What is Your Position on Inflation?
If you read Monday’s post about the movie, In Time, you know that it is a futuristic thriller about time as the ultimate currency. I won’t recap the post from two days ago, but instead want to highlight one of the scenes from the movie. After Will and Sylvia had escaped the wealthy time zone and were running from place to place in the ghetto of Dayton, Will becomes discouraged. They had been robbing banks and handing out the time (money) to the poor. Will of course realizes that ultimately their efforts are futile. He tells Sylvia that the rich would simply raise the prices of everything and the cost of living would increase. I immediately thought to myself, “BINGO, dude!” That is inflation! Which brings me to today’s question and discussion–
What is Your Position on Inflation?
Now I am not talking about a political or philosophical stance on inflation. I am talking about how you will be able to respond to an increase in the cost of living. Are you in a hopeless position like the residents of the ghetto? Or are you in a position to raise the cost of living of another person and profit from inflation? Or are you somewhere in between? And perhaps most importantly, which direction are you going?
Darwinian Capitalism
It doesn’t matter what social or economic model you most favor. The reality is that there have been and will always be different social and class structures regardless. Look at Libya, the former Soviet Union, the Roman Empire, Japan, the United States. It doesn’t matter. There will always be owners and renters, borrowers and lenders.
Even if you took all of the world’s wealth and split it up precisely evenly among all the world’s 7 billion inhabitants, by the next morning, there would be differences again. Some might want to spend some of their money to get a particular food that they like. Others might want to move closer to the mountains or the beach and be willing to pay extra to live there. Others might be a buyer or seller of the second oldest profession and so services would have been exchanged for money. The bottom line is that human nature will always be about fulfilling desires and trading money or time or possessions to get that done.
Back to the Question at Hand
When the price of gasoline increases from $3.05 to $3.35 in an afternoon, do you cringe? Or do you own Exxon Mobil stock so as an owner you know that you benefit from higher prices? When I first saw that yesterday, my initial gut reaction was to cringe since I was so hoping that I would see gas below $3 per gallon this winter. But once I thought about it, I realized that this might in fact be neutralized by some of the investments in my retirement portfolio.
Do you own the shelter over your head? Or are you worried that your rent will go up forcing you to move? Do you own farmland or grow a garden? Or do food prices dictate what you eat? Can you change your own oil or fix your own sink? Or do you have to wonder how it is that a plumber can charge so much?
So think about it! What is your position on inflation? Does the cost of living have you by the throat, or can you get the upper hand? Are you stuck in Dayton or moving toward New Greenwich? Feel free to share below.
Having a large vegetable garden insulates one from food swings, but only to a limited extent.
I should think that increases in gasoline prices do not necessarily mean higher stock prices or increased oil company prices.
101 Centavos recently posted..Comment on Centavos Dividend Portfolio: Uptrend Update by 101 Centavos
My position on inflation will result in a question, rather than a reply.
Can I ask you a question, in regards to some long term investments? I recently did some calculations and the results are very much frustrating, to be brutally honest. Have a look yourself – they are all published.
If you invest $ 40, 000 a year over 35 years, at modest inflation rate of 2% and administration fee of 1-2% you need stock market to perform at 4% just to preserve value of your money and higher to gain anything.
This means that you are only preserving money you are investing at a very high risk. So it is just plain wisdom – is there a point to be frugal and try to save, if you could end up loosing money?
Feeding financial industry and no living your life in full?
Financial Independence recently posted..November 2011 update – ($165,000, + $9,000 or +5,3%)
Well, you have to start somewhere. Other investments don’t even keep pace with inflation. Historically, stocks will return about 7% above the inflation rate. Why is that? Because they are businesses and business tend to grow especially the publicly traded ones. Furthermore, half of the historical return of stocks has been due to dividends. Dividends are from the profits of business. You want to own a profitable business that can raise prices. Of course, we are currently in a rough patch looking at the numbers, but dividend paying stocks have done rather well even over the past decade.
When gas or food prices increasee, itis not included in inflation because it is considered a commodity. The reality is it affects all of us and yes itis inflation. I would rather have a little inflation then the turmiol in the economy we have now. Inflation usually goes along with growth. I am referring to minimal inflation (a couple persentage points a year).
krantcents recently posted..Are You Ready to Be a Landlord?
