With mortgage rates at record low levels, my wife and I decided to investigate refinancing our mortgages, and it looks like it's going to save us a ton of money if we do it, even if we just stayed a couple more years.

The arithmetic gets a bit complicated because we currently have a second mortgage with a balloon payment that comes due in about 10 years, but the upshot is that, as long as we come to the table with enough to get the loan-to-value ratio to 80% (which shouldn't be too much of a problem) we end up saving $500 a month, get rid of the big ballon payment, and have enough equity to potentially take out loans to do more repairs in the future.

The big variable, of course, is the appraised value of the home. Our region has maintained home values better than almost anywhere else in the US, so I'm not very worried about the value being less than what I paid for it 4 years ago, but I do want to make sure the appraisal comes in as high as possible, which would lower the amount we have to put down now.

The house is in very good condition structurally. The roof is in good shape, the HVAC is all very modern and efficient, etc. The major problem areas would be the asphalt driveway, which is cracked in many spots and in need of repair/replacement, the front walkway, which currently consists of rickety concrete pavers, and a timber retaining wall in the back that's falling over from the weight of the earth behind it. These items are all in the "eyesore" category that I've heard appraisers focus on when they evaluate home values.

I've gotten some estimates to re-do the retaining wall with blocks, and to redo the walkway and driveway with poured concrete. The estimates so far seem pretty reasonable to me ($3500 for the wall, $6000 for the walkway and the driveway) and they may come down as I get a couple more estimates, but I'm wondering if I need to rush these repairs to be finished before the appraisal or if they can wait until afterwards. If I do them now, it's more money we have to dump into the house now at a time when we may have to pour even more into the refinance if the appraisal comes back low, but putting the money in now may itself improve the value, and they're things we'll have to deal with at some point anyway.

I guess my main question is how much these kinds of repairs are likely to pay off in helping improve the appraised value. I know I won't get dollar-for-dollar or even half of that, but my goal is to do whatever I can now to avoid any negative surprises from the appraisal. Anyone have any experience with this sort of thing?

If the value of the house isn't going to go up more than what it costs to do the upgrades then why not just use the money to pay down the loan?

Well, mainly because we probably have to do these repairs sooner or later anyway, so I thought I might as well try to get some immediate value out of them beyond the value of having things not look awful or be dangerous to visitors.

The retaining wall is leaning at about a 20 degree angle, and getting worse each year (it was vertical when I bought the house just 4 years ago.)

The driveway is in bad cosmetic shape, which we could probably patch up and seal, but that's just putting a band-aid on it when it's got multiple cracks that will just crack again with winter ice and snow.

The walkway is flat-out dangerous right now, with sections of itteetering when you walk on it. I've tried using portland cement to stabilize them, but it lasts for 3 months and then the ground settles and they're wobbly again.

I don't have much to say about influencing the appraisal, but I do know that a lot of this stuff falls into the category of maintenance. You're not adding size to the home, you're just fixing what's become run down.

What I do have to say is this: get a 30-year fixed-rate loan. That's how you exploit the artificially low interest rates we have now and use the debt as an inflation hedge. You'll screw yourself hard if you get another 10 year balloon.

You may want to read Peter Schiff's "Crash Proof 2.0", which has a section about how to turn whatever equity you might still have in the home into something resembling a hedge fund.

FWIW,

Jim

Yeah, we're definitely going fixed rate if we do this -- both the current loans are fixed, but at much higher rates, and with a balloon on the second.

I actually did consider going with a 20-year or 15-year fixed to get a lower rate, since I don't buy into the inflation boogeyman theory, but the rate difference isn't quite enough to make it worth stretching our monthly budget that much.

Best of luck to you, Tony. My wife and I are considering doing the same on our condo, and even though our area has been pretty good for home values, condo values really took a hit. I'd estimate that we lost around 1/3 the value of our home, based on the most recent comparable sale.

Still, we're looking to refi as well because I think we're at around 6.5% so we can certainly do better! Definitely let us know how it turns out for you.

I would say fix up the pavers no matter what - if the appraiser feels at risk walking into the property that won't set them in a good frame of mind If you can bodge fill the drive so it looks nice, that might do for the moment.

In the UK the valuations for remortgages are often based on models of sale price data of the area (the sale prices of properties are public data here), and nobody actually visits. IIRC if they do, they just say yes/no to the proposed value which is given to them.

Not intending to start another political post, but you can find more accurate measures of inflation. The CPI is a very bad measure of actual inflation, and this is by design so the government can understate it and thus borrow at lower interest rates.

Those who have conducted an honest analysis of inflation are remarkably consistent and all seem to show current inflation between 10-11%, and trending higher. That certainly seems to be much more realistic given all of the extra liquidity (money) in the system due to the QE programs. Not to mention everyone's experience with rising prices everywhere. Regardless of whether you think the stimuli were a good idea, nobody disputes the fact that they add money to the planet -- that was what they were intended to do. And that's what inflation is -- by definition.

What makes this interesting for a home owner is that you can borrow today at around 4%, and pay this loan back with money that is 10% cheaper every single year.

