arizonaroseFebruary 14, 2009

Do you think the stimulus package will create inflation? I heard someone ( can't remember who it was on Fox ) talking yesterday and he said he thought all the money the government is pumping into the economy will cause an abundance of money and a lack of goods. I'm not sure I understand this. Do you think it will cause the interest rates on CD's to rise?

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I'm not sure I understand what the Faux News guy was talking about, either.

As I understand it, the current mess was caused by an abundance of money -- people at financial firms, who thought they were being clever, sliced and diced all kinds of (questionable) debt into mortgage-backed "securities" which threw off all kinds of money for holders of those funds -- until reality struck. There was no lack of goods, either. Many Americans were content to play along, living beyond their means in houses they could not afford and buying stuff on credit lines they could not/did not pay down.

So now we're going to spend more than a trillion dollars (if you count the stimulus package and what already has been spent on TARP).

There is almost no money in the stimulus plan to help keep people in their homes (not that I'm keen on rewarding bad behavior, but people have to live somewhere and occupied houses are better for neighborhoods), so the problem of foreclosures and loans based on devalued assets will continue.

There is almost no money geared toward restructuring an economy so heavily based on consumer spending that we're darned if we do and darned if we don't. Companies are hurting because consumers are not buying, but, at the same time, we've long bemoaned that many (most?) Americans are living on money they don't have in credit cards and negative savings rates. What in this plan changes the economic need to get people to buy more stuff?

The plan does not address the whole sick notion of private profit and socialized loss. The guys on Wall Street who were only to happy last year to haul home their seven-figure compensation packages "because their business acumen and stature demand it" still will accept that compensation despite having to beg for money in Washington and screwing up the retirements and careers of millions of people. As taxpayers, we're buying AIG's resort trips and Citi's $40,000 chairs, and we don't get to visit the resort or sit in the chairs.

Too much of the stimulus package is given to tax cuts, which, history has taught us, just. don't. work. Eight years of Bushonomics (and eight years of Reaganomics) all dreaming that showering the folks at the top with money would cause them to shower those on the lower rungs with money. Hasn't worked yet. Why is now different?

All told, we'll saddle the next few generations of us paying off a trillion dollars which will line a few already-well-padded pockets, maybe put some people to work temporarily, and give folks a few hundred bucks in the hopes they'll buy something (probably made outside the U.S.) but more likely will be banked against credit charges or spent on the necessities of life now that they're laid off.

Nope, I don't see inflation as any part of that. Sorry.

    Bookmark   February 14, 2009 at 6:18PM
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I've heard people who know alot more about economics than I do suggest this may happen. Stimulus creates a bolus of demand that can not be met because companies have cut back so dramtically. Demand suddenly far exceeds supply - that causes inflation - basic laws of supply and demand. At least that's how my simple mind understood what I heard.

    Bookmark   February 14, 2009 at 6:26PM
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Possibly huge inflation will be the only way to pay for all this.

Make the dollar cheaper, the debt is relatively less.

    Bookmark   February 15, 2009 at 12:04AM
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What I am really curious about is...don't CD rates rise during inflation? My dad said back in the 80's ( during Carter's admin. I guess ) there was huge inflation, and CD rates were in the teens. That's why I connected the inflation with the higher yeild.

I guess nobody knows for sure when rates on CD's will rise or fall. If they did they'd all save up and buy CD's..right?

    Bookmark   February 15, 2009 at 9:49AM
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Even with an infusion of cash, banks are still hoarding. The average citizen is likely hoarding cash as well so there doesn't seem to be much demand or bank competition for the CD dollars right now.

The markets have been running on fear and greed for a long time, that doesn't turn around on a dime. I've run across a few lines here and there from a few economic types willing to stick their necks out predicting we might see some movement in the second quarter - and that's not all that far in the distance. It all remains to be seen - including a rise on confidence levels. To me, stemming the job loss and getting people back to work is the crux of the situation. Failing that there will be no spending and no restructuring of mortgages that can't be kept up with at any interest rate or level of debt forgiveness.

