# Printing more money = inflation - how?



## archilles (16 February 2009)

At what point do the effects of printing more money ( out of thin air so to speak  ) create inflation ? 


Peter Schiff tells us that by allowing the government to print more money 
( to prop up failing business and stimulate the economy ) we are potentially allowing inflation to spiral out of control - AND PRICES ACROSS THE BOARD WILL RISE! 

What i don't understand is at what point do prices start to rise ? and what are the direct causes ? No one seems to know the answers to these questions. Schiffy tells us prices will rise, but why and how ? 


Ladies and gents, please correct me if i'm wrong - but this is my take on it -

IF the government(s) keep doing what they're doing our wages will stay the same ( provided we even have a job ) tip top bread will go from $3.80 per loaf to $ 300 per loaf, your house with a $ 500,000 mortgage will be worth $120,000 and to top it off if you lose your job, you'll be broke. 


As a young aussie battler i want to know what is going to cause the above scenario, and what to bloody do about it... 

Growing vegetables and eating off the fat off the land is a nice idea, but surely i can salvage what's left of my savings/equity before they become worthless.


P.S.   Please don't tell me i'm taking this too seriously, i just want some form of insurance lol


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## Wysiwyg (16 February 2009)

*Re: Printing more money = inflation - how ?*



archilles said:


> At what point do the effects of printing more money ( out of thin air so to speak  ) create inflation ?
> 
> 
> Peter Schiff tells us that by allowing the government to print more money
> ( *to prop up failing business and stimulate the economy *) we are potentially allowing inflation to spiral out of control - AND PRICES ACROSS THE BOARD WILL RISE!




Are you absolutely sure money is being printed to prop up failing business and stimulate the economy?

If so please provide some evidence.Thanks.


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## archilles (16 February 2009)

*Re: Printing more money = inflation - how ?*

According to Schiff, that's is where is all going or better yet Rudd is planning on giving us up to $950 smachos to do what we like with.. My question is where the hell do they get this money from  ? 

Surely someone has to foot the bill - isn't it going to be us ?


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## shaunQ (16 February 2009)

*Re: Printing more money = inflation - how ?*

Just a couple of things till someone smarter comes along. Inflation is technically your money being worth-less, prices going up is a symptom. Australia isn't printing money madly (unlike the US) and has borrowed which is different. But if hyperinflation were to take place in the US like your suggesting we'd have to be affected. Your only real hedge against it would be buying gold but I would be careful with that as well as your just as likely to get burnt in my opinion (if it doesn't appear).

My view is deflation will win this, with possible high inflation coming much later. If a loaf of bread becomes $300 without a real-wage increase your screwed regardless - you may have a job but may well get killed for that loaf of bread on your way back from the shop.

Also, If a loaf of bread is $300, I doubt your house will be only $120,000. Your house would probably be worth several million.


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## Beej (16 February 2009)

*Re: Printing more money = inflation - how ?*



shaunQ said:


> Also, If a loaf of bread is $300, I doubt your house will be only $120,000. Your house would probably be worth several million.




Correct - property and other hard assets would go up in line with inflation just as a baseline - maybe more due to their perceived role as an inflation hedge (eg gold). 

Also, if a loaf of bread was $300, then some people are getting a lot of raw $$$ for:

* Growing the wheat to make the bread
* Storing and transporting the wheat to a bakery
* Making and baling the bread
* Transporting the bread to the shops
* Storing the bread on a shelf in the shops and then selling it to you at a cash register

If you think about the people involved in just the above (farmers, farm workers, truck/train drivers, bakers, owners of bakers premises, more drivers, shop assistants, shelf stackers, managers etc at Woolies and Coles and so on, shareholders of transport, bakeries, and supermarket companies etc), then just for bread to be $300 that's a LOT of people who would be getting (in pure $$$ amounts) much higher wages (and dividends etc) than they currently do. Ie, if bread was $300, wages MUST also be correspondingly higher as they are all related in the price chain.

That's how inflation works - but at the end of the day it's mostly a zero sum game - all you can do pretty much is hedge against it and cash is the worse thing to keep around in an inflationary environment.

PS: I do not mean to imply any prediction as to whether high inflation is a likely outcome of current conditions and policy in my comments above - just illustrating how inflation actually works.

Cheers,

Beej


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## archilles (16 February 2009)

i see what you mean ShaunQ, by why do you think high inflation follows a deflationary period.. 

Also, if you knew we were heading in that direction what would you do ? Say i had a crystal ball 

Everyone keeps telling me we wold be screwed, i know that - but surely we could combat this somehow ?


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## waz (16 February 2009)

You pretty much answered your own question there Archilles.

We dont know at what point and by how much inflation will rise if we print money. Which is why it is rarely used.

Keep in mind that money is a scare resource, it is a store of value, if you start printing more money, then the value of existing money falls.

Also keep in mind it lowers the value of your currency. With the US dollar appreciating, they can happily print more money and they wont mind a little depreciation.

Whereas if Australia where to print more money, our currency would depreciate by even more (making our interest payments on previous borrowings even more expensive). If both countries do it at the same rate. Exchange rates will not be affected so much.

So one solution for Australia is to print money once we know every other country is doing it.