Policies like this (deliberately) encourage borrowing, and theoretically spending, rather than saving. So you don't want any equity or savings in this kind of environment, you want debt. The hedging strategy is to borrow as much as you can from your house (leave no equity in it), and then take whatever equity you have and invest it in non-inflating assets (either non-US dollar assets or in a commodity of some kind). For example, let's say you owned your house outright. You can borrow the whole value at 4%, then take the money and buy a Canadian municipal power company bond that yields 9%. You make a free 5% on your money with essentially no risk. And that doesn't even consider inflation. In US dollar terms, you're making about 15%. You can take the dividends from the bond and use them to pay your mortgage.

One reason this "stimulus" doesn't work that well right now is that consumers are tapped out. So nobody has any more equity or credit left to spend. Meanwhile, corporations will take some version the hedge vs. investing here where they take a 10% haircut every year from inflation. This is why "hard money" economists (also called "Austrian economists") will say that credit does not drive production, which they also say is the only way an economy grows (not from consumption).

But it doesn't matter where you fall on any of these arguments. Even if inflation were zero, you can still get a 5% nearly risk-free hedge due to the artificially low rates right now, and that means that you should carry zero equity right now.

Again, FWIW,

Jim

Oh, don't you worry -- you should I'm never one to shy away from yet another political post here.

I want to be an informed consumer, so I've been hunting for this double-digit inflation monster you Austrian types keep talking about, but I can't find him. I understand where you're coming from, but you're going to have to show me your source for the 10% inflation number.

Alternative inflation measures like MIT's Billion Price Index (which only covers goods, not services, and must therefore be compared to the equivalent BLS numbers) don't show any significant deviation from the core inflation numbers that BLS puts out. Every time I've seen a chart or table from a hard-money type purporting to show mass inflation, it's been shown to be focused on specific sectors (such as energy or food) that swing in price wildly from year-to-year, or the x-axis was constrained to show an inflation spike after a long, steady period of deflation. I have yet to see reliable evidence that inflation fears are warranted -- and yes, I know that it can come suddenly and spiral out of control -- but that does not mean we should ignore the equally destructive risks of deflation.

I have a coworker who follows the economy very closely who recently yanked all of his 403b money out of stocks and put everything into Vanguard's U.S. Treasury fund. He's seeing what I'm seeing, and what global investors are seeing -- the U.S. dollar is the safest investment vehicle in the world right now, and, if anything, we're headed for a period of deflation, not inflation, and since deflation is devastating for people with a lot of debt, I'm hesitant to pull all my equity out at a time when (in my view) all signs point to inflation risk as minimal to nonexistent.

But I'm happy to see what sort of data you've seen that I've missed out on!

The other aspect is, without at least 20% equity, I can't take out a home equity line to do future repairs, etc. My mortgage guy told me that as long as I get to 20%, I can then take 10% out as a loan basically the day after I sign, but still avoid paying mortgage insurance. So, even if I did want to max out my debt to take advantage of future inflation, putting some money in now might make sense.

Yeah, if our appraisal came back and told us we've lost 1/3 the value of our house, we obviously wouldn't be able to do this, or if we did, we'd have to pay mortgage insurance, because we'd start out well above 80% loan-to-value. Of course, the upside of a drop in the value of the home is that the monthly payment will be a lot less after the refinance, so depending on how much equity you guys have now, it might still be worth doing.

Luckily, the comparables in our neighborhood seem to have done okay, which is part due to Pittsburgh having never really spiked too much during the bubble, and part due to buying in late 2007 after the prices were already on their way down. So I don't see that kind of precipitous drop in value happening.

Yeah, I've heard that the appraisers here don't do too much in the way of inspecting the house, and rely more on an overall sense of what the neighborhood values are like -- but I also don't want to give them any reason to lowball their valuation.

I was also considering the walkway as the highest priority item, but doing the driveway at the same time will save a ton of money, since concrete contractors like bigger jobs. So the real question is do I fix it up so it's stable (but not pretty) or cough up $6000+ to make it stable *and* pretty. I'm leaning towards the latter, at this point.

I'm in the same position with refinancing. My pool needs to be resurfaced, it is so bad that I've kept it empty last year. I also need to 'freshen' up the rocks in my yard, apparently that is the term the landscaping company uses when you need 16 tons of rocks to fill the yard back in. Sometimes it makes you wonder if owning a home is worth it :P At least my roof is still good (for another 8 years), my boss paid over $14,000 to repair his roof this summer.

I can't say exactly how appraisals work, but if we're talking about work that you would have done, regardless, then it's sensible to do it sooner than later.

For what it's worth, I'm a fan of spending the bucks and fixing small problems before they become big problems. About the only maintenance that I'm deliberately deferring is replacing a dead tree on the side of our house, since we're still technically in a draught and I don't want to pony up for new landscaping until the weather gets less insane.

As to all the investment action going on here, all I'll say is that I'm a convert for low-fee index investment. Pick your asset allocation (stock vs. bond, large vs. small cap, etc.) then find the cheapest way to get it, often Vanguard ETFs.

