Black Coffee: Don’t Worry. Inflation Is Dead and the Economy Is Fine.

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It’s time to sit back, relax and enjoy a little joe

Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.

Let’s get right to it …

The Way-Back Machine: Past Posts Of Mine You May Have Missed

From December 2008:

Creating a Household Strategic Plan in 3 Easy Steps – This was one of the very first blog posts I ever wrote — and, boy, does it show. God, it’s dry; so much so that, just ten minutes ago, I fell asleep while trying to reread it. Even so, the message is good, but I really need to go back and freshen it up.

And Here’s Some Other Posts You Might Enjoy …

The Dog Ate My Wallet – College is About Getting an Education, Not a Job

And Then We Saved - 34 Ways to Show Gratitude

Control Your Cash – Hunter Mahan Has Too Much Money

Save Outside the Box – The Top 20 Things to Watch on Netflix

Stacking Benjamins – A Job That Pays $800 per Hour? Sign Me Up!

Credits and Debits

Debit: First, Detroit goes belly-up; is Chicago next? The Windy City is $29 billion in debt; but last year the city comptroller said nobody should worry because their bond rating was “very strong.” Well, Moody’s just dropped said bond rating an unprecedented three notches. Let the worrying begin.

Credit: As for Detroit, a home there has been on the market for more than 519 days despite the fact that the owner is selling it for $1. That’s what happens nowadays when a home lacks stainless steel appliances and granite countertops.

Debit: On a related note, the US home ownership rate is at its lowest point in 18 years. That wouldn’t be so bad if US rents weren’t at all-time highs while wages and personal incomes continue their long-term declines — but they are.

Debit: Don’t tell that to economist Paul Krugman. Last week he proclaimed high inflation to be all but dead. No, really. I guess Paul doesn’t rent — or have any kids in college. Come to think of it, he must not drive a car, eat, drink or go to the doctor either.

Credit: Inflation is everywhere. Heck, I wouldn’t blame you for thinking even airline luggage fees are getting out of hand after a passenger flying Delta Airlines had to abandon four bags in Seattle to avoid paying $1400 in fees. I know what you’re thinking … I have no idea either.

Debit: The weak economy spurred Fed chairman Ben Bernanke to announce this week that he would continue pumping $85 billion into the economy every month. I suspect Mr. Krugman would say that’s not nearly enough.

Debit: Despite trillions in deficit spending and economic sugar from the Fed over the last five years, real GDP has been declining. You don’t think that’s why the government rolled out a new GDP methodology last week that increased the size of our economy by $550 billion, do you? Nah.

Debit: Of course, the government will tell you that the new methodology is “improved.” One example: Now, GDP calculations will not just include pension fund payments, they’ll also include all pension promises too — whether or not they’re pie-in-the-sky assurances. Imagine that.

Debit: Speaking of pie-in-the-sky promises, I see the White House has approved a deal to exempt members of Congress and their staff from some of the provisions of Obamacare. George Orwell was right; some animals are more equal than others.

Debit: I bet that isn’t going to go over well with Georgia residents who will soon be seeing a 198% increase in their health insurance premiums thanks to Obamacare. No wonder our Congressional overlords want relief from the same law they’ve foisted upon the rest of us. Pathetic.

Debit: Did you see this? Last month a knife-wielding thief stole 96 rolls of toilet paper from a Brooklyn merchant. Toilet paper. Sad, isn’t it?

Credit: What kind of barbaric society do we live in where toilet paper isn’t provided to us for very little, if not free? If you believe everybody has a right to subsidized healthcare, then shouldn’t we all be entitled to a clean, er, derriere too? I’m just thinking out loud here.

Debit: Especially since our economy is slowly collapsing right before our eyes — and the pace is quickening. In fact, four out of five Americans now rely on government welfare, or are currently struggling with near-poverty or joblessness. Why do you think that is?

Debit: Ninety-six rolls of toilet paper are worth $56 in Brooklyn; but in Venezuela, where “the revolution” provides for its citizens via government subsidies and price controls, 96 rolls are worth, well … mucho mas. Assuming anyone can find it.

Credit: By the way, Venezuela’s toilet paper shortages have been so severe that one particularly savvy entrepreneur recently invented a smart phone app to help his fellow citizens locate scarce supplies.

Credit: There’s a lesson there for politicians who continue to insist that the American healthcare system is going to improve under Obamacare.