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## kincella (16 February 2009)

for those who want proof...just google it...saw last week again..US printing money press has been going at it 24/7 since Sep 08...I would get it for you but a bit too busy now
cheers


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## Beej (16 February 2009)

kincella said:


> for those who want proof...just google it...saw last week again..US printing money press has been going at it 24/7 since Sep 08...I would get it for you but a bit too busy now
> cheers




I don't take a hard position on this either way, and don't claim to be an expert, but there is an argument floating around that because of the destruction of value brought about in the US economy by the sub-prime/credit crisis, their "printing of money" will not be inflationary as it is replacing that lost value, and therefore just kind of "canceling out" the real and potential deflation. It would only create inflation if it got out of hand.... which of course it might.

Cheers,

Beej


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## explod (16 February 2009)

Good question and good thread all.

There is a philosphy to economics that can be hard to quantify and explain.  Have been reading books on the subject for years and still find it as clear as mud sometimes.   This question is one of them.

However I have formed a view for myself that I have had to batten down the hatches to protect against those very concerns that you put up Archilles.

In short, I got rid of residential property.   Still have a good interest in a commercial property (which has a supermarket as main tennant, inner Sydney area)  Some gold shares, some physical gold and silver stored away.   Someone said they would not have gold, I have some and consider myself diversified.

Agree with the property scenario later on (and I will be in again then).  My studies leads ME to think inflation will rare its head strongly after the deflation plays out.

How do I know this, I DONT;' but the trends and the best information I can turn up tells me this is the way at the moment.

I would no sooner have a mortgage on a house as a place in hell, but that's just me.

cheers explod


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## juw177 (16 February 2009)

The rate of destruction of money through bad debts is far greater than the rate the government can print money. So deflation it is.


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## kincella (16 February 2009)

explod...my understanding with inflation...and all the stuff on the net refers to germany as an example...apart from zimbabwe...
is that with hyperinflation..if only for a short period...months not years...you wipe out any debt easily...
so in my case..houses would become very very expensive....hence I hold...
regarding the debt...well sell one house and wipe out the total debt  combined of all the others....just need someone to buy the one very expensive prop...but mine would be cheap compared to all the others....
and sufficient funds to cover the higher interes rates
so in the eg; if bread is 300 a loaf, then houses would be ???
and the german example,,,,said people with the debt were the biggest winners...it was virtually wiped out overnight....thats the bit I like...not that I have much..spread over 5 props


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## shaunQ (16 February 2009)

archilles said:


> i see what you mean ShaunQ, by why do you think high inflation follows a deflationary period..
> 
> Also, if you knew we were heading in that direction what would you do ? Say i had a crystal ball
> 
> Everyone keeps telling me we wold be screwed, i know that - but surely we could combat this somehow ?




As Beej said,  


> [there's] an argument floating around that because of the destruction of value brought about in the US economy by the sub-prime/credit crisis, their "printing of money" will not be inflationary as it is replacing that lost value, and therefore just kind of "canceling out" the real and potential deflation.




But there is also many opposing views. My view is just based on who I believe out of all the claims. You really just need to look around at some articles giving reasons why they think inflation, deflation, stagflation or nothing will happen then make your own judgement.

This site always updates with many different theories from everywhere, 
http://www.marketoracle.co.uk/ but is probably not reputable.

Personally I am thinking of buying a little silver bullion from Perth Mint, simply because gold is historically expensive at the moment where as silver is historically cheap, but not much, and doing it just as much to collect as anything.

But seriously, don't take any advice from me. I'm just an amateur, but by reading up on it you can a least feel a little more confident your more aware than most - even if it is false.


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## gfresh (16 February 2009)

I think it should be noted that cases of "Hyperinflation" or extreme cases, where the price of everyday objects such as bread can double, triple, or more in say a week have only occurred throughout history in extreme basket-case situations where Government (usually a Dictatorship) action has in fact contributed to such a situation occurring. These periods also tend to take place during periods of extreme societal breakdown. Looking at places such as Zimbabwe, South American countries in past periods, the (German) Weimar Republic example, hardly esteemed company. 

So unless things really go to pot, I think the chances of "hyperinflation"  happening in Western countries seems remote. That is not to say high inflation (say 5-10% in a year) could not occur, and that would be painful for many, but that's a little different to hyperinflation. 

As I've said previously, I think Australia would actually be better off than many countries if inflation were to run out of control.. causing the price of coal, iron ore, copper, nickel, etc (our major exports) to run up very high, giving large profit to our miners, and the trickledown effect cushioning our economy somewhat. Although I guess you'd need demand also, may be difficult if there was also a global stagflation phenomenon.


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## explod (16 February 2009)

gfresh said:


> I think it should be noted that cases of "Hyperinflation" or extreme cases, where the price of everyday objects such as bread can double, triple, or more in say a week have only occurred throughout history in extreme basket-case situations where Government (usually a Dictatorship) action has in fact contributed to such a situation occurring. These periods also tend to take place during periods of extreme societal breakdown. Looking at places such as Zimbabwe, South American countries in past periods, the (German) Weimar Republic example, hardly esteemed company.
> 
> So unless things really go to pot, I think the chances of "hyperinflation"  happening in Western countries seems remote. That is not to say high inflation (say 5-10% in a year) could not occur, and that would be painful for many, but that's a little different to hyperinflation.
> 
> As I've said previously, I think Australia would actually be better off than many countries if inflation were to run out of control.. causing the price of coal, iron ore, copper, nickel, etc (our major exports) to run up very high, giving large profit to our miners, and the trickledown effect cushioning our economy somewhat. Although I guess you'd need demand also, may be difficult if there was also a global stagflation phenomenon.





