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How Inflation Affects Personal Debt Consolidation
What is the effect of inflation?
As a result of inflation, the value of tomorrow’s money decreases with regards to today’s money. In other words, you can purchase less with the same amount of money. This is commonly seen as prices having increased. This can make the situation appear more appealing for borrowers because they can buy today and pay back with less valuable dollars. But lenders and creditors don’t appreciate receiving less valuable dollars. So, in order to offset the declining value lenders and creditors increase the interest rates they charge. Thus inflation in general results in increased financial problems all around. It not only results in rising commodity prices but in increased interest rates as well. Inflation is mainly caused by governments. Because of high borrowing and deficit spending they find it necessary to increase the money supply which results in the value of each individual dollar in circulation being worth less. Continue reading
Is There a Correlation Between Inflation and the Stock Market
When inflation is high and commodity prices are rising on what seems like an almost daily basis, have you ever wondered how that might affect the price of stocks?
Recently I received the following question:
In the years leading up to the great depression and the great recession, the DJIA nearly quadrupled.
My question is… what the cost of living did in these time periods and if there is a correlation between the stock market and the cost of living?
John Kelsch
John,
Great question! You would think that if all commodities are going up stocks would probably go up as well, since companies produce commodities. But that isn’t always the case. Often high inflation can actually squeeze profit margins and cause companies to lose money or barely break even. So lets look specifically at the correlation between stock prices and the inflation rate.
First let’s look at the average inflation rate for the entire decade and the average annual rate of return in the stock market. In this case we will use the S&P 500 since it provides a fairly broad-based reference for the stock market.
In the following chart we can see Continue reading
How Global Financial Developments are Affecting the Price of Gold
Let’s face it. With the US economy facing the bitter consequences of extravagance and unscrupulous spending, it has become quite difficult for the US to manage both its public and private debts now. In this phase of post recession hangover and economic meltdown, the U.S. federal government has bumped up against its permitted borrowing limit. According to Alison Fraser, director of the Roe Institute for Economic Policy Studies, America’s debt just crossed $15 trillion, which means presently, the amount owed by the United States government to the world, is equivalent to the amount produced by the American economy per year. All these factors lead to higher prices and intensifying inflation concerns in the U.S.
Along with the U.S., there is the raising euro zone crisis where a number of European countries like Greece, Ireland, Portugal, Spain, and most recently Italy failed to pay their sovereign debts and consequently are heading towards insolvency. In fact Europe’s weakening economic performance literally forced the European Central Bank to follow more accommodative monetary policies. In short, both US and European economies are going through several years of sub-par economic commotion, high unemployment, and rising inflation. However in the midst of economic turmoil, when unemployment is up and there are conflicting tax increases, the price of gold is soaring almost beyond belief. It seems the skyrocketing gold price has a strong impact on both the dollar value and the European debt crisis as well. Read ahead, to know the latest forecasts about the future of Gold price. Continue reading
Another Way to Measure Inflation
In this article Jeff Clark shows us how to think about prices and purchasing power in a different way. The true measue of inflation is in relation to how much stuff your money can buy and in reality it is also related to the return you can get on your investment. If you can get 10% on your money a 5% inflation rate isn’t so bad. But if you own any assets and they are only appreciating at 1% (or worse yet depreciating) and prices are increasing at a 5% rate the value of your assets are declining (i.e. they are being insideously and secretly being stolen by the government printing presses).
In this article Jeff will give you another way to look at the issue of prices and perhaps open your eyes to something you hadn’t thought about before.
The US’s Education Bubble
By Doug Hornig and Alex Daley, Casey Research
In the world of finance, there is always talk of bubbles – mortgage bubbles, tech stock bubbles, junk bond bubbles. But bubbles don’t develop only in financial markets. In recent years, there’s been another one quietly inflating, not capturing the attention of most observers.
It’s an education bubble – just not the one of student debt that has graced the pages of the New York Times and so many other publications in recent months.
The problem is not that we are overeducating ourselves as many would have you believe. Rather, it’s that we are spending a fortune to undereducate ourselves.
The United States has always been a very educated country. But it is becoming less and less so, especially in the areas that matter to our individual and collective economic futures. Our undereducation begins with a stubbornly high dropout rate among secondary education students. About a quarter of those who begin high school don’t finish.