Debit: Finally … Cyprus and its international lenders have agreed to take 47.5% of depositors’ money exceeding $133,000 in order to recapitalize the underwater banks there. Is that outright theft? Yes. Do the bankers care? No. Is this eventually going to happen to your 401k plan? Probably — at the rate we’re going. So plan accordingly.

The Question of the Week

Last Week’s Poll Results

When is the last time you attended a concert?

  • More than a year ago. (52%)
  • Within the past year. (23%)
  • Within the past 30 days. (16%)
  • I’ve never been to a concert. (9%)

By the Numbers

High inflation, dead? Yeah, right. Check out some of these ten-year price increases of various products:

158% One gallon of gasoline. (2002 average: $1.44; 2012 average: $3.73)

143% One pound of margarine. (2002: $0.86; 2012: $2.09)

90% One pound of coffee. (2002: $2.92; 2012: $5.58)

73% One dozen eggs. (2002: $1.03; 2012: $1.80)

61% One pound of ground beef. (2002: $2.28; 2012: $3.69)

60% One liter of wine. (2002: $6.23; 2012: $10.03)

56% One pound of turkey. (2002: $1.05; 2012: $1.65)

46% One pint of orange juice. (2002: $1.84; 2012: $2.69)

44% One pound of spaghetti. (2002: $0.91; 2012: $1.32)

42% One kilowatt-hour of electricity. (2002: $0.091; 2012: $0.130)

Sources: The Blaze; US Bureau of Labor Statistics

Book Giveaway

If you like my continuing series that highlights readers who are making ends meet on less than $40,000 per year — and in some cases far less than that — then you’ll want to read Clark Howard’s Living Large for the Long Haul. The book highlights real stories from Americans who saved money, lost, and then saved again.

If you’d like to win a free copy, all you have to do is leave a comment below between now and Friday, August 9th at 5:00 p.m. Pacific Daylight Time and you’ll be in the running. I’ll draw one name at random among all the comments. And if you can’t think of anything to say, let me know what your favorite food is. (For what it’s worth, I think my favorite is pirogis.)

Other Useless News

Programming note: Unlike most blogs, I’m always open for the weekend here at Len Penzo dot Com. There’s a fresh new article waiting for you every Saturday afternoon. At least there should be. If not, somebody call 9-1-1.

Hey! If you happen to enjoy what you’re reading — or not — please don’t forget to:

1. Click on that “Like” button in the sidebar to your right and become a fan of Len Penzo dot Com on Facebook!

2. Make sure you follow me on Twitter!

And last, but not least…

3. Don’t forget to subscribe to my RSS feed too! Thank you. :-)

Top 25 Referrers for July

It’s the first weekend of the month, which means it’s time once again to thank the top 25 referring websites to Len Penzo dot Com.

1. MSN
2. The Simple Dollar
3. Kiplinger
4. Money Talks News
5. Wisebread
6. Budgets Are Sexy
7. Business Insider
8. Save Outside the Box
9. Deseret News
10. Clark Howard
11. Frugal Village
12. The Quest for $85k
13. Control Your Cash
14. Budgeting in the Fun Stuff
15. Consumerism Commentary
16. The Dime
17. The Free Financial Advisor
18. Afford Anything
19. Smart Asset
20. And Then We Saved
21. Money Crashers
22. Wealth Pilgrim
23. Time
24. Canadian Budget Binder
25. Money Funk

Thank you to everyone who refers their readers to this little ol’ blog! It’s much appreciated.

Letters, I Get Letters

Every week I feature the most interesting question or comment — assuming I get one, that is. And folks who are lucky enough to have the only question in the mailbag get their letter highlighted here whether it’s interesting or not! You can reach out to me at: Len@LenPenzo.com

From Qflux, who got frustrated after reading my post explaining why I wasn’t impressed with her luxury car:

Let’s make a nice list (of) what you spend money on. Oh let me guess … You ONLY spend money on food, shelter, bare necessities and hoard cash for the apocalypse, right?

Ha! You missed it, Qflux. The apocalypse already happened — I bought a new car a few months ago.

I’m Len Penzo and I approved this message.

Comments

  1. 5

    Daryl Bowling says

    not hard to figure out where the “elites” in Congress and President as usual decide they are not part of the populace covered by the law, after all there is no such thing as inflation, “they” say so, lol to bad they have forgotten to read the newspaper, go to the store and buy gas for their cars. but of course that is just for the mundane peasants to deal with. not seen from their cloud…to bad, if i had my way they would pay their own way completely, rent the office from us that they use, pay for their own security, fly at their cost, and pay for their own internet,telco, and any other cost, plus pay us a 10% fee over and above the cost, and have their books audited every year and they pay for that also.oh and for every rise in the inflation rate their opay goes down by that rate. now that would i imagine get a very prompt fix for most of the issues.