Agree to a point.   I think the US is heading toward the situation in Germany.  (Problem is when tipping point occurs, history has shown that it accellerates exponentially) On current available, OFFICIAL figures the US require, just to service their debt (forget about the amount they owe) more than their current Gross Domestic Product.   They are printing money to pay the debtors.   Germany printed money to pay its debtor back then, ironically,,, the US.   It is actually the main reason the US got very interested as WW11 progressed, to mop up and take command of all the new stuff they owned by default.    China have huge holdings of US debt which to me is omminous.  Japan is in with a lot too and they were once our enemies.  There are still some WW11 veterans around who will put the wind up you about this situation.   Worth seeking some out as they can relate a tale or two on the great depression also.


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## Temjin (16 February 2009)

Here is my attempt.

Inflation is caused by an increase in the volumn of money (money supply) and velocity of money existed in the system. What you hear from the news about inflation has dropped or increased because of various things like commodity price crashed or wage stagnant are merely the consequences, not the cause. 

This is an Austrian economic explanation. 

We are still in a deflationary phase because while governments around the world have been busy with "printing" money (in real practical term, they haven't really printed anything from thin air yet), there were little inflationary effect because the cash were being hoarded byt the banks to maintain their capital reserve ratio. (maintain solvency) Another reason that was pointed out by others are that the speed and amount of financial losses from bad debts are occuring much faster and higher than the amount of money being put back in.  

So do we continue to expect the deflationary spiral to continue and end up in a global depression or do we expect a hyperinflation scenario? It depends on two things. To stop deflation, there is a need for having ALL bad debts to be written down and that asset prices (of everything) to stabilise. We are not in that stage yet and I do not think the governments will allow such a thing to occur. (will create massive public outcry) 

What about an inflation scenario? (not necessary a hyperinflation) Then we need to have faith in the  world governments to continue to follow their keynesian economic teachings and do ABSOLUTELY EVERYTHING in their power to reinflate the economy and prevent the greater depression II from occuring. This is a more likely scenario because most central bankers around the world are devote researchers of the great depression and they know it is something they must avoid at ALL cost. Looking at it from the US perspective, a few tens of trillion of dollar public and private debt can be easily fixed by inflating the currency than repaying it. 

And if people think inflation will make you rich because you own assets like houses, you better think twice. It's a naive thinking.


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## explod (16 February 2009)

Temjin said:


> And if people think inflation will make you rich because you own assets like houses, you better think twice. It's a naive thinking.




Can you explain why this is so?

___________________________________________________
My views are just that, views and the picture, often cloudy


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## waz (16 February 2009)

What makes you rich is the value of your assets (cash, property, gold, your apple tree in your backyard) RELATIVE to the value of assets that everyone else in society holds.

So if the average price of a property is 500k and the value of your property is 2mil (1.5 mil and 400% times more). Then yes, you can call youself rich.

But if the value of the average property were to goto 5mil, and the value of your property is 6.5 mil (You're still 1.5 mil ahead of everyone else, but the value of your asset is only 30% more).

Another way of looking at it is the person in Sierre Leone who earns $500 a year is rich relative to his countrymen in the same country who earn $50. But compared to you in Australia he is poor.

Its all relative.

Economics is all about allocating scarce resources. Those with a larger share of the resources are the rich ones. 

Another thing to keep in mind is that not all assests have a dollar value.
A person who earns 50k a year with a good education, healthy body, and is well loved is in my opinion richer than a multi millionare who won the lotto and is about to have a heart attack.


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## kincella (16 February 2009)

I do not normally wade into the 'tit for tat'...not when online and you are communicating with an unknown audience...but I do take offence when another suggests one might be..or is..naive to think a certain way....

my answer is 'you may also be very naive....to think another way'

....you have no idea of the depth of knowledge I , or other posters /bloggers hold on a certain subject.....so hurling insults around will not get any friends...and on some forums you would be suspended...or put on the ignore list...
one needs to have good manners...and decorum...if you wish to be taken seriously


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## waz (16 February 2009)

Relax kincella. Temjin was not insulting anyone.
You said it yourself, the audience is unkown.

Insults are in the eye of the beholder. If you feel you were insulted, ignore it and move on.

Personally if someone commented on my post telling me that I need to have good manners if I want to be taken seriously, then I would take it as an insult.
You have no idea of the depth of knowledge I , or other posters /bloggers hold on a certain subject. 

What you wrote was in reply to a certain post which means it was directed at a certain person.


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## Beej (16 February 2009)

Temjin said:


> And if people think inflation will make you rich because you own assets like houses, you better think twice. It's a naive thinking.




Just on this comment (seeing as it seems to have become somewhat controversial!) - I personally don't say that owning assets like property make you "rich" in a high inflation environment, but I do say they stop you from getting any poorer..... Ie it's a great inflation hedge due to the fundamental value of property/land in the scheme of things, regardless of the actual number of $ in circulation.