I don't have the cojones to pull everything out of the market. My market investments are for a 20-30 year time horizon, not for next week. Yeah, the numbers have gone down, but that's okay. That's not money we actually need for anything, any time soon.

My wife and I re-financed to a 4.0 15-year fixed, from a 6.something 30-year fixed. The payments ended up being negligibly higher (about the cost of a cable bill ;)). It's not the rate difference that makes it worth it, but the time factor. By going this route, we shave off something on the order of $250k from our interest payments, because we aren't carrying the loan for an additional 15 years.

But would you do the same if you were moving out within, say, two years?

I'll admit not being all that familiar with hardscaping in northern climes, beyond being aware of its difference due to frost heave, but the driveway and walkway pavers sound like DIY projects to me.

I've successfully used asphalt patch products to fix cracks and holes by hand. I'm not talking about tar patches, but, essentially, bags of asphalt concrete that you can stuff into the cracks and holes and compact to make them effectively, over time, part of the existing blacktop.

As far as the walkway goes, you should be able to fix that by digging dirt from underneath the pavers and replacing it with some stone and stone dust.

In both cases, you'd want to compact it, and doing both at the same time would be a great time to rent a plate compactor. It'll be a hell of a lot easier than tamping by hand.

Yeah, like I said, I've successfully stabilized the walkway by digging out and filling in, but it never lasts. Using portland cement the last time helped maintain it for longer than usual, but a couple of them are wobbling again, and I'm getting tired of having to fix it all the time.

I've never gotten good results from asphalt patching, but I've also always used tar. If I decide the concrete isn't worth it now, I'll definitely try that Sakrete stuff (or something like it.)

The thing I like about concrete (for the walkway and the driveway) is that when it's done, I never have to worry about it again, save the very occasional re-sealing. Also, nothing's going to grow up through it the way grass and weeds have been doing in-between my existing walkway sections. It's not going to be easy to cough up $6kish right before a home refinancing, but I only see the asphalt patching/sealing cycles getting shorter and shorter over time as the existing surface continues to wear down.

Based on what I know about your climate, you probably need to dig down at least 8" in order to keep your walkway pavers from heaving.

Ah, no. Definitely not. In that case, I'd go for the option that puts the most money in my pocket now.

But a refi could conceivably lower my monthly mortgage payments, or at least let me pay less in interest, which would do exactly that.

Look at the total amount paid in 15 yrs vs. 30 yrs. If the payments can be handled, it's worth doing. The extra amount paid goes mostly to equity.

Two years? Most likely the loan fees will eat any savings.

Tony, I don't get to the BBS as often as I would like these days.

I think what you're saying is that you don't see evidence of rapidly rising prices. But rising prices are not, technically, inflation, but rather are the result of inflation. "Inflation" is precisely the increase in the amount of money in circulation. Nothing more. Eventually, goods will exchange for more of this money, because there is more money for the same amount of goods. If we all decided to add a zero to our federal reserve notes, the money in circulation, measured in dollars, would increase 10x, but nothing else would have changed, so prices would immediately rise 10x. In "real" terms, nothing would have happened.

But this is not what happens when central banks "add liquidity" (inflate). In my silly example, everyone equally participated in the money devaluation. The problem with inflationary monetary policy is that the money enters the economy from a few participants (bailed out corporations or the government agencies spending the new money), thus allowing them to unfairly purchase goods (labor, debt, whatever) at the old prices. This is a great scam for the recipients of the new money, at the expense of everyone else. Eventually the new money makes its way through the economy and prices stabilize. Those who save money in reserve notes or treasury bills are harmed the most because their notes do not magically add zeros -- they are just worth less in real terms.

We know that over $2T has been added to the supply of dollars in the last 3 years, and it appears that the Fed may have lent as much as $15T it does not have in reserve to (mostly) European banks. This is the inflation; the rising prices come (inevitably) later.

But prices *are* rising. Food, gas, clothing and most hard commodities are up around 50% over that 3-year period. The CPI doesn't consider these prices because they are "too volitile", which really just means they respond the most quickly to changing money supply.

The best part of the hedge I mentioned, however, is you can make a free 5% whether prices rise or not. If they do, then you come out better, but even if the dollar doesn't continue to lose value you still make money from the interest-rate spread.

Jim

How long do the economists you listen to say it generally takes for an increase in the money supply to affect prices? The Fed has been engaging in expansionary monetary policy for several years now, but we've seen no significant movement of core inflation or the broader inflation measures like the MIT index I mentioned earlier in the thread.

Please show me a source for the 50% food/gas/clothing spike over the least three years -- that's a lot higher than the numbers I've seen. One can cherry-pick the noisy food and gas prices over a short timespan, but once you zoom out, even those are relatively stable. I've never seen anything suggesting a 50% rise over 3 years in those

At this point, with 10% unemployment, some short-term inflation is a good thing. You'll get no argument from me that a big inflation shock later on would be a drag on a functioning economy, but our economy is not functioning, and needs some juice right now. Expansionary monetary policy can provide some of that.