CD's, like Treasuries, protect your principal - in an uncertain market a small return seems a fair price to pay for not losing big.

    Bookmark   February 15, 2009 at 12:35PM
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We presently have a risk of the reverse of inflation -- deflation. If that spirals out of control, i.e., if prices decline uncontrollably, the recession will just keep getting worse. That is PRESENTLY the thing to worry about, because that could cause the whole economy to go to "dead slow" with less and less demand for goods and services, and the prices of things falling below the cost of making them.

The danger of inflation caused by the stimulus package is real, but some time later, years from now. And the Fed can control that by raising interest rates once the economy stabilizes and the volume of demand starts to come close the the volume of supply. We are no where near that scenario right now.

The immediate worry is the volume of unknown "toxic" assets. Nobody know how much or where they are or, if they know, they aren't telling. The banking system is in a very, very shaky position. Many large ones are close to failing and may yet fail. We still have some more bad surprises. In other words, things could get worse before they improve.

    Bookmark   February 15, 2009 at 9:42PM
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Prior to a trip to the U.S. last month, I bought U.S. 400 Dollars at a Canadian bank, some 50s and a number of 20s and 10s. Not one used bill among them, and many were sequentially numbered.

A few days later, repeated the same story, same bank, same branch - again, not one used bill.

The U.S. is printing money, hand over fist. Probably our guys are, as well.

When there was One Dollar looking for a loaf of bread last month, and now there are Two Dollars looking for it - prices usually go up.

But if quite a few are not earning much ... maybe not as much as one would expect.

When our big shots go to foreign lenders, cap in hand, wanting to borrow more money, they're going to have to offer enticements in order to pry the money loose: who wants to lend money to a borrower who's deflating the value of each dollar by printing so many more ...

... further, how's he going to be able to pay off the loan in future (let alone paying in cheap dollars)???

Interest rates will be rising.

Twenty-five years ago, when I began my career as a personal financial advisor, selling mutual funds (which I did for a year or so) some folks, mainly seniors, gleefully recounted how they'd earned 19% on Canada Savings Bonds, a couple of years earlier.

They pooh-poohed my claim that they'd netted only a couple or three thousand on a hundred thousand invested (using simple figures).

Firstly, though they liked the number going into their bank book, the game didn't end there.

The income tax people have a question annually ... "How much did you make?".

Followed by a statement ... "We want part of it!".

Wages, the resultant pension ... and interest income ... are taxed at top rate.

Income tax at 25% shrank that 19% to 14.25%.

Dividends paid by local corporations were taxed at a much lower rate ... and it was recently lowered even farther ... and capital gains are taxed at half regular rate ... and not until the asset is sold. If you can't avoid paying tax - defer it.

Secondly, did those folks know what the rate of inflation was in those days?

Few did - it was 12%. When you invest in situations where the number of dollars of principal can't shrink ... that number can't grow, either. But inflation means that each dollar buys less next year - when the number of dollars of the underlying asset can't grow ... the value shrinks every year due to inflation.

Taking the 12% of inflation from the possibly 14.25% leaves about 2.25%.

Furthermore - as interest rates rise, the amount that people are willing to pay for a bond issued earlier that's paying about half of current rates goes down pretty heavily - especialy on long maturities.

Not my idea of the way that I want most of my money to work.

Most of the time.

I've been playing this game for about 50 years - and I'm not smart enough to know when to shift.

My sister's 80th birthday gift was a button to wear on my jacket, "I survived damn near everything!"! We all got a good laugh out of that one (as we did about my daughter's gift, a baseball cap bearing the statement, "Don't forget my senior discount!"!! We all got an even bigger laugh out of that one.

(When I do it, it's "frugal" - when you do it, it's "cheap!", right??!!).

ole joyful

    Bookmark   February 15, 2009 at 10:45PM
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joyfulguy , thanks for taking the time to explain things so thoroughly. I don't post in this forum often, but I enjoy reading your posts.

You said "Interest rates will be rising" Are you talking about CD rates?

I understand the more you make the more they take, but it's still better than not making it at all., don't you think?