Cheers,

Beej


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## Uncle Festivus (16 February 2009)

Beej said:


> Just on this comment (seeing as it seems to have become somewhat controversial!) - I personally don't say that owning assets like property make you "rich" in a high inflation environment, but I do say they stop you from getting any poorer..... Ie it's a great inflation hedge due to the fundamental value of property/land in the scheme of things, regardless of the actual number of $ in circulation.
> 
> Cheers,
> 
> Beej




I would have thought that, in a high inflation environement, housing is a poor choice, unless it's 'value' is appreciating faster than the rate of inflation, a point some property advocates conveniently leave out when calculating their return? 

The number of dollars in circulation is intrinsically bound to inflation (because that's what inflation is - the amount of currency created surplus to organic growth) and thereby to property prices?


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## waz (16 February 2009)

Beej makes a good point.

Lets take an analogy. Lets say we live in an economy with 100 people and the only thing in this economy is 100 houses. If each person owns a house, then each person owns 1% of the scarce resources. They are equally rich.

20 years later, inflation in the economy has casued prices to go up by 1,200,345,765%. There are still 100 houses and 100 people in the economy. Not one person has sold a house and no one has built a house (why would you bother the poplutation isnt increasing), and there is nothing else of value in this economy, so even though they are now all zillionaires, they still all hold 1% each of the available resources. 

Relative to each other they are all the same. The only thing that has changed is price.

Now lets say there is one smart chap out of the 100 who wants to become rich. As houses are the only resources in this economy he builds another 10 houses and invites 10 immigrants to live in them and pay rent.

We now have a situation where the economy now has 110 houses.
1 guy has 11 houses
99 have 1 house each 
and 10 are renting.

Who is rich?
One guy owns 10% of all the scare resources. (Before he had 1%)
99 own 0.9% each (Before they had 1%)
and 10 own nothing. (And they had nothing to begin with too)

The smart guy who increased his stake of scare resources is now the richest (Assuming all houses are of equal value).
Note, the price of these house is irrelevant to work out who is the richest in this simple economy.

Moral of the storey, if you want to become rich, you need to acquire something which is scarce. Property being a good example.


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## Beej (16 February 2009)

Uncle Festivus said:


> I would have thought that, in a high inflation environement, housing is a poor choice, unless it's 'value' is appreciating faster than the rate of inflation




No - only if your aim is get "richer". To simply not get any poorer, you only need your property to appreciate at a rate equal to the prevailing rate of inflation. That is the nature of a "hedge".

PS: Properly selected property should outpace inflation by a margin in a high or low inflation environment anyway, plus the use of debt to gear into property can really make you a relative winner from high inflation, but that is another discussion 

Cheers,

Beej


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## Uncle Festivus (16 February 2009)

Beej said:


> No - only if your aim is get "richer". To simply not get any poorer, you only need your property to appreciate at a rate equal to the prevailing rate of inflation. That is the nature of a "hedge".
> 
> PS: Properly selected property should outpace inflation by a margin in a high or low inflation environment anyway, plus the use of debt to gear into property can really make you a relative winner from high inflation, but that is another discussion
> 
> ...



Then that would depend on what is inflation? The official figure is not inflation but the effects of inflation - that's the big difference. The estimated growth in money supply has been north of 10% in Aus for a while, so unless your returns, from any investment, are greater than that then you are going backwards?


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## Beej (16 February 2009)

Uncle Festivus said:


> Then that would depend on what is inflation? The official figure is not inflation but the effects of inflation - that's the big difference. The estimated growth in money supply has been north of 10% in Aus for a while, so unless your returns, from any investment, are greater than that then you are going backwards?




Increase in money supply does not automatically equal rate of inflation, as growth in GDP (due to increasing economic capacity from both productivity improvements and increasing working population etc) is reflected in (non inflationary) increased money supply. If real inflation had been running at 10% plus for the last few years it would absolutely be reflected in headline CPI, underlying CPI, PPI and other related inflation tracking index!

Cheers,

Beej


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## gfresh (16 February 2009)

How's mr "smart guy" going to be able to afford to build a 10 properties if the prices for materials and labor now cost 1,200,345,765% more?? If his wages didn't go up an equal amount he has no chance of building one property, never mind 10. 

Property guy over 20 years can also rent out his backyard to 10 of those who are unable to afford food and shelter and therefore increase his relative wealth? 

Rental guy also being passed on whatever costs are being imposed on landlord guy. Rental guy not necessarily benefiting here either..


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## waz (16 February 2009)

Simple, he built the houses in the first quarter of 2009 before inflation took off.

Its just a simple model. The point im trying to make, is that if you want to become rich, regardless of the inflation/deflation rate, you need to take away resources from other people and make sure there is a demand for it.

So a few options are available to you. You can:
Build houses, then chop of the legs of all builders.
Invade an oil producing country and ban electric cars
Buy every airport around the world and create a monoply
Take over BHP, Rio Tinto and Vale, then force them to merge
Invent something and patent it.


Remember, in order for you to increase your stake of the worlds limited resources, that means somone else is decreasing their stake. So if someone becomes rich, someone becomes poor.