As for my own situation, we're definitely not going to park any more money in our house than we need to, but we'll at least need to get to 80% loan-to-value to avoid mortgage insurance. If the house appraises high, we'll be able to take some money out, if it appraises low, we'll have to put some in. But you're right that there's no good reason for us to pay a whole lot of the loan down right now, and we probably won't.

Repair-wise, we decided that for now, we're going to just do the walkway and the retaining wall. Values in the neighborhood seem to have gone up quite a bit, so this might help us out a lot if we get a good number from the appraisal.

Sorry, but inflation does not help an economy. Inflation merely hides the adjustments that must happen. In high unemployment, wages must drop. In our current situation, housing prices must drop to clear the market. Rather than letting wages and house prices drop, we're inflating the currency instead. This is delusional, and worse in the long run than just letting the market adjust.

There's a million references to rising commodity prices, just look on google. You'd have to be blind to not realize prices are going up. Consider the prices of gold, silver and copper since 2005. Consider the price of gasoline vs. 3 years ago. This is not just volatility, and to dismiss it as such is wishful thinking, at best. Here's just one from the first page of google results: http://www.denverpost.com/business/ci_19151044

Here's a guy who tries to untangle the mess of the government's redefinition of terms:

http://www.shadowstats.com/alternate_data/inflation-charts

During the Great Depression, with unemployment around 30%, the government redefined what it meant to be unemployed by declaring that you needed to be 16 years old to be legally unemployed. This is just one manipulation. Today we're struggling with a "real" unemployment of at least 17%, with some suggesting it's close to 25%. The government number only includes those workers currently collecting unemployment benefits, and it's as crooked as the rest of the government statistics.

Remember "stagflation"? That's what we've got now. Rising prices are not good for anybody. The idea that deflation is horrible is a myth. I realize this makes me sound like a lunatic, but these are lies the government tells the people to get them to go along with the theft of their savings.

Read this short book by Murray Rothbard:

http://mises.org/books/whathasgovernmentdone.pdf

Edit: here's a paper describing the deliberately misleading and changing CPI calculation landscape. He also makes the important point that understating inflation overstates GDP growth. This is why "double dip" fears are stupid -- we're still in the midst of the huge first dip. Despite real inflation much higher than reported, the government was only able to fabricate a paltry 1.7% GDP growth in the last 12 months. In reality, the economy contracted around 5%.

http://www.shadowstats.com/article/consumer_price_index

Another way to look at is that this country (the U.S.) owes so much money (depending on how you look at the numbers, anywhere from seven to 14 trillion dollars) that there are only two ways to get out of it: default, or hyper-inflation. Since our "leaders" (there's a joke!) are concerned only with their next election, default is not an option. So that leaves...

tanstaafl.

Well said. You did the right thing. I'm trying to work a plan to leave the country also. :-)

Hyperinflation only means the destruction of the currency, though. So as long as you have real assets (non US-dollar denominated), you can survive it. But it's going to hurt bad.

You specifically said that "Food, gas, clothing and most hard commodities are up around 50%" over the last 3 years. I can't find any recent charts for food and clothing, but if you can find some, please post them.

The price of gas was at ridiculously low levels 3 years ago, but if you go back just a year prior, it was at $3.11. It's just kinda bounced around over the past six years, and is now around $3.40 or so, and has been on its way down since the spring. That, sir, is volatility.

You can't just cherry-pick a particular window to justify inflationary fears -- you have to look at the trend over time, and gas prices are among the most noisy prices due to the oil cartel, speculators, etc, so you have to be even more careful to not infer wider trends from spikes over 3 or even 6 months. Panicked statements like "prices are rising at the fastest rate ever" are uttered by clueless financial reporters who don't bother to inform readers that they fell at the same rate a few years before.

"The idea that deflation is horrible is a myth?" It's certainly horrible for borrowers, which makes it horrible for the economy at large, and falling prices mean lower revenues and profits for corporations.

Neither runawway inflation nor runaway deflation is desirable, but to say deflation is not a very bad thing is an opinion relegated to the crankiest of crank economists.

I have thought long and hard on that. Unfortunately, my primary asset is my (and SWMBO's) retirement incomes, a quite livable amount but only as long as the US Dollar is worth anything. I am concerned about what will happen to those incomes when the dollar collapses, probably right on the heels of the collapse of the Euro.

My situation where I live now is (quite deliberately, I might add) optimized for survival in the very bad times that are coming: I own my house free and clear, my cost of living is a small fraction of what it would be in the U.S., I have no debts, not a lot of cash on hand, in an agricultural community that might be safe when the food riots start.

I am afraid that there are some very interesting times ahead.

tanstaafl.

The time is coming when those cranks will be seen as the ones who stuck with solid principles and turned out to be right in the end. Calling them "cranks" does not contribute anything to the argument. The authorites love central planning, so you can always appeal to those authorities to support the now-fashionable Keynesian ideas. But while they all claim that "nobody could have seen the 2008 collapse coming", the "cranks" did see it coming and warned about it.

