I finally figured it all out and we are all screwed! No way Out

Im no economist, I'm not even a college graduate but I've actually done pretty good and live a very comfortable life. Im embarrassed to say it took me 48 years to figure it out but now I have it. I understand how our money system works, i understand the federal reserve, i understand inflation, and deflation. I also understand why politicians do the stupid things they do. The conclusion I came to is its pretty much all bad.

I will try to keep this as short as possible but here goes. Everything government does has one common side affect or consequence so to speak. That is inflation. Inflation benefits the government because it de values our 18 trillion in debt. It also drives up costs of goods and services which in turn drives up wages that equals more tax revenue. They all say they are fighting hard for the middle class but wages don't keep up with costs and the middle class is always burdened with raising taxes and living expenses. However with interest rates near 0, money easily borrowed, inflation really isn't rising and the dollar is still relatively strong. So what gives? The shale boom and technology in general are deflationary. Energy prices have dropped, giving people a few extra bucks in their pockets. Transportation costs are lower, and cheap energy drives the costs of goods down overall. So with that being said you have a huge inflationary force (The government) and a huge deflationary force (energy and technology). Both sides working against one another and everything is just kind of stalled.

One of the biggest problems we face is there is nothing else for the fed to do when the next bubble bursts, and its coming. The Fed has shot all their bullets and thrown the gun at this economy and they have nothing else to go to. Not only that but we having 93 million people not in the work force, millions of college grads burdened with massive school loans and working at chipotle. For those that still can put a few bucks away there is nothing safe to invest in. Stick the cash in your mattress and you lose 3-4% in spending power annually. In summary here is what we have, crippling debt both national and personal, a stalled economy, higher taxes, more and more regulation, all bad. There is no way this can end well.

 

Congrats on doing well, without a college education, when we live in a society that considers it the air we breathe.

Yes, even with inflation to minimize the debt, we are headed towards a very harsh financial reality. But, don't worry, liberals are working hard to pass this reality to future Americans while keeping the wine flowing today.

 

thats actually pretty good if you literally just sat down one day and thought all of that up yourself, you should study business.

to answer your question, deflation is also bad in many cases worse than inflation, and negatively effects the poor as oppose to inflation which is a good thing if managed

http://en.wikipedia.org/wiki/Deflation

 

That definitely is a huge problem. But keep investing; the government has your back when the music stops and you find yourself without a chair to sit in. Or at least it has the brokers' backs.

 

While that does indeed tend to be the mainstream view in economics, not all schools of economic thought agree with this axiom.
Inflation does not help the poor; the interest rates on the loans they have to pay are tied to the expected rate of inflation, that is a fallacious argument.

A large part of the reason the Federal Reserve Bank was expanding the money supply was to take the place of all the money that disappeared. During the height of the bubble, people thought they had money they did not actually have, so the general economy become overly inflated. When the economy began to deflate, the Federal Reserve stepped in. We can argue about whether that was a good thing, but that's basically what happened.

I agree with this assessment. Artificially subsidized interest rates are keeping asset prices high, when inflation begins appearing, those asset prices are going to begin falling at the same time the money becomes worth less, the net result is there will not be much change in price, but the assets will be worth less. People might have less wealth and purchasing power at that time too.

It will also result in higher future interest rates. Much of this debt is short term and has to be constantly renewed, if investors expect high rates of future inflation, they will also demand higher interest rates to compensate. This could potentially result in a catastrophic spiral that would end in a debt crisis.

 

Inflation also benefits the banks and big business. If people hold onto their money it gets devalued more than if sitting in a bank. If they invest in equities big business gets cash flow more beneficial to them than borrowing from a bank (in the case of IPO's and bonds). In addition stock brokers collect fees from managing assets. So it's beneficial for the banking and finance sector.

 

inflation helps the poor, more than deflation for many reasons but the main reason is that if you have take out a loan, for 500 and you agree to pay back 600 over the course of a year, if the value of inflation is high or even higher than your interest rate then you end up paying less than what you would have paid, if the value of your money stayed stagnant, or even less than your original loan amount. This also the same for the government when paying back its debt

inflation for 2015 is starting to head into the negative meaning we are seeing deflation happening right now, which is why there going to raise interest rates around 6 months (or so) from now

 

It depends which sectors are experiencing inflation.

And yes, we are heading downwards toward deflation. We're not as bad as Europe yet though.

 

Other than the fact that the economy has not stalled and that taxes are lower than in most of recent history your post makes sense.

Also note that inflation benefits the government if the debt is long term but is a negative if the debt is short term and has to be refinanced at higher rates.

 

In bold above isn't this only true upon the results of an IPO or in the future if the company itself sells more stock to the public?

 

Yes. That part is in parenthesis right after the bolded.