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## Beej (16 February 2009)

waz said:


> Remember, in order for you to increase your stake of the worlds limited resources, that means somone else is decreasing their stake. So if someone becomes rich, someone becomes poor.




That is not entirely true. Eg, if you make something with your own labour and/or enginuity, then you increase your relative wealth without having taken any resources of someone else and made them poorer. Eg, you could have built your own house, you could grow your own food etc. These are simple examples, but they demonstrate how wealth is actually created through productive labour.

Cheers,

Beej


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## Knobby22 (16 February 2009)

The US and GBR are printing money.
Not that big a deal as money supply has been increasing for years.

If..if...they get it right and don't print too much, they may stop deflation without getting hyperinflation. As inflation increases they can tighten money supply and if they are the "smartest guys in the room" in reality, it just might work.


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## Dowdy (16 February 2009)

Beej said:


> I don't take a hard position on this either way, and don't claim to be an expert, but there is an argument floating around that because of the destruction of value brought about in the US economy by the sub-prime/credit crisis, their "printing of money" will not be inflationary as it is replacing that lost value, and therefore just kind of "canceling out" the real and potential deflation. It would only create inflation if it got out of hand.... which of course it might.
> 
> Cheers,
> 
> Beej





Sure they're replacing lost value but that 'value' was over inflated and in a massive bubble so to prop up prices that couldn't be sustained in the first place will only lead to destruction of currency.

You don't fight debt by creating more debt and most of the homes (US and here) are 80%++ debt.


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## Dowdy (16 February 2009)

Beej said:


> Increase in money supply does not automatically equal rate of inflation, as growth in GDP (due to increasing economic capacity from both productivity improvements and increasing working population etc) is reflected in (non inflationary) increased money supply. If real inflation had been running at 10% plus for the last few years it would absolutely be reflected in headline CPI, underlying CPI, PPI and other related inflation tracking index!
> 
> Cheers,
> 
> Beej




CPI figures are manipulated. I wouldn't use those as a reference. They just simply change the 'basket of goods' to make it look like everything is fine and dandy 


http://www.youtube.com/watch?v=zsNgJVD8KgY&feature=related


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## Uncle Festivus (16 February 2009)

Knobby22 said:


> The US and GBR are printing money.
> Not that big a deal as money supply has been increasing for years.
> 
> If..if...they get it right and don't print too much, they may stop deflation without getting hyperinflation. As inflation increases they can tighten money supply and if they are the "smartest guys in the room" in reality, it just might work.




I think the M agregates figures show a contraction for a few months now, at least for the US.



Dowdy said:


> Sure they're replacing lost value but that 'value' was over inflated and in a massive bubble so to prop up prices that couldn't be sustained in the first place will only lead to destruction of currency.
> 
> You don't fight debt by creating more debt and most of the homes (US and here) are 80%++ debt.




$15 trillion of previously printed money 'lost' so far on global equity markets, can't or havn't seen them 'printing' that much money in the priming packages so far?


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## waz (16 February 2009)

This is more in reply to Beej, thanks for making me think harder. hehe

Another analogy. We have an economy with two farmers. Mr Productive and Mr Non productive.
At the moment  the economy produces 100 units of food (output) and there are 20 units of resources.

They both make 50 units of output each and they both use 10 units of input each. So they both have the same level of income and access to resources. 50% each.

Mr Productive goes to university and learns a new farming technique which enables him to produce more units of output using the same level of inputs as before.

Mr productive now makes 60 units of output while Mr unproductive still makes his 50. In total the economy is more productive, we are creating 10% more using the same resources.

Both our friends have 50 customers each and sell their units of food for $1 each (Assume there are only 100 people in the world). So both have $50 of income. However, now that Mr Productive has 10 spare units, what does he do? He sells these spare units to Mr Unproductive's customers for 90c (The units of food are exactly the same and the customer do not care about loyalty).

Mr productive sells all his 60 units for an income of $59.
Mr unproductive only sells 40 units for an income of $40. (10 units sit unsold).

Both are using the same amount of resources, one is now more productive than the other and has increased sales and profit, the other has lost sales and profit. The gap between them has widened. One is better off than before, and one is worse off than before.

Ofcourse this model is very simple, Mr unproductive can reduce his price to 80c, Mr Productive customer's can hold out purchasing until he agrees to sell all his units for 90c.

The point is, the person with the productivity gains has the upper hand. Even though they still have access to the same amount of resources as before. The productive person has generated more income and in the future years his relative wealth will increase at a faster rate than the non-productive.


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## Temjin (16 February 2009)

kincella said:


> I do not normally wade into the 'tit for tat'...not when online and you are communicating with an unknown audience...but I do take offence when another suggests one might be..or is..naive to think a certain way....
> 
> my answer is 'you may also be very naive....to think another way'
> 
> ...




Wooo, no need to get so "emotional" about this. I certainly don't feel my posts are done so in a bad manner. Anyone who have ventured this forum for a while and have read my posts would know the type of "style" I use to illustrate my points. 

But ok, if my post offended you, I will apologise for making the "naive" comment. 

I will rephrase that last sentance and add in a few more words that I forgot to mention.  

Anyone who believes holding a property purchased on credit and expect it to provide a hedge against hyperinflation should really think twice about it. 



			
				explod said:
			
		

> Can you explain why this is so?




Now I will get to the point. 

