Wednesday, September 30, 2009

Whether Deflation or Inflation, Things are Going to Change

It is going to be very cold tonight, so you can imagine how happy I am about that. I am feeling marginally better today (thanks for asking!) and hope to continue to improve this sinus issue.

Star Wars in Concert
I wanted to pass along thanks to a very good friend of mine who alerted me to what could be one of the greatest ideas of all time. I give you:
Star Wars in Concert
Economic Disconnect will be on the computer when tickets go on sale Saturday morning for the Boston show, and no matter what I will be going to see this!

Breaking Bank of America News
This story is just coming online as I write, so I thought I would offer my two cents on it (link for Zero Hedge edition of saying goodbye):
Ken Lewis is Gone
Mr. Lewis will leave BAC by years end (that soon?) and if seems rushed to you, then you think like me.

This is some kind of ploy to take the heat off all the legal cases involving the BAC/MER deal. Sadly I think it will just that. I am not a legal scholar and have no idea how this will affect things, but politically the heat will not be turned down on anything involving BAC over the past year. Which is too bad.

Whether Deflation or Inflation, Things are Going to Change
Trolling around the financial world I was overwhelmed with the continued raging debate over deflation, inflation, or some monster born from the two. I have covered that debate too many times to really wade in again. To be honest, we are just not going to know the real answer for some time (think 5 years out) so a daily grind of data points is wearing me thin.

What cannot really be debated is that our system is going to change because of the financial crisis made possible by a careless government and reckless banks armed with liquidity which had no end. If we can all agree on that, I think that may be a good start.

I think my favorite part of the deflation/inflation debate is that you, the ordinary person, will find the real world effects almost identical to your daily life. I think most of the emotion about this area of contention is the belief that one may be able to position themselves in such a way to be insulated (to whatever degree) should either scenario unfold in earnest. On that, allow me to offer some advice.

If you are extremely well to do, or rich, then forget all this stuff and carry on. In a major deflationary episode you will either be in control of hard assets (which no one can buy) but will have utility and cash that has gained a significant amount of purchasing power (which you will not want to spend). If we enter a major inflationary phase, you are already way ahead of most chasers, and can buy hard assets for protection and move your value losing cash into another vehicle.

If you are the other 90% of the population, you will just have to do the best you can.

I stand by this call. In deflation, everything costs less and dollars are worth more as spending falls off a cliff. Of course, so does wages, so with less dollars that will buy more, you are struggling to get what you need. In inflation, everything costs more, and you of course will get paid more in dollars that will buy less, so again you will struggle to have what you need.

What's the debate?

Economic Disconnect prides himself on the very keen observations of the readership that frequent the site. If you would like to add to this debate, here is the question that may change the debate to more real world terms:
-If you only had $20,000 today, in what way would you try and prepare yourself for;
A) Deflation
B) Inflation

That's it. $20k. No leveraging the house, no liquidation of your entire net worth, just $20k. And no poking at people that "should have saved more in their life", they did not so it is not relevant. I might add that $20k is far beyond the immediate cash position of many, many families and individuals.

I look forward to the ideas.

Have a good night.


Stagflationary Mark said...


Here's my take on explaining the never ending inflation vs. deflation debate. It's a long time theory of mine.

You take the deflationary Great Depression and mix it with the inflationary 1970s. What do you get?

You get what we've got right now. The deflationary forces offset the inflationary forces. You are left with the only common themes between the two periods... high unemployment and massive economic pain.

So, that said, here's what I would do with the $20k.

$10k goes in cold hard cash so that you can actually afford to pay bills if and when you lose your job (and/or a financial emergency appears). That covers the deflation part.

$10k goes towards buying things you know you will someday need (before other people get that same crazy idea). This would include, you guessed it, toilet paper. That covers the inflation part.

No stocks. No bonds. No TIPS (a favorite of mine). No gold (a favorite of yours). No managed futures accounts. No derivatives. No leverage.