 

The Gold Rush is on.

http://www.zerohedge.com/news/2015-...illion-gold-ny-fed-makes-it-non-confiscatable

 

Inflation is largely responsible for the poor and middle class having a hard time finding affordable places to live. Deflation almost always corrects itself, when left alone.

 

Inflation and deflation are almost exclusively the result of the government fiddling with the money supply and/or the velocity of money. In fact the true technical meaning of "inflation" is the government inflating the money supply (printing more money), increased prices is a possible result of inflation. In the dumbing down of America, the actual understanding of the mechanism of the economy has been lost and inflation is thought to mean increased prices.

Inflation benefits the borrower, deflation benefits the saver and lender. Governments like inflation but not because its good for the poor or middle class or good for the economy, governments are big borrowers and they love inflation because it allows them to monetize their debt and keep the borrow & spend cycle going a lot longer.

 

I do not believe inflation or deflation "wreck the economy" (not directly), not unless there is huge amounts of inflation. Prices have a way of automatically adjusting in proportion to inflation, and the currency is just paper, after all.

What inflation does represent, however, is a colossal waste of money. And here's why: It diverts purchasing power from the government to the Central Bank, typically so the central bank can have the means to meddle with the economy. (For example, making loans with low interest rates)

And if the government Treasury has to borrow more money to compensate for its loss of purchasing power, this is very damaging to the economy.

 

Consumer prices are determined by supply and demand. If there are only 100 housing vacancies in an area but there are 500 consumers looking for housing, the housing prices will increase. Should this be called 'inflation' or 'cost of living'? Typically and generally inflation is defined by rising consumer prices. In this example one can say the price of housing is greatly inflated. Further in this example, the greatly inflated prices of housing don't 'wreck the economy' but instead define the local economy...

 

That's the good news.....now lets hear the bad news?

 

What you have stumbled onto is the fact that there is no exact or easy way to quantify inflation. However, if the money supply doubles and all else remains constant, surely we must say that there has been inflation. Prices can change for all sorts of reasons, and this does not necessarily have to do with the money supply.

 

Growth of the national debt is outpacing and has surpassed the national GDP.
I would think that is probably not a good thing. If nothing else it shows very irresponsible governance.
I also expect this inversion will grow rapidly over the next 5 years. But I also believe there will be a collapse before then.

But then, I have been wrong before............once.

 

Problem is 'all else' does not 'remain constant'...and inflation and/or cost of living is different across the country and has been this way forever. One area has $750K homes and three miles away they have $250K homes for similar homes. Everything is more expensive in San Francisco than in Bakersfield and so on. Lower incomes need to avoid higher cost of living areas except when they can commute to and find employment in those areas. All in all the US is a pretty sweet place for people to live so all the whining is just whining. There is a place for everyone culturally and economically...

 

As long as enough people and governments perceive US bonds to be a safe haven there will be investment in US debt. If and when the risks are perceived to be higher, it will force interest rates to increase. If people and government find other safer havens for investment outside of the US then interest rates will rise and/or fewer debt bonds can be sold. A lot of debt interest money is paid out each year directly from taxpayers and we get absolutely nothing for these billion$...nothing! The prudent thing to do IMO is have a 10-year plan for the government to eliminate deficit spending and start lowering the principal debt...slow and low but mandatory. Of course we won't do this, or anything proactive, and instead are forecasting higher and higher deficit spending...as you say this is irresponsible governance and greed...

 

And it needs to be done now. The more debt we accumulate the harder austerity is going to hit the economy. What needs to be done, like you said, is a slow 180 degree shift from deficit to surplus, even if it's small, and a cap to spending based on inflation. The economy will initially suffer from the cuts, but will adjust over time.

People keep investing in the US debt because we are unlikely to default. Most of the debt is owed to our own bank or tax payers entitlements, which we repay a variety of ways, take out bonds, print money to inflate the currency, borrow from the SS trust fund (which is why it's in such danger) etc. but it's not sustainable.

 

It does when prices continue to rise but incomes stagnate or fall. Stagflation. Mucking with the market artificially to keep prices up, screwing with interest rates, etc. causes this kind of thing. Whatever the fed is doing is largely benefiting investors. Take a look at the stock market, now go ask any random guy on the street if he feels like the economy is better and if he is worried about job security. I'm sure most people do not feel we are much better off. I don't, people I know don't. The market as a whole is very distorted.

If unemployment is 5.4%, why is it that every job interview i go to (no matter what the job is) there's 20 people sitting in the lobby waiting to be interviewed for one position? Something is definitely not right in the wood pile.

 

I support deficit spending if there is some form of national emergency but not as SOP. And when there is deficit spending for an emergency I want to see a quick short-term payback of the debt.

I continue to find it interesting that our government and most of it's citizens are comfortable with deficit spending as SOP...

 

What the Fed is doing is keeping interest rates low in order to stimulate growth. What the stock markets are doing IMO is in a parallel universe operated more as a casino...