inflation concerns

[gamecock43]

I hope I explain this question right.

I am somewhat young and just making connections between real world finances and how it affects me. The last few years have been a great education for me.

Lately I realized that it seems like a good idea to save and accumulate during booming years when money is easy to find (and interest rates are high), and spend during slow years when items are on sale and laborers are undercutting one another (and interest rates are low).

I keep hearing that inflation is going to start going crazy. Is there anything I can do to prepare for this? I imagine that once inflation kicks in- it will be an eye opening experience where I will wish I had done this/not done that. So,
are there any tips about inflation and how to make it work in my favor, minimize negative effects?

[shultice24]

1. Don't hold any variable-rate debt. If possible, refinance now while rates are low.

2. Don't lock up any money in CDs now for any extended length of time. If you lock in, say 1.5%, you'll be kicking yourself when rates climb WELL above that.

When rates are sky-high, that's when you might want to consider locking in long-term CDs.

It's funny how banks try really hard to get people to do the exact opposite, since that works in their favor.

3. If the time is right for you personally, now is the perfect time to be in the housing market (provided you are financially ready and can find a mortgage). Lock in a low, fixed rate and you're set.

This buyer's market could very well be the best we ever see in our lifetimes. Too bad I'm going to miss it entirely..I'm still in college.

4. If you are worried about serious inflation, you might want to consider investing in some precious metals- I myself have bought some pre-1964 junk silver coins and some silver Maple Leafs; this serves as both an addition to my investment portfolio and a good hedge against the infinite supply of fiat money.

This probably wasn't anything you didn't already know, but this is what I'm doing...

[gamecock43]

Are you serious Shultice your still in college! You are smarter than me and I am 5 years out of college! With a Masters degree! Everything you said makes so much sense but didn't occur to me before! (Except the buying coinage- I find it a hassle to have around personally.)

During the housing boom, CD's were offering 6% interest rates (and dumb me was frightened away from CDs because I locked in at 4.5% and watched interest rates just climb while I was stuck- so I decided it would be foolish to invest in a CD again.) Now at 1% I sure miss that old rate! Anyways, I HEARD that interest rates were in the double digits in the eighties- any chance we could see that again- or is 5-6% a good number to lock in at?

I did jump into the housing market in February, and locked in a good fixed 5.5% interest rate. So I feel smart for that move.

Question - does inflation and the stock market ever correlate? I have a huge chunk of change in the stock market, and wonder if the market gets stronger or weaker with inflation- or if there is no linkage between the two.

[shultice24]

Eh, I'm not that smart. I've just spent way too much time being a finance nerd. If I were at an SEC football school instead of my little private college, I'd probably be just a tad less into the finances and a bit more into that craziness! haha.

You heard right- 20% plus for some consumer loans (and maybe even mortgages?) is what I recall hearing from one of my professors. I think it'd prove futile for me to try and make an actual prediction, but double digits wouldn't surprise me.

Many billions of new dollars have been created, but they aren't circulating well right now- many are just being held as cash positions, which isn't inflationary. When banks/insurance companies/etc stop sitting on so much cash and start doing normal business again, that's when the economy will really see the effects of being over-flooded with money and inflation will take off. This is my understanding anyway.

Nice work on the house purchase! Do you see yourself there for quite for some time? The longer you utilize the cheap credit, the more it will prove to be an incredible financial decision. Cheap, long-term fixed debt can be a good pal on appreciable assets.

The stock market is generally a good place for your money to keep pace with inflation. Businesses increase prices when inflation goes up, so their profits are higher, therefore the price of the stock should theoretically rise otherwise it becomes undervalued.

When higher inflation/i-rates are on the horizon, bonds are where you do not want to be. Since bond prices move inversely with interest rates, bonds don't do well in that environment. Money managers who foresee inflation will almost certainly be shifting money from bonds to stocks.

It's good that you're thinking about these things. Life tends to reward those who are proactive in nature.

[disneysteve]

I HEARD that interest rates were in the double digits in the eighties- any chance we could see that again- or is 5-6% a good number to lock in at?

You're making me feel old. Yes, in the 80s, inflation was out of control and money market and CD rates did get up into the teens. I remember going to the bank with my dad for him to buy CDs paying 12 or 13 percent. The really prescient people bought long-term CDs then, like 10 year terms. Years later, when rates were back to normal range, they were still earning those sky high rates.

Will we see that again? I guess anything is possible but I think the Fed takes a more active role today and there are more safeguards in place to prevent that from happening.

[gamecock43]

Thanks for the help! My football loving school taught me a lot, but not about finances! Anyways, I feel secure. Ish.

Preparation is key for me, I fail when I guesstimate. And I always believe that other people know more about whats going on than I do- so I hope humility plays a role in financial security.

I guess I just gotta make one smart step in front of another and stay disciplined. I THINK I know the difference between financial right and wrong...but checking up on the boards and constantly educating myself keeps me ahead of the curve and increases my confidence.

Thanks for the bit of financial education.

BTW- I hope to have this same house to pass onto my kids one day, because I love it and because I believe that having one house forever might be cheaper than buying and selling several times. But things change you never know what will happen.

[Inkstain82]

Here's something you have to accept: Nothing is 100% safe.