No doubt that in a hyperinflation (or high, not necessary million % per year) scenario, prices for everything will raise, including property. But is it the perfect hedge against it? No, I don't think so because it does not satisfy certain criteria that I believe to be crucial for a good inflation hedge. 

- It is not liquid enough enough and not easily diversible. This make property a difficult asset to sell when one needs the inflated money to purchase the corresponding increased value of everyday needed goods. In theory, if purchased in cash, it may "perserve" your net wealth, but it serve no purpose in maintaining your lifestyle because you cannot sell 1% of it to pay for anything you need. Wage rate and cash rate generally don't raise fast enough to counter the inflation effect on general goods. This explains why most countries that experienced a hyperinflation (or near) scenario tend to suffer a rapid decrease in living standards. (i.e. Germany in 1920s and of course, Zimbabwe)
- Interest rate will raise rapidly during high inflation because banks will move extremely quickly to protect their underlying profit. In fact, they will most likely to raise borrowing rate far above underlying inflation rate because it is almost impossible to predict the growth in money supply fast enough to adjust the changes needed. It's a risky business for banks during these periods if they underestimated the inflation rate. Thus, those who hold properties on credit will get crushed by the rapidly increased debt servicing burden. Combined it with a rapid rise in unemployment, you get a double punch on the value of your property. 
- Again, wages rarely raise fast enough to catch up with high inflation. Look at Zimbabwe as a perfect example. This is why there is a 90% unemployment rate over there because their q And if wages don't raise fast enough, the ability for a person to service a new mortgage debt based on high interest is severely reduced. No demand = no raise in price. 
- I also highly doubt properties will maintain their value during a hyperinflation scenario, especially if it is a stagflationary one where there is a rising price PLUS rising unemployment. No one would be able to afford these "hyperinflated" houses.

Regardless, I'm not saying property cannot be used as a hedge against inflation. It's just that it cannot be used in a practical way to act as a perfect hedge in a realistic world. 

If you have a fully paid house, then it may retain your overall net wealth but it serves little practical hedging purpose if you cannot afford to maintain it and/or to feed your family due to job lost or your cash reserve was deflated too rapidly.


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## robots (16 February 2009)

hello,

great work, who cares about inflation, deflation, hyperinflation its all irrelevant

if twisties drop to $0.50/packet can i get more today?

look at the doctor just *recently* who had council revalue from 1mil up to 6mil, wouldnt be too concerned about any of that

spot on Beej, add value at the moment is the way to go 

thankyou
robots


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## Dowdy (16 February 2009)

robots said:


> hello,
> 
> great work, who cares about inflation, deflation, hyperinflation its all irrelevant
> 
> ...




So now we're using some doctor who done a council revalue as the benchmark and everything else is irrelevant. Keep up the good work robots


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## robots (16 February 2009)

Dowdy said:


> So now we're using some doctor who done a council revalue as the benchmark and everything else is irrelevant. Keep up the good work robots




hello,

will do

thankyou
robots


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## juw177 (16 February 2009)

The causes of inflation during the boom and subsequent deflation are little to do with printing money par se. It is to do with fraudulent credit creation by the banks.

In order for a bank to lend money, it only needs to hold a fraction of the loan amount, not the entire amount. When a loan is made, the bank has created money that was not there before, which is effectively the same as printing money.

Credit creation without the GDP means to back it up is inflationary. During the credit boom, there was a lot of money (credit) available which caused high inflation. No stop was put to the increasing of leverage and the intentional mis pricing of high risk loans.

But, we now find that the credit were bad loans. The defaults start happening. No more credit is issued because everyone is overcapacity in debt and there is not enough reserve to support any more loans. Now have deflation.


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## Beej (16 February 2009)

juw177 said:


> The causes of inflation during the boom and subsequent deflation are little to do with printing money par se. It is to do with fraudulent credit creation by the banks.
> 
> In order for a bank to lend money, it only needs to hold a fraction of the loan amount, not the entire amount. When a loan is made, the bank has created money that was not there before, which is effectively the same as printing money.
> 
> ...




Yes that was the story in the US. In Australia, the creation of credit (and thus the money supply) was throttled slowly through higher and increasing interest rates over the past 5 years. Hence we are in a much better position here in this regard than the US is.

Cheers,

Beej


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## Macquack (16 February 2009)

juw177 said:


> The causes of inflation during the boom and subsequent deflation are little to do with printing money par se. It is to do with fraudulent credit creation by the banks.
> 
> In order for a bank to lend money, it only needs to hold a fraction of the loan amount, not the entire amount. When a loan is made, *the bank has created money that was not there before, which is effectively the same as printing money.*




Great summary, if only everyone could understand this.




juw177 said:


> Credit creation without the GDP means to back it up is inflationary. During the credit boom, there was a lot of money (credit) available which caused high inflation.




Its about time world governments restricted the growth of the money supply to only match growth in GDP and NO MORE.

Inflation is a form of taxation that reduces "real" purchasing power.


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## juw177 (16 February 2009)

Beej, this is the second time you have insisted that Australia did not go through a credit boom (now bust). Look at the property boom, the rise of Babcock and Mac Bank, the exponential increase in private foreign debt.... how many people do you know who maxed out their credit card and did a 0% balance transfer?