In an educational system where graduation from high school at a minimum level often means no grasp of mathematics beyond basic arithmetic, no training in basic personal finance, and no marketable professional skills, this is an obvious problem We can and should do more to prepare high school graduates for the world they now live in. Continue reading
Adam Fergusson: “Inflating your economy means playing with fire”
GoldMoney founder James Turk interviews When Money Dies author Adam Fergusson, who discusses the parallels and differences between the Weimar inflation and the situation in the US and Europe today. “I don’t see how any of these [Western] economies can grow their way out of the extraordinary debts that they have.” Continue reading
America’s First Deflationary Depression: Is a Bigger One Ahead?
Social psychology precipitates economic depressions
Don’t blame Martin Van Buren for America’s first deflationary depression. Social mood rode higher in the saddle than did our 8th President, who only stood 5′ 6″.
Elected in 1836, by the time Van Buren assumed office in March 1837 a speculative bubble had burst and a banking crisis was at hand (sound familiar?) — the national mood had turned south and the “Panic of 1837″ followed. Van Buren was known as “The Little Magician,” but he could not pull an economic recovery out of the hat. He met defeat seeking a second term.
America’s first deflationary depression lasted until 1842. Van Buren blamed over-zealous business practices and a credit bubble (sound familiar 2x?). The panic precipitated bank failures; many speculators who bought land to capitalize on railroad expansion lost everything. The depression worsened as Van Buren continued Andrew Jackson’s economic policies. Businesses failed and unemployment was widespread. There were even “food riots” in several cities. Continue reading
Markets Fear Deflation
The best way to know the future is to survey millions of people and analyze their responses. That is exactly what the market does every day. And even better Mr. Market knows not only what people say they believe but where they are putting their money as well. In the following article Chris Ciovacco, the Chief Investment Officer for Ciovacco Capital Management shows us how the markets view the current possibility of deflation. Chris has an amazingly simple chart that shows us exactly what the market is thinking right now. That chart is the ratio of Treasuries to Treasury Inflation-Protected Securities (TIPS). Currently the ratio is indicating a deflationary bias in the market. When you think about it, if people fear inflation they will pay a premium for Inflation protection but as the fear of inflation decreases the premium decreases as well. Interestingly, deflation is bearish for the stock market. As Robert Prechter has been telling us for a while the only thing valuable in a true deflation is cash. Everything else decreases in value as we saw in 2008. ~Tim McMahon, editor
As we noted on November 1, a rally back toward 1,250 is well within bear market bounds. How we rally (volume, conviction, etc.) will tell us quite a bit about the odds of a more lasting upside move in stocks. We also outlined in a recent video reasons why the improvement in market breadth does not necessarily lean toward bullish outcomes. We are open to higher highs in stocks and the onset of a new bull market, we just do not have the evidence in hand to support those outcomes at this time.
We reviewed leading ETFs from several angles last night, including volume. The interest in Treasuries (TLT) and TIPS (TIP) was high in Tuesday’s session, with Treasuries getting a slight nod over TIPS. We will be watching the relative performance of TLT and TIP after today’s Fed announcement.
When the ratio of Treasuries to TIPS is rising it points to (a) little concern about inflation, and (b) increasing concerns about deflation. The chart below shows what the TLT:TIP ratio looks like during a bull market in deflation fears and a bear market in stocks.
In the following chart from November 21, 2008 we see an extreme example of rising deflationary expectations. When TLT:TIP is bullish, it tends to be bearish for stocks and inflation protection assets. The chart below shows what the ratio looked like during a bear market in stocks. The S&P 500 is shown under the bond ratio. Continue reading
How Does Inflation Affect You?
When people go the the grocery store and see ever higher prices they know how inflation affects them. But when they are feeling more philosophical they might reason that if all wages and prices increased at the same rate it would all balance out in the end right?
Well theoretically yes but in reality it never works that way. Prices of various items all increase at different rates so some people are benefiting while others suffer. Those on fixed incomes suffer the most because the cost of things they are buying increases but their income stays the same.
This is where COLA or “Cost Of Living Allowance” comes in it is an adjustment that is made to compensate for the increase in prices due to inflation. Continue reading