    • 8

      Len Penzo says

      Believe it or not, that is number two on my list. I occasionally make homemade gnocchi but, man, it is a lot work.

  2. 11

    JD says

    Since I AM living on less than $40,000 a year and not really enjoying it, I’d love to see how to do it better.

  3. 12

    Sam says

    Inflation is not “things getting more expensive”. It is a fallacy to equate the real affordability of an item and inflation. If incomes are not rising, something else must be getting cheaper to compensate. Keep in mind one person’s spending is someone else’s income.

    In other words, if real wages are falling, that will happen whether there’s inflation or not. The Fed’s choices in the face of new structural issues are stagflation or deflation induced Greater Depression. More and more conservative economists are realizing it’s foolish and counter productive to pick the latter.

    • 13

      Len Penzo says

      Re: inflation … You’re arguing semantics, Sam.

      I do agree with you that real (as opposed to nominal) wages have the inflation effects already baked into the cake — regardless of whether those real wages are falling or increasing. The bottom line is prices are increasing (i.e., price inflation) and real wages are falling. That economic cocktail results in a lower standard of living because things are less affordable.

      As an advocate of the “Austrian” view of economics, I will argue that, technically, “inflation” is actually an increase in the money supply, which in turn leads to price increases, which in the presence of falling real wages, does indeed lead to things getting more expensive.

      That being said, I completely disagree with your statement that “If incomes are not rising, something else must be getting cheaper to compensate.” That might be true if the economy was a zero-sum game, but its clearly not. As an example, one only has to look at the banks’ fractional reserve system where they are allowed to loan $9 for every $1 they have in deposits.

      As for the Fed, you are right: Their reckless irresponsible policies have boxed them into a corner from which they cannot escape. They can no longer raise interest rates to contain stagflation like Volcker did in the early 80s because now we have an enormous National Debt. The interest on that debt is now about 25% of our tax revenues; even a small increase in interest rates today (say, the 10Y treasury rising to 5% — it’s currently 2.7%) would eat up all the tax revenues and would bankrupt us. On the other hand, deflation is a non-starter for the government and the banks because that would increase the cost of maintaining our current debt — and since our financial system depends on an ever-increasing amount of debt to sustain itself, that won’t work.

      I predict more deflation, followed eventually by hyperinflation. The hyperinflation will result from a loss of confidence in the system that will occur after enough people realize the world’s current debt-based financial system is a Ponzi scheme that is mathematically unsustainable.

      Hopefully, after the resulting short period of upheaval that will follow, we will then return to a saner, sustainable credit-based financial system. Hopefully.

      • 14

        Sam says

        I’m trying to reduce confusion. When you talk about things getting harder to afford, that’s not the same thing as inflation. You can’t redefine it as money supply, and then use real prices as an example.

        The debt is sustainable with 4-6% NGDP growth – any combination of that can be real or inflation; I don’t know why you think they would need to do more than that?

        My prediction is, barring new supply side interruptions, NGDP will gradually speed up to that target and there will not be 1 single quarter of annualized inflation above 10%.

        You are backwards that the Fed can cause prices to rise before incomes. The Fed works on the demand side – i.e. bidding up the price of a scarce item.

        • 15

          Len Penzo says

          I guess we’ll have to agree to disagree, Sam. I know what inflation is and I know what causes it. I redefined it with respect to money supply, because you wanted to argue semantics.

          You are implying that things aren’t getting harder to afford. How can that be when prices are increasing, and real wages are declining?

          You’re also implying that the debt is completely sustainable if, say, 4% NGDP growth is 100% due to inflation and 0% to real productivity. That’s patently false; that implies no real GDP growth (0%). In that case, the debt would be unsustainable as long as we continue to run deficits — especially trillion dollar ones. Otherwise, we could end taxes for everyone and let the Fed simply monetize all government debt!

          And I never said anything about the Fed increasing incomes. The Fed can’t directly raise anyone’s income except the bankers whom they employ! :-)

          • 16

            Sam says

            No, you misunderstood. “Things are getting harder to afford” can happen at any inflation rate so showing that “things are getting harder to afford” is not proof of inflation!

            • 17

              Len Penzo says

              Yes! I absolutely agree with you, Sam. But, for the record, I never said — or even inferred — that “things getting more expensive is proof of inflation.”