Prices are not the measure of inflation, like I said. Money supply is. The inflation has already happened (and will continue).. Prices are beginning to rise and will contine. Wages are declining in real terms and this will continue. You've got to be smart enough to recognize these things before the prices are spinning out of control. It's too late then. Prices *are* rising, you even admitted it. You prefer to think my time horizon is too short and its just a *coincidence* that prices have risen after the $2T+ was added to the money supply. Or maybe it's the weather, as the administration has said. Or maybe it's just the early signs of the inevitable. I understand the appeal of denial, especially from those seeking (re)elected office, but fortune favors those who accept reality.

Just study the issue for yourself and make up your own mind. You are being lied to. Is that so hard to believe? This is the same government that dreamed up the Gulf of Tonkin hoax, tested nuclear and biological weapons on it's own citizens, lied about WMD -- I could go on and on.

Think for yourself. Read both sides, consider their motivations, and then decide. You are simply repeating the sound bites of the media.

The most deflationary industry, perhaps in history, has been computers. It has been a huge boon for people. Spending and borrowing does not drive an economy. Savings and production drive economic growth. You have it backwards.

Jim the Crank

Austrian economists have been crying doom over inflation fears for 3 years now, but none of it has materialized. They've also been insisting that bond yields were going to go through the roof any day now due to the Fed's inflationary policies, yet many years later, the yield for 7 and 10 year teasuries was *negative*. People have been paying a premium to park their money in U.S. Treasuries long-term.

The idea that nobody saw the collapse coming is preposterous. Many prominent Keynesians saw the housing collapse coming a long time before it happened -- Nouriel Roubini and Paul Krugman chief among them. They were called Cassandras at the time, but they ended up being right, and they weren't alone.

So yeah, guys like Schiff got it right too, but Cassandras don't get credit for being right if the methods they used to arrive at their correct conclusion are ultimately proven wrong, and time and time again, inflation hawks have predicted dire consequences of the Fed's actions that have not actually happened. At some point, one loses patience taking their arguments seriously. I probably could have used a more artful term than "crank", but, seriously, the Austrian guys are trying my patience about as much as climate skeptics these days. (BTW, bad week for those guys.)

Prices are rising because the Fed is pursuing a long-term inflation target of around 2%. There will be individual months where prices rise faster than that, but that's the target they're aiming for. So yes, prices are on a long-term rise, and that's not by accident -- the Fed *wants* inflation, and it's gettting about the rate it wants.

I do think for myself, and I've got a coworker who feeds me with a lot of thoughtful, well-argued stuff from the Austrian perspective -- but while Austrians start out with principles that make sense in the gut, they don't end up with models that match up with the real world. Keynesians don't always get it right, either, but in a choice between letting one out of every ten Americans sit idle or borrowing money cheaply to pay them to work, I'm going to choose the latter.

(And you still haven't backed up your "nearly 50%" statement.)

Okay, who are you, and what have you done with the usual lunatic we call "TigerJimmy" ?

I did, actually, but you dismissed it as volatility and too short a time sample.

The new money does not enter the system simultaneously, that's the problem with inflationary monetary policy. At least we agree it is deliberately persued by the government. You don't yet realize that this deliberate policy is theft. Please read that short book by Murray Rothbard.

I shall tackle "climate change" on my next post, tomorrow. :-)

Love it, Mark! At least it's interesting, I hope.

I really don't think you did.

You said prices are "up around 50%" for food, gas, clothing etc. I asked you for evidence of this specific claim, and you told me to do my own googling to find it, providing only a single link from a news story that cited exactly two annual number for price increases, those being a 10.2 rise in dairy prices and a 33.3% rise in gas prices.

In what universe does that count as support for an increase of "around 50%" over three years? Suppose I offered you an investment opportunity and promised you a rate of return of 50% over three years. You give me some money, and I come back in a few years and say "well, I got you 33% from oil company stocks and 10.2% from dairy industry stocks, but the overall rate of return was in the single digits." You'd say I over-promised and under-delivered on the investment.

My core argument is simpler than just volatility and cherry-picking the time window -- you have also provided no support for your 50% number, and have only shown double-digit rises in prices within a very small number of commodities (gas and dairy products.)

I totally concede the point that prices are rising higher within certain sectors and commodoties, but you significantly overstated your claim of a much greater rise within those volatile sectors. Further, I do think the volatility argument has merit, especially with the gas prices.and you've provided no evidence to the contrary.

I'm happy to engage in a higher-level discussion of the relative evils of inflation and deflation with you, but before we do that, we need to at least agree on the problem we're trying to solve. It's widely understood that the Fed is pursuing an inflation target in the low single digits, and all evidence now points to them meeting that target, even if it spikes higher within specific months in specific sectors.

Our economy has a LOT of problems. Inflation barely makes the list.

I think you may be confusing the effects of inflation with the actuality.

As TigerJimmy stated, inflation is not rising prices. It is an increase in the money supply that will eventually, inevitably, cause prices to rise. With the trillions of dollars that the Fed has dumped into the money supply, the inflation is already a done deal. Now we're just waiting on the effects.