Safety first. Ask questions later.

Lisa said...

I'm with Mark on this one. With one exception. I would allow at least a few thousand for the exclusive purchase of chocolate.

getyourselfconnected said...

Very good take. The cash part is very important. I will probably go into my own allocation tomorrow.

so good to see you. Would that chocolate be the high end stuff or good old hersheys?

Of course, I would blow a thousand on redundant CD players, batteries, and redundant copies of the Randy Rhoads Tribute album, but I am a disturbed individual.

Stagflationary Mark said...


"I would allow at least a few thousand for the exclusive purchase of chocolate."

You are very wise.

"WWII Escape Evasion Survival Kit"

"The contents are Chocolate Ration..."

Chocolate is indeed an excellent survival item. Relatively inexpensive. Lots of calories. Doesn't take up much space. Decent shelf life. What's not to like? ;)

GawainsGhost said...

What would I do with $20,000? Good question. But I assume it means two stacks of high society separate from income, which I hope would continue even in these trying times.

Actually, I had $20,000 in the bank not too long ago, had been saving for years. Since the condo is paid for, and I don't carry credit card debt, my living expenses are pretty low. My only debt is one student loan I took out for graduate school. So, I figured, what the hell, buy a sports car. Down payment, insurance, and Cowboys accessories added up to about $7000. The rest is safely parked, gaining interest, albeit very little.

I'm with Mark on this. It's all about safety of principal and adequacy of return. The secret to having money is in protecting it. So if I had $20,000 to invest right now, I certainly wouldn't put any of it into stocks, bonds or mutual funds.

I'd probably put $5000 in a money market accout, $5000 in a savings account, and buy $10,000 worth of certificates of deposit at a reputal local bank, i.e. NOT Bank of America. Then ride out the storm.

Minimize expenses, maximize savings, pay off the car as quickly as possible. That sort of thing.

regularly scheduled programming said...

Unrelated story. PC out of controlledness.

I'm going thru the checkout counter at the supermarket yesterday. I guy ahead of me asks where the bathroom is. The cashier woman says she can't tell him because yesterday she got in trouble for telling someone.

This gentleman leaves, apparently with no questions about this strange answer. So then she starts ringing up my items.

Then she turns to the bagger dude and tells a story.

A little background. The bathroom is along the back wall of the store between the Deli and the Chinese food section.

Now back to the bagger dude, she (a black woman in her 30's) told him that the previous day someone had asked that same question, and she answered that the bathroom is along the back wall of the store between the Deli and the Chinese food section, to then be told by this individual that..., ready..., it was racist of her to say Chinese food section.

I was 'taken aback' by this bizarre story. Clearly someone had been receiving their regularly scheduled programming.

And How! as Spanky would say. Or, There is no such thing as an underestimate of average intelligence, as Henry Adams would say.

watchtower said...


1. $1000 for fishing poles, .22 rimfire rifle, a few rolls of pre 64 silver dimes, sleeping bags in case heat is out of service for one reason or another, extra gasoline.

2. $2000 for TP, canned food, underwear, T shirts, good footwear for you and the kids, plastic garbage bags, etc.

3. $1000 in small bills kept at the house just for grins and giggles sake...not so much that if it was stolen it would devastate you or too little so that it wouldn't do any good.

4. $16,000 in a boring FDIC insured savings account.

CT-Hilltopper said...

I couldn't agree with Lisa more.

Take Mark's view and add Chocolate!

A girl can't live without chocolate.

And definitely not Hersheys. :)

I think we would have deflation if the government would leave it alone, but they're screwing with the mix, so what we have is a mixture of both. Deflation in things that we own (houses, cars, etc), and inflation in things we need to survive ( food, energy, etc).

Alexander said...

Just get Swiss Franks and be calm. Everything will be okay. Work hard and read "An Ordinary Black Cat" ( Cheers!