Also, i remember your post about being in Arizona for your Birthday. Hope you enjoyed your stay, and had a *Happy Birthday*!

    Bookmark   February 16, 2009 at 7:37AM
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I'm not entirely sure of ole joyfull's predictions about reluctance of foreign countries to lend to us. The reason -- the whole world is in a Recession (Depression). In other words, we're all in this together. It is understood that the US economy is still the BIG engine that drives the world economy. so it's in everybody's interest to help us get back on our feet.

China? We can't buy their stuff until our economy turns around. So you better believe they'll continue buying our paper. Maybe not as much as before, but enough to make a positive difference in our (and their) economy.

Of course, that won't happen any time soon. First we've got to get the banks to come clean on their malfeasance, close or nationalize a few of them, and open new ones that everyone can have confidence in. And the bankers responsible for the debacle should be identified and their names widely publicized. Some people want them to go to jail. I think that's too good for them. I would like to see them subjected to the humiliation of abject poverty that they are responsible for putting many Americans through. They are, in my opinion, no different from Madoff.

Will the Fed really fix the banks? They are so far trying very hard not to. In this connection, somebody quoted Winston Churchill who said, "Americans can always be counted on to do the right thing, after they've tried everything else." So far, Obama and his team have been too middle of the road. they need to make a clean sweep and not worry so much whose feathers they ruffle.

Ole joyful is right about inflation, but it's probably not a real worry right now. The bigger immediate worry is sustained deflation, which would cause the economy to slow even further than it is now. So let's worry about inflation later.

    Bookmark   February 16, 2009 at 11:54AM
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Deflation is more of a near term concern and rates will stay low for the next 1-2 yrs IMO. After that, because monetary policy has been loosened steadily in the recent past and because the Fed is doing what it has to to support the financial services industry, I would suspect that inflation and interest rates will have a tendency to rise, say in later 2010/2011. But then, if Obama does what he says he's going to do and reviews/cuts entitlement programs, the work on cleaning up spending will have the effect of lowering interest rates, strengthening the dollar and keeping inflation down.

Don't hang your hat on seeing the kind of interest rates, double digit, that were around in the 1980's. I don't think that'll happen again in my lifetime. I'm 53 now.

    Bookmark   February 16, 2009 at 12:40PM
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I agree with kce01, in so far as it is possible to forecast interest rate changes.

    Bookmark   February 16, 2009 at 1:15PM
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>>It is understood that the US economy is still the BIG engine that drives the world economy. so it's in everybody's interest to help us get back on our feet. Agreed, and in fact, Treasury Secty Geithner got criticized at the G-7 by a foreign leader for "the US passing a bill that was not bold enough (e.g., too small)."

All the furor and angst domestically tends to obscure what experienced analysts are seeing: it is worse in Europe and Asia, and no other country has the depth and breadth of the US economy. The EU is beginning to break down into divisive, nasty sniping; Japan's economy has halted; China is facing increasing ecologic disasters even as it spends its surplus frantically to restart its economy (check the Feb 6th story in the NYTimes on how one of its badly needed dams may have caused the death of 80,000 people in Sichuan's earthquake last year).

Government spending is not to stimulate consumer spending, attractive as that fallacious sound bite is. It's to keep the economy moving by getting private industry money involved, which in turn gradually filters out into reassuring the consumer (through actual jobs) that the end of the world didn't happen this time, either, so it's okay to take some of that $7.8 trillion out of cash and go eat dinner at Olive Garden again.

It is a stopgap measure. Will it work? Who knows? But doing nothing certainly wasn't working, either.

One extremely good aspect of the bill that was passed was mentioned yesterday by NYTimes op-ed columnist Nicholas D. Kristof, titled "Our Greatest National Shame" (Education):

"That makes the new fiscal stimulus package a landmark, for it takes a few wobbly steps toward reform and allocates more than $100 billion toward education. Thats a hefty sum  by comparison, the Education DepartmentÂs entire discretionary budget for the year was $59 billion  and it will save AmericaÂs schools from the catastrophe that they were facing. A University of Washington study had calculated that the recession would lead to cuts of 574,000 school jobs without a stimulus."