Things cost pretty much the same today as they did 50 years ago. In 1962 a man earning good wages could buy an entry-level car for about eight weeks wages, say $2,000. In 2011, a man earning good wages can still buy an entry level car for about eight weeks wages, say $20,000.

The car hasn't become more expensive, at least not in the only currency that counts: how many man hours did it take to buy it. The money has become worth less. That's inflation.

If I were smart enough to be an economist, perhaps I wouldn't have this nagging suspicion that there is a basic flaw in our whole economic system. Apparently in order to sustain itself the economy has to grow at an annual rate of 4% or so. If it doesn't, then bad things happen. Well, we're living on a finite planet with finite resources, and open-ended growth like that is simply not sustainable. What is going to happen when it's time to "pay the piper"?

I have this dreadful suspicion that we're about to find out.

tanstaafl.

This is not the canonical definition of inflation, nor has it ever been. An increase in the money supply is an increase in the money supply. Inflation is a rise in the prices of goods and services in an economy.

Austrians have tried to redefine the term, but referring to my aunt as my uncle doesn't cause her to grow facial hair and take an interest in football.

You guys are more than welcome to bring your own evidence, theories, and arguments to the table, but if we can't use the agreed-upon vernacular of the field of economics, we're not going to have a very productive discussion.


The price of the car is higher, therefore, there has indeed been inflation. But the rise in the price of the car does *not* track in any meaningful way with the increase in the supply of money.

In your particular example, you've not used the correct numbers, and your example assumes that the rate of increase in car prices tracks with the rate of increases of other prices of goods, which isn't the case.

$2,000 in 1962 is worth about $15,000 today, or an annualized rate of increase of about 4.25%. Econonists generally believe that inflation at this level can be useful to an economy, because it encourages people to put money into capital, investments, etc. rather than hoarding cash, which doesn't help an economy grow.

Obviously, runaway inflation is a bad thing, but we're not seeing that now, and the overall rate of inflation in the last 50 years is manageable.

Regarding the supposed need to "pay the piper", Paul Krugman addresses this very well in this piece.







Just because we're borrowing cheaply and injecting money into the economy doesn't require that there be an equal and opposite reaction later. Economics isn't physics where the laws of motion need to be obeyed, nor is it religion where actions are understood to be inherently good or evil. Sometimes borrowing a lot and spending a lot is the moral action, and sometimes saving a lot and spending very little is the immoral action. It's all about context.

Yes, those are in a single year. Compound over 3 years.



33% in one year is considerably more than 50% in 3 years. For dairy, 10.6% CAGR is 35% over 3 years, which is "about 50%". Prices on commodities are up substantially over the last 3 years. I don't really understand how anyone could argue that point. Gold is up around 100% in that same period. Cotton is up almost 400%.



Well, those are just the first couple that came up. Commodities are up substantially across the board, like I said, and it doesn't take much looking to see that.



OK. You know what? I just don't know what to say to this. I really don't.

There is no dispute that money supply has expanded dramatically. Even the Federal Reserve admits that it has done that deliberately.

So I guess your argument is, "so what? inflation is a good thing." Inflation is a mechanism by which the government and its cronies (wall street banks and other preferred industries) get an unfair advantage by using what is essentially counterfeit money. The effect of this is to diminish the value of savings in federal reserve notes or US dollar-denominated assets. It is literally stealing from people who have saved.

We've seen several decades of expansionary monetary policy and artificially-low interest rates and we're now (just barely starting) to reap the results. The problems with our economy are directly related to these misguided ideas and the central planning which seeks to manipulate markets by inflating bubbles (.com, housing, and now commodities).

I don't understand how someone can stand on the brink of economic apocalypse (where we are right now) and call a group with different ideas "Cassandras".

Edit: I guess to a certain extent, you're right. IF the extra money entered the system uniformly, there would be no issue. In that sense, inflation doesn't really matter. It doesn't matter if we all added a zero to the money in our pockets. But when SOME people do, and not others, then it matters a great deal. It's stealing.

The problem isn't inflation, per se. The problem is central planning as opposed to a free market in money. When the government controls the money, they can and will manipulate it to the destruction of the economy. This has been the case repeatedly throughout history, and it's the case here, too.

While I don't agree with the "literally stealing" hyperbole, I totally agree with this. In fact, that's the point. We don't want people saving. We want them investing. The more people put cash in their mattresses, the less money is moving around to employ people. This isn't merely printing more money to pay off loans at an artificially discounted rate; it's encouragement to put your money elsewhere.

Would you buy an investment from me that you plan to hold on to for three years if the only thing I told you about it was that it's gone up 33.3% in the last year? No -- you're a smart guy, so you'd want to know the long-term performance, and if you look at gas prices -- and I even gave you a link to the chart so you could look yourself -- you see that they were even higher than they are now in mid-2008, then they tanked (ha!) all the way down to $1.61, before rising again over the next few years:



Choosing the nadir of that wild swing as your starting point for the price of a commodity that's known to be far more volatile than others is a flat-out masterpiece of cherrypicking, but even with that cherrypicking, you're wrong. Let's look at the 36-month chart:




The price of gas on October 25, 2008 was in the $2.60 range. It's $3.46 today. That's... a 33% increase over 3 years -- or nearly the same growth rate over 3 years as over the past year -- in other words, there was no growth at all in the two years prior.

