DYOR


----------



## hotbmw (8 February 2009)

GumbyLearner said:


> I appreciate the fact you started this thread HotBMW.
> 
> If you think deflation is imminent, then invest in physical assets.
> 
> ...




Hey Gumby
Yeah i bought physical gold and silver a few months back at a nice price.
I will accumulate more if i can buy for under 800 an ounce (gold) or under $11 silver


----------



## joeyr46 (9 February 2009)

I'm right with you Lionness deflation is the destruction of asset prices or the increase in value of dollars. Lets be honest it has already arrived. Your dollar already buys a lot more than a year ago.  Everyone thinks the Government can control things nothing could be further from the truth Interest rates are low now because their is no demand (at least from people banks will lend to) People have stopped borrowing because of fear and the more the government interferes wit stimulus packages etc the longer it will be before we have any confidence to borrow. Hotbmw it is a regular part of the investment cycle and the trick is to recognise when it is over no need to panic and buy on the way down because we dont know how low prices will go (or how valuable our dollars will become ) Will the government print enough money to reinflate ? Maybe but that will take time to work thru the system and the excessive debts have to be worked off first before any infaltion will occur. After the boom in house prices in the late 80's it took nearly a decade before they started to run again. Picking bottoms is rarely profitable


----------



## Stormin_Norman (9 February 2009)

consumer prices have been held low thanks to cheap chinese imports.

the hidden inflation, as was mentioned earlier in the thread has been asset price inflation. something which isnt measured, or at least isnt the concern of the government and seemingly the central bank either.


----------



## joeyr46 (10 February 2009)

Stormin_Norman said:


> consumer prices have been held low thanks to cheap chinese imports.
> 
> the hidden inflation, as was mentioned earlier in the thread has been asset price inflation. something which isnt measured, or at least isnt the concern of the government and seemingly the central bank either.




Not consumables especially imports because they can go up or down dependant on exchange rate and the other country's economy 
Assets ie debt obligations, real estate and  shares 
1) Debt obligations are falling as confidence in the borrowers ability to pay Banks unwilling to lend as much on assets as previously. The ultimate fall in debt obligations is when they default totally like Allco
2) shares  (I dont think there will be an argument to this class of asset
3) Houses (Always difficult as they are so varied anywhere up to 15% depending on area at the moment although some seem to have held up firmly at this stage
4) Commercial real estate (Once again difficult to assess but have seen some fairly substantial falls locally and the RE Trusts are having trouble getting loans and there share prices are reflecting hefty falls in their portfolios already
   The other thing that points to deflation is money volatility  ie when people start taking a bit longer to pay so everybody does until someone defaults and credit is destroyed or there is less money to buy the same assets (Deflation, assets cost less)


----------



## joeyr46 (10 February 2009)

hotbmw said:


> Hey Gumby
> Yeah i bought physical gold and silver a few months back at a nice price.
> I will accumulate more if i can buy for under 800 an ounce (gold) or under $11 silver




Explain why you would buy gold and silver unless we have inflation or are about to. Cash is king in deflation I always thought ? 
So what is your definition of deflation?


----------



## gfresh (11 February 2009)

It is a hard one to guess the outcome at the moment. Pure logic says printing more money, and keeping rates low eventually leads to highly inflationary periods. General economic volatility and uncertainty can also lead to high interest rate periods. But these are quite different times. 

From history we know that deflationary periods are quite rare and last generally for short-periods of time (some exceptions exist). Because the relative shortness of these periods, I'd be considering the present deflationary period as short-term, and weighting more towards an inflationary scenario in the medium term. 

That said, rather than guessing too much whether we are going to be entering a drawn out deflationary period, or a large inflationary one, and putting all eggs into either basket -- the best course of action would simply be hedging for both?? 

* For inflation the best hedge appears to be hard assets, or holding debt in previous dollars, or gold if you swing that way. 

* For deflation, from my understanding, it seems the only thing that really beats this is holding cash to buy assets eventually at lower prices. 

So say, you'd maybe hold at least 50/50 assets vs cash, or weight into which you thought was more likely going forward. 

I think Australian's are a bit lucky in some ways that we're likely to get by fairly well if we enter a large global inflationary period. We've in fact seen this in effect leading up to 2007, so have much recent history to go on. 

Australian wages have been fairly good at keeping up with inflation over recent history, unlike say the US. For those that keep jobs, wages *should* keep track up with inflation, meaning paying off debt in old dollars could be easier. 

Rent is likely to closely track CPI as it has done for 35 years. Large rent rises could be seen during high inflation, meaning holding a property (to live in) may in fact be more beneficial rather than renting. High interest rates would lead landlords to pass on interest costs, as well as their own higher living costs through higher rent.

A lot of profits come into the country from our mineral assets. Holding shares in resource stocks could be beneficial as overseas interests hold companies that benefit directly from rises in mineral prices. Already some mineral prices seem to have bottomed, seemingly indicating inflation is not far away. 

High inflation may cause overseas parties to purchase $AUD to hedge against high inflation in their own country, as we are seen as largely a resources based country. We saw this with our dollar rising as the minerals boom rose as well. In turn a higher $AUD can lead to certain imported goods being cheaper, such as electronics, cars, and other such items. This can help offset higher fuel, food, and other prices.


----------



## brty (11 February 2009)

During the seventies inflation remained above interest rates for quite a few years. Only from about 1980 onwards were interest rates above inflation.

Why can't it happen again??

Governments printing money is not going to lead to deflation. In the 1930's governments contracted spending, lead to the depression. Helicopter Ben is well aware of this, so is Kev.

The only question to ask yourself about what is ahead, is What is/are the governments of the world doing, are they contracting spending or expanding spending???

There is a lag time for spending to take effect, just like the collapse in asset prices happened a year after the interest rates were rising.

brty


----------