Imagine if you lived in a country that was one of the most prosperous and industrialized in the world, possibly the leader in both. You have had a century of fairly consistent peace, and your military is such that you have little fear of being attacked. Your society is stable and your culture is deep and rich.

Now imagine you live in this country, are 55, and you have decided you have a well-diversified set of investments and enough money to easily last you until your retirement.

Great, right? Well, unfortunately, you live in 1914 Germany. Before you turn 70, your country will have lost a World War, be about to start another, your society will be falling apart, and hyperinflation will have wiped out your savings entirely.

(Hopefully you aren't Jewish, because it's also about to get a lot worse)

[gamecock43]

That's an interesting perspective!

[Broken Arrow]

In case you missed it, here's a fun little visual chart on inflation to help shed some light on the subject.

Although I constantly hound that no one can predict the future, it is safe bet that inflation will eventually skyrocket for the next decade. The question will be how quickly it will shoot up and how far.

Although we are experiencing inflation right now, I don't think this is the "scary part" we need to worry about. Quite the contrary, it's only a "small burn" right now, which in a way is a welcome relief given the current chilly economic climate. (Please remember that inflation isn't completely bad.) But the mother of all inflation hikes? Not here yet....

Now is a good time to double check your portfolio to make sure that it has some hedge against inflation.

[PetMom]

Keep basic spending habits in check as much as you can, the habitual high spenders, shopaholics and spendthrifts get hit much harder with inflation as it has a wider base to build.

People that can hold back their spending to minimum during inflation times are not as vulnerable.

And as someone mentioned in these times is the best time replace the old washer, purchase anything you might be needing and do a stock up.

Maybe get the lowest priced home in an good location. Inflation tends or used to be good for homeowners. (always carefully research any home purchase)

But, in my humble opinion, it will not be only inflation but also more taxes and maybe even that VAT thing that will be after our wallets.

Also we are already in some categories finding inflated bloated pricing but some economists have been more concerned about deflation.

[jaes]

Can I jump in with a question?

I've registered with this website and read this particular Thread, because I am concerned about the economy. In post #2, "shultice24," recommends: "1. Don't hold any variable-rate debt..." In the back of my mind I know this is sound advice, but could someone please elaborate? ---I have about 9 variable rate mortgages (on small rental properties). In the 1970s I would insist on Fixed rate mortgages---but, in the 90s, until now, I switched to all variable rate. It worked well for me. The ARMs adjust every 3 years--next adjust is about 2 years from now---curent rate ranges from 6.75% to 7.00% (remember these are investment properties---rates are higher than home mortages). ---I believe I can get 2 or 3 of these properties refinance with Fixed rate mortgages---but it will cost me appraisial fees, etc. Please, elaborate why it is a good idea to go from ARM to Fixed (I am not arguing with the idea---I just need some "fear" to motivate me to make the switch. Oh, by-the-way, I am old enough to remember double digit unemployment and the PRIME rate at 21% (yes the prime rate). That was near the end of the Carter administration (I voted for Carter). --Any response to the above requested elaboration would be most appreciated. ---Jaes.

[shultice24]

Hey Jaes,

I'm guessing your variable rates are based on a formula using a benchmark- say the London Interbank Offered Rate- (LIBOR).

I'm just going to be hypothetical and probably simplistic, but this is how I understand most variable rates work in essence: the lender takes a benchmark (say LIBOR), which is currently 1.6% + a fixed % of their choosing, say 4%. In that case, if your ARMs reset today, your rate would become 5.6%. Not bad...

But what if, in two years, LIBOR is 8-10%? You would *almost* certainly have been better off to refinance now and get a low, fixed rate.

In my mind, variable rate debt is only attractive when interest rates are high and you foresee them falling in the future, that way the rate you pay will fall as well. Today we are on the opposite side of that.

[Shane Watson]

You have shown a very early concern. I would say you are in the first step of getting prepared. I learned it the hard way. My mortgage problem almost took the best out of me. It was for a site called editmyloan I got to recover my house. For them I was saved big time.

[EEinNJ]

Inflation is not just the cost of money (interest rates). Commodity prices and value of the dollar are where it will hurt your pocketbook most if you don't have debt. When corn goes up, bread and everything else with high fructose corn syrup in it goes up. When oil goes up, not only gas goes up, but shipping costs, anything made of plastic, etc. When the dollar goes down, imported goods (which is almost everything now) cost more.
There's an inverse effect with housing prices, when interest rates go up, housing prices are lower because people can't afford to borrow more money.
My guess is interest rates will be held low for quite a while, but we will see price inflation at the retail level.

[wincrasher]

High inflation is not a forgone conclusion, nor is betting on interest rates going up. Lots of factors, so you are hearing alot of conflicting advice in the media.

Things that will affect inflation:

Fed policy
New regulations on financial institutions
Tax Rates
Health Care Reform
Money supply
Commodity supply
Regional/international politics
Strength of the dollar relative to other currencies
Federal deficit
Employment rates
OPEC
Environmental regulation - primarily "cap & trade"

All these things fit in the mix. Could be we have low interest rates, yet high unemployment and stagnant inflation. Or we could have high interest rates, high taxes, high unemployement, high energy prices and high inflation to boot.