Thursday, February 28, 2008

Inflation is Your (Ben's) Friend

by Bill McBride on 2/28/2008 12:31:00 AM

Here is partial excerpt from a great Saturday Night Live piece in the late '70s, with Dan Aykroyd impersonating Jimmy Carter:

Inflation is our friend.

For example, consider this: in the year 2000, if current trends continue, the average blue-collar annual wage in this country will be $568,000. Think what this inflated world of the future will mean - most Americans will be millionaires. Everyone will feel like a bigshot. Wouldn't you like to own a $4,000 suit, and smoke a $75 cigar, drive a $600,000 car? I know I would! But what about people on fixed incomes? They have always been the true victims of inflation. That's why I will present to Congress the "Inflation Maintenance Program", whereby the U.S. Treasury will make up any inflation-caused losses to direct tax rebates to the public in cash. Then you may say, "Won't that cost a lot of money? Won't that increase the deficit?" Sure it will! But so what? We'll just print more money! We have the papers, we have the mints.

Case-Shiller Nominal and Real Click on graph for larger image.

And here is a graph of the Case-Shiller index in both nominal terms and real terms (adjusted using CPI less shelter).

In nominal terms, the index is off 8.9% over the last year, and 10.2% from the peak.

However, in real terms, the index has declined 12.9% during the last year, and is off 14.6% from the peak.

Inflation is helping significantly in lowering real house prices. If prices will eventually fall 30% in nominal terms, then we are only about 1/3 of the way there. But if the eventual decline is 30% in real terms, then we are about half way there.

Wouldn't you like to own a million dollar home? With 4% inflation per year, many people will.