Don't forget that one of the reasons economists were so worried, pre-subprime crash, about inflation, is that the US was (and is) running off the balance sheet for its Iraq and Afghanistan wars, now going into the sixth year and not likely to be easily throttled down anytime soon. Total cost to date is estimated at $600 billion. Expenses per week have been increasing over the last two years due to heavy infrastructure spending in both countries to support a sustained permanent presence. They are now estimated at $2 billion/weekly, twice as much as when we originally entered Iraq.

Figures do not include veterans' benefits or healthcare needs when they return to civilian life.

    Bookmark   February 16, 2009 at 4:27PM
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Cindy Noll

Of course there will be inflation. Alan Greenspan started the ball rolling on this whole thing by making rates too low & keeping them there too long. Then we had the "faux boom" after 2003 when we all lived on debt and inflation climbed, partly because of oil. Now Bernanke is trying to revive a dead economy by lowering interest rates too low (wasn't that the problem in the first place?). The stimulus is only part of what will cause inflation, our government's stupid policy of printing money will bite us in the end. As far as CD rates, yes the people with money in the 1980s made out real well, but GW Bush probably ended that also. Keep in mind prior to 2003 most savings accounts were fixed at about 5.25% for my entire 52 years. Now banks have to pay you nothing and even though their CC rates are through the roof, savings rates keep dropping. So while I was paying 11% on a private mortgage, others with cash were making out well. I foresee rates on mortgages going up, but the savings rate going up not as much. It's capitalism after all and you cannot regulate it! Nobody with cash complained over the last 6 years about low rates, so they never will. The government wants you to put your money into the "smoke and mirrors" stock market to make others rich, they don't want you saving in a bank account.JMHO

    Bookmark   February 18, 2009 at 8:26AM
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springer, I take very strong exception to your last sentence. The investors of the world wanted their money in the stock market to make themselves rich over the last number of years. And by investors, I mean pension funds, people who receive pensions, insurance companies, people who want lower insurance premiums, mutual funds, other investments and both the individual and corporate investors who had money in all of these. Greed was evident across the board.

If one doesn't run a balance on a credit card, who cares what the rate is? It can be 20% but if you don't have a balance, so what? I sure hope you weren't paying 11% on a mortgage any time in the last 20 or so years...rates weren't anywhere near that high since the late 80s.

I think this country is in the very beginning stages of a long overdue shift of learning the true value of a $. And it's going to be an ugly lesson for alot of people.

    Bookmark   February 18, 2009 at 9:24AM
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All this talk about shifting the learning of the true value of a $ ? What does that mean. I invested in my first 40lK in 1965. I was 18 years old! I helped my husband through college after he got out of the army during Viet Nam. We worked, we saved we invested in 401k's and IRA's to the max every year we could! This was the year we were going to start using some of that money (after seeing it disappear and recover at least twice) only to see it disappear again in the last year. We will never be able to use our money, I know that, now. We've seen 100's of thousands just go down the toilet because of others' greed and mismanagement.
What did we do wrong? Trusting in our Government's plan for us?
Explain to me the ugly lesson I need to know about the true value of the dollar and where we went wrong in trying to prepare for our future!
If you are not at retirement age, you will probably be able to recover and see your way through this mess. We will not.

    Bookmark   February 20, 2009 at 11:18PM
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I'd suggest that a large number of people under the age of 35ish will be learning the true value of a $ and they will have to learn the difference between a want/need.

    Bookmark   February 21, 2009 at 6:28AM
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We've seen 100's of thousands just go down the toilet because of others' greed and mismanagement.
What did we do wrong? Trusting in our Government's plan for us?
Explain to me the ugly lesson I need to know about the true value of the dollar and where we went wrong in trying to prepare for our future!

To be fair, I think you have to except some of the responsiblilty for your loses. I've never seen any financial advisor or goverment advice suggesting you should have more than ~20% of your assets in stocks two years before your expected retirement. The closest thing to a goverment recommendation of asset distrubition is probably the TSP lifecycle funds. If you had your money in the 2010 fund you'd lost 10% last year (linked). Chasing higher and risker returns is not limited to those under 35 and bankers, we all have some personal greed. You even commented you seen your money disappear and recover twice in past cycles. Fool me once shame on you, fool me twice shame me, fool me three times....?