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## lioness (17 February 2009)

juw177 said:


> The causes of inflation during the boom and subsequent deflation are little to do with printing money par se. It is to do with fraudulent credit creation by the banks.
> 
> In order for a bank to lend money, it only needs to hold a fraction of the loan amount, not the entire amount. When a loan is made, the bank has created money that was not there before, which is effectively the same as printing money.
> 
> ...




I keep telling you DEFLATION is here and now. Worry about inflation in 2 years time, trouble is once deflation sets in, inflation does not comes for a decade. no-one is listening on here, just listening to the sheep who keep stating deflation is not a problem. Look around you rising unemployment all around te world and we are next. Spain has 20% unemployed now.


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## Beej (17 February 2009)

juw177 said:


> Beej, this is the second time you have insisted that Australia did not go through a credit boom (now bust). Look at the property boom, the rise of Babcock and Mac Bank, the exponential increase in private foreign debt.... how many people do you know who maxed out their credit card and did a 0% balance transfer?




So where is our sky high mortgage default rate? Massive increases in personal bankruptcies? Banks going bust due to mass default on all their "fraudulently created" credit?? Is lending to consumers frozen in Au right now? No! A few highly leveraged corporates going under does not a 30 year credit boom and bust make..... Seen things like this happen many times before.... Are you old enough to remember the antics of Alan Bond (Bondcorp) and Christopher Skase (Quintex) in the late 80s?? What about the .com boom/bust even?

There seems be this almost religious zeal around internet forums like this one about this issue, which extrapolates a potential concern about high-ish consumer debt levels (which appear to be quite manageable in AU) with an irrational belief that all debt is bad, the fractional reserve banking system and FIAT monetary systems etc are a big fraud and are all going to collapse and so on. The end of the world is nigh and all that.....get your tin foil hats on and stock up on baked beans and shotgun ammo quickly!

Instead of joining this religious bandwagon I tend to agree with more mainstream views like those of the RBA governor Glen Stevens, who has stated many times that Australian consumer debt levels seem quite manageable, especially now that interest rates are at all time lows. All the data backs this up. Australia did not and does not have a sub-prime lending crisis or anything like it that has brought the US financial system into it's current woes - we are impacted by the problems there yes for many reasons, but a local credit crisis/bust is not one of them IMO.

But, anyway, you believe whatever you want to believe.

Cheers,

Beej


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## kincella (17 February 2009)

beej...hear hear....
they would probably be surprised to learn that even low doc loans are still available....and this time CBA has them at the same rate as an ordinary standard variable rate....not a higher rate as most had them before this fiasco.....
the abs stats when I last bothered to look had the average home loan around 240,000...at current rates of 5% thats only 12,000 pa interest cost....or about 250 pw....almost everyone can afford that amount for a roof over their heads
Must admit I buckled under the weight of the 10% interest rates last year....but beginning to feel its time to come out and do some spending....if only to assist some people to stay in jobs....and the bargains that are out they ...almost unbelievable....so have been buying up for family and friends...the only thing I want...is probably a new car....there is nothing I need.....might buy a laptop for some of the family too....with wireless broadband now they dont need the additional cost of a telephone...landline to hook up...most are on mobiles only
cheers


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## juw177 (17 February 2009)

Beej said:


> So where is our sky high mortgage default rate? Massive increases in personal bankruptcies? Banks going bust due to mass default on all their "fraudulently created" credit?? Is lending to consumers frozen in Au right now? No! A few highly leveraged corporates going under does not a 30 year credit boom and bust make..... Seen things like this happen many times before.... Are you old enough to remember the antics of Alan Bond (Bondcorp) and Christopher Skase (Quintex) in the late 80s?? What about the .com boom/bust even?




- Mortgages with 5% down payment and low interest rate with the assumption we were in a property boom?

- Credit card customers getting limits beyond their means

- Government having to guarantee bank debt and deposits because our banks are struggling to raise capital

- Government having to bail out REIT

- Government having to pay increasing yields on bonds in order to borrow

- ASX tanking more than the SPX

- AUD crash... what happens to our foreign debt costs?



**** WILL hit the fan simply because sums don't add up. I expect the trigger will be unemployment and world interest rate rise.

Do you remember how the world got out of the late 80s crash and the dot com crash? Without going into detail, it was by blowing the biggest credit bubble the world has ever seen. That option is now off the table.




> Instead of joining this religious bandwagon I tend to agree with more mainstream views like those of the RBA governor Glen Stevens, who has stated many times that Australian consumer debt levels seem quite manageable, especially now that interest rates are at all time lows.




Does he realise unemployment is rising and asset prices are dropping? I will not be taking the mainstream view because they have been proven to be consistently wrong.


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## aleckara (17 February 2009)

Macquack said:


> Its about time world governments restricted the growth of the money supply to only match growth in GDP and NO MORE.
> 
> Inflation is a form of taxation that reduces "real" purchasing power.




I absolutely agree with this statement. The only problem with this of course is that inflation is very popular to the average punter. It makes them think they can get money the easy way just by talking to the bank manager. Get a loan on a house is the only way to build wealth after all, even though in reality most of the time no new assets have been created.