Core inflation and the government numbers are a farce. What matters is what comes out of my pocket. I agree I would rather have some inflation and growth than malaise.
I don’t like T as a consumer, but I make sure I get a piece of their duopoly action by owning stocks!
I do cringe when I see rising gas prices, but then hedge it by owning stocks of those companies!
Inflation will raise its head. The question is how many will be prepared.
MoneyCone recently posted..A curious thing happened to my credit score when I took on some debt
That is the spirit! It is exactly what I am talking about.
A very good question. In Europe of course there has been inflation – quite a lot particularly in the eastern former Soviet empire.
If inflation comes then there are only two places to be – either very rich so it really doesn’t matter or poor but self-sufficient. Unfortunately most of us are somewhere in the middle.
Whichever way, you need to move any assets out of cash or banks into something much more secure. Hence the price of gold has hit a high and will probably go higher and desirable land has retained its value.
John@MoneyPrinciple recently posted..How much do you waste on food?
Well, I want to be gradually moving into an ownership position so I can benefit from higher prices.
I only buy what I need trying to decrease my exposure to inflation and also try to be as self-sufficient as possible.
World of Finance recently posted..Introduction to Investing
That is certainly one approach to minimizing the impact of inflation and a good one at that.
Great post and reminder to look for alternative forms of income. Need to also check out In Time. Interesting concept looking at time as money!
Buck Inspire recently posted..Two Weeks Notice
I think having alternative sources of income is wise.
I think you are on track, cash is really a depreciating asset, so holding it is not safe at all. Yes, the S&P 500 has been flat for 10 years, but it is not always going to be that way. As inflation rises cash will depreciate and asset values will rise, so best to be invested in stocks and commodities rather than bonds…
Neo recently posted..OMG, My Wife is Pregnant, Initiate Financial and Behavioral Overhaul
I agree that stocks and commodities are the place to be when inflation hits.
I think inflation sucks. It seems like you can never get caught up with savings because the value of each dollar in that account keeps changing. It is really frustrating and it seems like inflation is increasing at more rapid rates than it used to.
Miss T @ Prairie Eco-Thrifter recently posted..8 Ways to Stay Healthy During the Holidays
I think it is increasing more than we realize.
I cringe, I am afraid. Although, inflation doesn’t have to affect one’s quality of life this needs so much creativity and savvy that I am not sure whether I have it all.
Maria@moneyprinciple recently posted..How much do you waste on food?
Knowing what you are up against is half the battle. Next comes a strategy to deal with it.
I don’t like inflation, but it’s unavoidable.
I hedge by borrowing as much as I can from the bank to buy rental properties. If inflation hits hard, then mortgage payment will be easier AND I can raise the rent.
retirebyforty@retireby40.org recently posted..Sell Your Losers Before 2011 Ends
I think real estate is a good hedge against inflation. It tends to keep pace.
For some reason, I really don’t spend time thinking about inflation mainly because I do not have any control of it. I should be worried about it but I don’t think much about it.
UltimateSmartMoney recently posted..Practical Advice for Young Adults to Prepare for Better Life
Worrying is not good, but acting is.
Living rurally helps me avoid some of the worse parts of inflation. I would personally like to use inflation rates to automatically index in a lot of job payrates. I work for the Canadian federal government, and I think we should just put a large committee together and permanently decide how much a teacher, police officer etc is worth in the modern setting, and then simply index their salaries to inflation. Imagine the incredible savings we would see (of course numerous lawyers and union negotiators would lose out… I’m real torn up about that).
My University Money recently posted..The Black Market They Don’t Make Movies About
That would be an interesting solution to collective bargaining.
Since I am a Teacher I am used to no pay raises, none in the last 8 years unfortunately. I am pursuing other sources of income if I hope to keep pace with inflation.
Paul @ The Frugal Toad recently posted..Finance for Dummies – Credit Reports
I am not surprised that you haven’t seen any raises as a teacher. You have no choice but to pursue outside businesses that might have some pricing power.
I love love love inflation. I get at a minimum an wage increase based on inflation (by asking) I also, get to increase the price of my rental property rents.. Also, with more money coming in (because of inflation) and my debts remaining the same. I can pay them off faster. Inflation doesn’t bother me one bit
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It sounds like you are in a great place. I have rentals but can’t really increase the rent because of the supply on the market. But at least, one day, the property will be paid off.