It looks like you're trying to get away with the same sleight-of-hand with the dairy prices. I don't have those handy, but simply taking the one year price increase and extending it back 2 years is just plain wrong.

This is infuriating. I know you're smarter than this, but the reality of the situation belies the point you're trying to make, so you play dumb and suggest you can simply take a one year growth rate and extend it back three years.



Everyone knows what historical inflation rates look like, and everyone knows that the Fed targets an inflation rate in the low single digits -- it's not officially written anywhere, but it's well-understood by those who plan their investment strategies. If you're putting money in a non interest-bearing account and expecting it to keep up with an inflation number that anyone can look up at any time, you're a sucker.

By and large, governments have controlled the money in the manner you're referring to (via a central monetary policy) only since the late 19th century. There are a few that predate that. The Sveriges Riksbank and the Bank of England, generally considered the first central monetary regulators in modern history, were established in 1668 and 1697, respectively. As far as I know, they're still running just fine. There was a serious period of hyperinflation in at least one period in medieval China that would tend to meet your expectations. I can't really come up with many central banks that have failed, but I'm totally willing to be wrong. I searched for that, but the only failures of well-established central banks I found were the ones of the former Central Power banks in the Interbellum, and there were significant external factors involved there.

Anyway, what I'm getting at is: can you show me some documentation of economic destruction as a result of central planning? Because I can't seem to find any.

I probably should have said "to the detriment of the economy". I would argue that what we're seeing with the sovereign debt crisis in Europe or the runaway government spending in the US are examples of that. Certainly the Weimar Republic and Zimbabwe are examples. The total economic collapse of the Soviet Union is another example of failed central planning. North Korea vs. South Korea? Central planning is bigger than simply fiat money, but fiat money is a boon to central planners, and possibly a prerequisite. I probably didn't articulate my point very well.

It is certainly true, however, that governments with control of the money supply can spend as much as they want on whatever they want (up to currency collapse), and this is not possible with a commodity-backed currency. The great thing about a hard currency, whether gold or otherwise, is that it's beyond the reach of greedy politicians.

Would the collapse of the Soviet Union in 1991 qualify?

tanstaafl.

I guess I'm not going to get an answer on where evidence of this mythical runaway 50% inflation is, but I came across an interesting post today that lays out a moral case for a non-zero level of inflation to respond to recessions and depressions, a case that seems in tune with (or at least not entirely incompatible with) elements of Austrian economic theory.

The post itself is a bit heavy in Econ speak, but there's one section that really jumped out and reminded me of our discussion here about the perils of inflation, bailouts, etc.



The portion I highlighted gets to the heart of the matter, which is that just as foolish borrowers get in over their head, lenders don't have a perfect record either, and it's only the lender in a loan transaction who's required to be trained in matters of finance and to recognize credit risks. Lenders ought to do their job, and if they don't, they ought to absorb a good portion of the financial penalty that comes from not doing their job. Inflation ends up being a convenient way to do this.

Oh, and by the way, the retaining wall and walkway turned out pretty nice:

I give up on providing you with evidence. You don't want to accept commodity prices as evidence, though probably nothing is a better measure of inflation than the price of silver, gold, and currency exchange vs. the Swiss Franc (less so know as they are mistakenly devaluing that). All these are hugely up in price since the bailouts began. It's fine with me if you don't believe that inflation is happening. You asked a question about mortgages and financing, and I thought you might find this hedge strategy interesting.



This "justification" is basically saying that when the banks lower their lending standards too far, thus assuming too much risk, we should bail them out by devaluing the currency rather than letting them go out of business as they should. Of course, when things go well, we'll let the banks keep all the profits. Its another way of socializing losses and privatizing gains, which is the exact kind of corruption we have today. Calling it "moral" is appalling.

Inflation steals from people who have saved by reducing the value of their savings. I don't think an Austrian-school economist would find this acceptable, nor would a libertarian find it moral. In fact, I think they would argue that this kind of thinking is exactly the problem with fiat currency. It allows the government to preferentially protect some market participants (banks) at the expense of the others (savers).

Very nice!

Wait, didn't we both agree earlier in the thread that inflation is happening, and that the Fed is deliberately pursuing it? I've acknowledged from the very beginning of the thread that we are in an inflationary period, so much so that I agree with your statement that leveraging my house is a wise financial play. So why are you now suggesting that I don't believe it exists?

I really feel like you're not being straight with me in this discussion if we can't even agree on what we've already agreed on!



Why are those items better than measuring the things people actually need to buy in order to live? American families don't eat, live in, or drive to work in gold, silver, or Swiss francs. Looking at the dollar relative to those commodities is certainly a fair way of judging which of those two certain segments of the market think is a better thing to hold on to at any given time, but their prices are not measures of what it actually costs to live in the country, because they aren't goods that people use or need in any appreciable way. If you pick a few items out of a basket of millions of things people can buy, you're not measuring the price of anything other than those few items.