              However, I did explain that real wages are declining and price inflation is increasing, which, if you connect the dots, indicates that … wait for it … Things are getting harder to afford. :-)

              Phew. OK, I think this horse is dead.

              (Er, unless you believe things are not getting harder to afford.)

  4. 18

    Shirlee says

    I have been living on 40k or less for a few years now. Its not that hard, can’t spend what you don’t have.

  5. 19

    Taddy says

    With all of this inflation, I don’t feel too bad for going extreme on the couponing. I’ve stocked up enough toothpaste, body wash, and shampoo to last for several years (didn’t clear the shelves either, I do try to be considerate). I’ve been reading your blog for a little over 2 years now Len, and your Black Coffee’s especially help me to understand whenever my husband wants to discuss about the economy around the world (surprised him with the info about Venezuela/Cypress a few weeks back).

    My favorite food has a 3 way tie : Arby’s Chicken Bacon Swiss, Little Debbie’s Devil Squares, and TGI Friday’s Sesame Jack Chicken Strips. All of them are too fattening/expensive, so I’ve found with the sandwich to make my own at home with roast chicken (sliced) on honey wheat bread, and Perdue sells a bag of bourbon glazed chicken that tastes pretty close. Haven’t found a replacement yet for those Devil Squares!

  6. 20

    Sam says

    Apparently we haven’t beat it enough :)

    There’s no connecting the dots – real wages decreasing and “things are getting harder to afford” are the exact same thing.

    The sad truth is: if there is high unemployment, real wages are too high and have to come down regardless of what the Fed does. That’s simple supply and demand! Blaming inflation for that is silly since it is doing the job of lowering real wages in a less painful manner than the alternative.

    • 21

      Len Penzo says

      (Throws hands up in the air.)

      Now I’m going to turn the tables on you.

      You said: “real wages decreasing and ‘things are getting harder to afford’ are the exact same thing.”

      Not true, Sam. Not true at all. For example, we can live in an environment of declining real wages (regardless of the cause) and still afford more things if productivity gains cause prices to fall at a rate greater than real wages decline.

      Your assertion that high unemployment means real wages are too high is mistaken too. It’s nowhere near that simple. Again, you ignore, among many other things, the effects of productivity, that can permit rising real wages in the absence of price inflation.

      Also, I’m not sure why you think I am directly correlating high inflation as the cause of unemployment. I certainly never made such a connection, or conflated the two as you are doing now.

      And why do you keep putting “things are getting harder to afford” in quotes? Especially since you are the one who brought this up — not me? :-)

      • 22

        Sam says

        Len – declining real wages and real productivity increases are opposites. They both can’t happen at the same time. You mean declining NOMIINAL wages and real productivity increases can still add up to real wage increases.

        • 23

          Len Penzo says

          Argh. Yes. You’re right, I meant nominal wages there; it was late when I wrote that comment. In fact, way back in my original response to you I explicitly noted that: “real (as opposed to nominal) wages have the inflation effects already baked into the cake.”

          Now can you answer why, in your original comment, you said that: “Inflation is not ‘things getting more expensive’. It is a fallacy to equate the real affordability of an item and inflation.”

          Where did you get that quote, and what in my original post prompted you to make that comment? Were you just making an observation of your own accord? I say that because I spoke about inflation and mentioned nominal (not real) wages and personal income — but I didn’t go down the affordability rabbit hole.

      • 24

        Sam says

        The confusion lies here I think – your real wage is measured in terms of how much real stuff you could buy. A productivity increase which makes things easier to afford, IS a real wage increase because you can buy more stuff.

        I think you mean to say this:

        There are two ways to prevent sticky nominal wages from causing unemployment – one is to let inflation combined with flat nominal wages lower real wages. The other is to make the same employees more productive at the same nominal wage.

        This is correct; however, a mix of the two is usually required to prevent a deflationary or wage/inflation spiral. Money has to be “just right” or it introduces unnecessary structural problems.

        • 25

          Len Penzo says

          My head hurts, Sam. There’s no confusion. As I noted in my last comment, I had a brain fart and wrote “real” but meant “nominal.”

          Just answer me this: Do you believe the economy is a zero sum game?

          It sounds like you do.

  7. 26

    Lynn says

    Would love to win Living Large for the Long Haul book. Job was outsourced after working 25 years. As a 60-year-old widow, I qualify for social security–not even $900/month. Just out of the hospital! Good thing I bought health insurance, but one of my “discounted” prescription costs $735 for a 4-day supply!

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