Posted on 11/10/2012 6:45:18 AM PST by blam
UBS: 1000% Inflation Is Perfectly Acceptable...
Sam Ro
Nov. 10, 2012, 6:35 AM
In a recent note to clients, UBS Chief Economist Larry Hatheway suggests that even 1000 percent inflation can be manageable as long as people see it coming.
From his recent Macro Keys note:
When 1000% inflation can be desirable In fact, the costs associated with inflation (price change) are less than commonly supposed. There is the famous “sticker price cost” – the cost of constantly changing price labels – but in a world of electronic displays and web based ordering this is not a serious economic cost (in fact, it never was). To take an extreme position, one can make the economic argument that there are only limited costs in having inflation running at 1000% per year, with one caveat. 1000% inflation is perfectly acceptable, as long as the 1000% inflation rate is stable at 1000%, and it is anticipated. Of course, one can argue that high inflation tends to be associated with high inflation volatility and uncertainty (and that is true empirically), but economically it is the volatility and uncertainty that does most of the damage.
The maximum damage from inflation comes if it is unexpected or if it is unpredictable. Unexpected inflation causes damage, because the investor who holds bonds yielding 1% for a decade is going to feel cheated if inflation turns out to be 1000%. Of course, no one would voluntarily buy 1% yielding bonds if 1000% inflation was expected. Thaler’s Law comes into operation here; people dislike losing money more than they like making money. As a result episodes of unexpected inflation will lead to a significant adverse reaction on the part of consumers.
(snip)
(Excerpt) Read more at businessinsider.com ...
we were informed a few weeks ago that UBS was laying off 10,000 employees...I think we now understand why.
It’s possible to live day to day in the midst of hyperinflation with constantly escalating prices that change even on the hour. This occurred during the Weimar Republic, even before the advent of computers and internet.
But it still severely restricts the scope of economic complexity.
REV 6:6 Then I heard what sounded like a voice among the four living creatures, saying, “A quart of wheat for a day’s wages, and three quarts of barley for a day’s wages, and do not damage the oil and the wine!”
True, but what is the purpose of inflation if everyone gets prior notice? The entire purpose of inflation is for government to be able to use it as a stealth tax, usually to fund wars or massive welfare state. If not for that, there is no other reason to debase the currency.
It destroys the money that people have in the bank. It’s an unmitigated disaster.
Excellent post.
And what if a stable, sky high inflation level were to suddenly beome “unpredictable” and soar from there? If massive inflation was harmless, we would already see it as commonplace around the world. The reason it’s not is becuase it is fundamentally harmful to an economy.
Correct. The time-value of money becomes hyperbolically decays beyond the present moment, so there becomes little way to engage in effective savings, which implies no viable capital accumulation, and hence no real mechanism for sustainable finance & investment.
Correct. The time-value of money hyperbolically decays beyond the present moment, so there becomes little way to engage in effective savings, which implies no viable capital accumulation, and hence no real mechanism for sustainable finance & investment.
What's he saying is 'smart liberal elites' don't have to be hurt by massive inflation. He's probably right. It'll be middle class people and savers who will be destroyed. Lilberal elites and the MSM hate those folks anyhow... This guy's a 'let them eat cake' kind of assh*le.
Inflation isn’t the worst thing about inflation. Historically, wages catch up pretty quick to rising prices. The problem is interest rates. The rate of interest needs to be higher than the rate of inflation or nobody will loan money, purchase bonds, or buy U.S. treasuries. 20 percent inflation means 22 or 23 percent interest rates - which would wipe out the bond market, batter stocks, kill what’s left of the real estate market, and make current U.S. treasury notes worthless. It will be a huge catastrophe.
Yep!
It is also a massive transfer of wealth to the Government, Government favorites and people who own real assets (The rich).
It is the most destructive thing possible (economically) to the middle class.
So what do we transfer our cash savings into, in order to preserve our assets? Can we make a list? Gold and guns are obvious, especially guns to guard what you acquire. What other goods will people always want, that can be resold at a price keeping pace with inflation? Tools, clothing-making supplies, knives, furniture, bicycles and what else?
Friend, wish I could tell you the best way going forward.
I’m not a big believer in the guns and gold strategy. At some point the government will recall gold just like FDR did. Its also preparing for just one type of event when many others are more likely.
Being mobile and flexible and learning to live on less, much less is probably more realistic.
If we keep going down this road, we will see something like the Collapse of the Soviet Union or what South American countries have gone through periodically.
Best of luck and pray for our country.
Glad I dumped these bozos
One more point: The capital gains tax is not indexed to inflation. The higher the inflation, the more tax owed (even assuming that the inflation indexed value did not change). It becomes a tax on property owned.
Sage words of advice, thank you. I suppose it's a real possibility that what we acquire can be stripped away by force. My wife is Chinese-American, born here. Her mother came from a wealthy family in China, until the communists took over and she fled in the 1940s with nothing. My wife's father was Chinese-American and a U.S. soldier when they married. They had nothing yet became prosperous in the U.S. So even if wealth is stripped away, there is hope of starting over.
Who or what is UBS?
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