If you define inflation as "increasing the money supply" or "debasing the currency," then you can pretty much call anything we've done since we went off gold "inflation", in which case we just can't have a meaningful conversation, because you're using your own definition of the term, not the one economists use. If, however, we try to talk about it in rising prices as we've been doing here, we really do need to be precise about what prices we're measuring, and you showed a remarkable lack of precision in your numbers above, and seem to be latching on to items that we all know have skyrocketed in value against the dollar, while leaving out much more important things that have stayed much flatter.

Peanut butter prices just spiked like 30% because it was a bad peanut harvest. Do we say we're headed for 30% inflation? No, of course not. You need to look at things in aggregate, and when you do (whether it's the CPI number you claim is misleading, or the MIT index which looks at the price of nearly everything) you see somewhere between 2-4% for this year. In good times, that would be unacceptable, and a drag on our economy. Right now, it's the only thing that's keeping some people at work, feeding their families, and participating in our economy.



No, that's not what the author was saying at all. Read the last paragraph I quoted, which states that nothing about the fed targeting a nominal GDP number (which will implicitly target a moderate inflation number during economic downturns) prevents us from liquidating bad lenders when necessary. He elaborates on this in the following paragraphs, which I didn't quote above:



The argument being made is that having the Fed as the lender of last resort makes it an excellent check on the power of large banks, who can no longer claim that they're too big to fail. I wouldn't expect someone who fears government control of money the way you do to agree with the wisdom of this, but it certainly makes economic sense that once individual borrowers and businesses have somewhere else to go for emergency credit if their bank goes under, the moral case for bailing out those bad banks is significantly weaker, and we can limit the losses mostly to just the bank that goes into default or bankruptcy.



There might be a grain of truth to this statement if banks just kept peoples' money in vaults, but they also lend it out so that the money can do something productive in the economy, and inflation has a positive effect on one side of that transaction that you completely ignore when you focus exclusively on savings accounts. Simply saying the ones who make bad loans should fail doesn't address the problem of what happens when the losses cause a systemic shock to the economy. Given that we're not ever going back to gold or abandoning fractional-reserve banking, we need tools to deal with these things when they happen, and inflation is one such tool to balance the distribution of losses between creditors and debtors.

Inflation makes "saving", in the sense of stuffing your money under your mattress, less appealing than "saving" a.k.a. "investing" by putting your money into other enterprises in the hope of an above-zero return. The former removes value from the economy, and the latter adds value, so incentivising it that way round is a Good Thing.

Notice that inflation does not "steal" any value from savings that are not money: property, for instance, or art. It encourages the ownership, and thus production, of things that are real things, and not things that are just money. How is the opposite of this desirable?

Peter

Until the loss of purchasing power of the money (aka: inflation) is greater than the appreciation of real value of the property...

For lack of a better metric, I define real value as "How many hours of work did/does it take to obtain the property."

tanstaafl.

Unfortunately, that leads to a divide by zero error in the case of Paris Hiltons and Donald Trumps who (a) inherit their property or (b) gain property through investment income. Unless the number of people in the economy who gain income primarily through wages remains constant, your metric is flawed. "Real" versus "nominal" simply means "with or without inflation adjustments." We can bicker over exactly how those adjustments are measured and applied, but simply trying to boil things down to how many hours of work the average person has to work in order to buy something ignores the realities of our economy.

The opposite is less desirable for people who have insufficient funds to bury their money in property.

It's also less desirable for people who are retired from the workforce and trying to live from their savings, which must be kept in a more liquid form than property. Their savings must be kept as low-risk as possible for the short-term, since they aren't likely to be around long enough for the "long-term" to even things out.

Other than that, I agree.

Cheers

But the "real value", thus defined, isn't affected by the work:money ratio or the house:money ratio, as long as they change in sync. So your "until" isn't really the case. As long as "the appreciation of the real value of the property" isn't a negative number, inflation isn't "stealing" any of the property's value.

If what you're saying is that you have a mixed portfolio, with some of your savings in property and some in money, then yes of course, as in any portfolio, the losses on your poor long-term investment (money) can outweigh the gains on your good long-term investment (property). Like I said, the reason that (a small amount of) inflation acts to increase prosperity and productivity, is that it makes money look like a poor long-term investment.

Peter

Those are excellent points, both of which speak to (a) the fact that we ought not to have any inflation during the good times when it's a drag on the economy, and (b) why we ought to have a strong safety net to help the poor (who can't afford to invest money) and the elderly (who live on a fixed income.)

Generally, they don't, at least not in the short term. Wages are inherently sticky, so it's quite possible for the real value of investments to freeze or decline relative to one's salary during an inflationary period. They'll eventually catch up, but not necessarily when any given person will need to cash out. This, again, is a reason why we don't pursue inflation for inflation's sake -- it's not a universally good thing.