Beej said:


> nstead of joining this religious bandwagon I tend to agree with more mainstream views like those of the RBA governor Glen Stevens, who has stated many times that Australian consumer debt levels seem quite manageable, especially now that interest rates are at all time lows.





So what? When affordability goes bad due to credit induced inflation we pump in more money to reduce the interest rates to bring back affordability to start it off again? Yeah lets keep the debt rising. Benefits the people who got in early. When does it end? When does the dog stop chasing its tail? Affordability with a flick of a pen courtesy of the RBA. Wait .. when your like the US and Japan and the interest rates hit zero.

I never agreed with calculating affordability by interest rates. income generated to the person trying to acquire it should be the measure of affordability just like everything else people try to buy. You don't say a computer is more affordable because interest rates are lower do you?


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## juw177 (17 February 2009)

^^ Yes, inflation benefits those who know how to take advantage of it by buying assets that are certain to return above inflation levels. If you don't know how to take advantage of inflation, you lose out big.

And yes, interest rate does not matter much if you can't even afford the principle in the first place. Even at rock bottom rates, your principle is still COMPOUNDING.


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## Beej (17 February 2009)

juw177 said:


> - Credit card customers getting limits beyond their means
> 
> - Government having to guarantee bank debt and deposits because our banks are struggling to raise capital
> 
> ...




You know, I don't see you pointing out there any of the things I mentioned in my post (record mortgage defaults, bank insolvencies etc). These would actually be symptoms of the great "fraudulent" credit creation event for which you are arguing. You can see these symptoms in the US, but we don't see them here in AU.

Like I said, you believe what you want to believe. I'm not buying into this particular cult.

Beej


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## juw177 (17 February 2009)

Beej said:


> You know, I don't see you pointing out there any of the things I mentioned in my post (record mortgage defaults, bank insolvencies etc).




What do you mean?

The news has been reporting about property repossessions for a while now.

No one knows if the banks are insolvent or not... but we do know the government had to intervene to help them refinance through borrowing offshore. Remember, our currency is crashing. At least the US don't have to externally finance their banks.

Note that Australian law does not allow defaults like the US which might keep the banks up for a bit longer.


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## Beej (17 February 2009)

juw177 said:


> What do you mean?
> 
> The news has been reporting about property repossessions for a while now.




They are incredibly low. They were going up when interest rates were still rising (but were still MINUSCULE by US/UK standards), and have been getting lower ever since rates started coming down.



> No one knows if the banks are insolvent or not...




In the US.... meanwhile Australia we do know! Open your eyes - they are all reporting right now, most are still making huge profits. Our prudential regulation is far more strict than in the US and the banks cannot be still operating if they were in fact insolvent. Our system has been proven to work much better than theirs. We don't have a huge base of toxic/worthless assets sitting on our banks books. The situation in AU with our banks is chalk and cheese compared to the US!



> but we do know the government had to intervene to help them refinance through borrowing offshore. Remember, our currency is crashing. At least the US don't have to externally finance their banks.




I don't know what point you are trying to make here?

The government intervened (deposit guarantee) because in Australia we had none and there was a crisis of confidence driven by fear over what was happening in the US and the UK - this created the very real danger of a bank run, which then becomes a self fulfilling prophecy. The guarantee nipped this issue in the bud, and it hasn't actually cost them one cent. Pure confidence you see issue you see? No banks here were actualyl even close to going under.

Re currency crashing - pretty subjective statement! 65c is hardly a crash - still 44p to the pound, which is actualyl pretty good. Our currency goes up, our currency goes down - it actually helps stabalise the AU economy (quite effectively) when things change on the global scene.



> Note that Australian law does not allow defaults like the US which might keep the banks up for a bit longer.




You've lost me here too..... so you are STILL predicting an impending banking crisis in AU??

Beej


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## juw177 (17 February 2009)

Very well...

I wasn't talking about deposit guarantee, I was talking about the bank debt guarantee. FYI, our prudential regulation allows for off balance sheet assets and their values are not reported. Our dollar might be ok against the pound, but too bad our foreign debt needs to be paid in USD.

Other than that, if you believe our currency is doing well, mortgages are fine, banks are transparent about their balance sheets... I have nothing more to add.


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## Dowdy (17 February 2009)

Beej said:


> You know, I don't see you pointing out there any of the things I mentioned in my post (record mortgage defaults, bank insolvencies etc). These would actually be symptoms of the great "fraudulent" credit creation event for which you are arguing. You can see these symptoms in the US, but we don't see them here in AU.
> 
> Like I said, you believe what you want to believe. I'm not buying into this particular cult.
> 
> Beej




Well, you bought into the speculative house buying cult. 

This so called belief that you call a 'cult' is just Austrian Economics where they let free markets work and use history as their teacher.

And it seems in history Fiat money always comes to the same conclusion - it ends up being worthless


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## robots (17 February 2009)

Dowdy said:


> Well, you bought into the speculative house buying cult.
> 
> This so called belief that you call a 'cult' is just Austrian Economics where they let free markets work and use history as their teacher.
> 
> And it seems in history Fiat money always comes to the same conclusion - it ends up being worthless




hello,

spot on, many are probably in with all the poverty pack crew 

bid deal, you dont have to be part of anything

all I know is thanks to ABS stats, property owners 6x more $ than renters, paradise

keep spending

thankyou
robots


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