Saturday, June 15, 2013

Inflation Lurks, Beneath And Hidden

After much thought, I have come to the conclusion that while inflation appears tame and is not showing up in a big way the seeds have been planted, and the number of them is somewhat shocking. Inflation lurks beneath the surface and is hidden away in the dark corners of our future. Want to know where the real cost of things is going, just look at the replacement cost from recent storms and natural disasters. Several things to consider when trying to understand inflation come to mind, first competition tends to keep price increases in check, and our slow growth economy is helping the consumer in many areas. People concerned about inflation down the road point out that an increase in the speed or velocity that money moves about the economy or where money flows could change all that.

Another factor that masks what is really happening is super and artificially low-interest rates created by the expansion of the monetary base, for example, you can now rent or buy an automobile with a payment so low that it becomes difficult to say no, too many a lower payment means no inflation. This is really apparent in the housing market where mortgage rates have plunged causing the monthly payment of principal and interest on a thirty-year loan to be $435 for each hundred thousand dollars borrowed down from $665 just a few years ago. This is a one-off and has temporarily skewed values playing havoc with both construction and rental markets. Do not be lulled into complacency as low interest-rates have a dark side that includes discouraging saving and hurting those that have.

Those who do not see inflation as a threat point to the fact that a computer costs far less today than in the past, innovation does help, but one factor concerning cost that often gets overlooked is how long an item will last. Face it, we live in a disposable society. Many things are built not to last, or in ways that they can not be repaired. When an item is purchased we should look at the length of its useful life and if it will have any residual value, then amortize the cost over the life of the item. This becomes more interesting when factoring in how instant gratification based our society has become. In the morning when I open the original front door of my home built in 1920 I often think of the new homes today where a front door has to be replaced after only ten years, this is a "quality inflationary cost factor" that we tend to forget.

Understanding value helps solve and adds clarity to this complex inflation puzzle. For years as society rapidly changed and our technical abilities advanced we were able to produce more for less, we also rushed to pick the low hanging fruit so to speak, when it comes to the world's limited natural resources. An example that I used in my book was about the lobster, it used to be superabundant and dirt cheap. They were so plentiful that they were fed to prison inmates and children in orphanages. Farmers fertilized their fields with them as a substitute for manure, and servants would bargain not to be fed lobster any more than two or three times a week. The lobsters are no longer so abundant.

In recent years we have seen food prices, gas and oil, and the cost of many commodities like lumber begin to move upward, much of the increases have been prevented by substitution, but I contend that most of this has already occurred. Politicians seem to concentrate on the short game, even then they are far behind the curve. They lack the courage and have an aversion to tackling the problems of long term planning. Please note, the model of growth the world is pursuing based on consumer and government spending while creating more debt is very new in the history of mankind and has not proven to be sustainable in the long run. Countries that appeared to have a strong base like Japan and the Soviet Union have proved that looks can be deceiving, flawed systems crumble when put under stress.

The monster that puts all this at risk may be named inflation, and inflation may be lurking just around the corner or beneath the next problem concerning food or oil production. Over the years most Americans and people in many countries have enjoyed seeing their standard of living rise, the bigger homes, with multiple cars in the driveway has been the result of this trend for many. This may be about to end. Many of us still find ourselves in awe when we look at the rapid advances in technology and production that have taken place over the last several decades, but to think that they will continue at this pace and in a way that will impact prices to the extent they have may be overlooking other factors like population growth coupled with diminishing resources. The monster when unleashed will take a very large toll!

Footnote; For more about inflation and about the speed that it can be unleashed please read the post below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged,



  1. Excellent understanding. I've posted individually most of the points you make on MarketWatch. Very few understand it.

  2. I would like to share a comment that came in on Jan, 19th from David St.Denis on a different format.
    @Bruce Wilds/ from your article, "In the morning when I open the original front door of my home built in 1920 I often think of the new homes today where a front door has to be replaced after only ten years, this is a "quality inflationary cost factor" that we tend to forget."
    You are the first to bring this up other than myself here. Reality is NOT what we think if we are not educated enough or interested enough to see it. Most Americans are not, which is why our elected officials should be looking out for us, and they definitely aren't.