    Bookmark   February 21, 2009 at 9:18AM
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annie: "I invested in my first 40lK in 1965. I was 18 years old!"

I'm not sure what you invested in in 1965, but it wasn't a 401(k). The first 401(k)s were created in 1980. Even IRA's didn't exist in 1965. They started in 1974 I believe, although you couldn't contribute to one if you were covered by a pension plan. I remember first being able to contribute to an IRA in 1982 when the law was changed to allow workers covered by pension plans to also open IRAs.

    Bookmark   February 21, 2009 at 10:42PM
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Check again. I got my first job in 1965 with a fortune 500 corporation. Very soon afterwards the company matched contributions at 3% ,Maybe it was 1966 but it was most certainly not 1980. I am well aware that the IRA did not exist until much later. My point was to show that we tried to do what seemed right at the time that these "options" became available to us to provide for ourselves for our retirement years.

    Bookmark   February 22, 2009 at 6:32PM
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What are we arguing about here! Excuse me, people, I was talking about trying to provide for our own future, taking advantage of "opportunities" provided by our government to work, save and invest for our retirement years, and to use our own invested funds at a "lower income tax rate" when we were at retirement age.
Now it seems we have to help bail out every gumba that bought a $600,000 house, with no money down and virtually no annual income. I have every sympathy for the family that has lost their income through job loss or medical or other unexpected problems. But I have a huge problem with those that promoted their own financial gain at the expense of others.

    Bookmark   February 22, 2009 at 7:11PM
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tishtoshnm Zone 6/NM

Annie, Gumbas with $600,000 houses will not be helped by the mortgage "bailout" as it is limited to loans within the conforming limit. Furthermore, those who are being bailed out will still have to pay their bills and those who lied on their loan applications about income will also have no help from the government as well.

    Bookmark   February 22, 2009 at 9:05PM
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We may not be "bailing them out", but they are a part of, and I mean only "a part", of what has contributed to this financial problem for the rest of us! I don't care that those people are not helped by the financial stimulus; those people are part of the problem and have caused the need for the so called "financial stimulus." that is causing the downward spiral of our economy. Would that group of people be there to help baby boomers with their financial plight!? Apparently not. We sought to help ourselves. Now we have to help those that thought it should have been handed to them!

    Bookmark   February 22, 2009 at 9:50PM
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In the mid-20th century, most middle class people retired on a company pension plus soc sec and lived happily ever after without much of a worry about the stock market because the managers of their pension fund assumed all the risk. They just collected their pensions. Sure, they were on fixed income which loses purchasing power after a while, but the retirees typically died before inflation eroded their pensions to the point they could not live off them, or their families would step in to help.

THEN, starting around the latter half of the 20th century, there was a gradual shift toward making the retiree assume more and more of the risk in the stock market. Defined benefit pension plans are being phased out in favor of 401K plans - so YOU have to manage the thing, and if you get it wrong, YOU suffer the consequences. These gradual but sweeping changes took place for several reasons -- (1) we're living longer, which is mostly good but can be bad; (2) the baby boomer generation -- a lot more retirees; (3) a shift in political-economic philosophy in the past 25-30 years toward the Right, which emphasizes low, low taxes and individual responsibility, and plays down the responsibility of employers for its employees. Witness Labor's loss of political clout in recent decades, the tremendous wave of Outsourcing, and related trends. Fewer and fewer people work for the same company all or most of their working lives.

It is quite possible that the trends of the past few decades have reached their maximum and we may be on the cusp of a shift back to placing priority on the public interest first, instead of the public interest benefiting only from the corporate trickle down. We shall see.

    Bookmark   February 24, 2009 at 9:53AM
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quoted from
Rules and regulations for 401(k) plans are established by the US tax code. In fact, a 401(k) plan takes its name from the section of the Internal Revenue Code of 1978 that created them.

Quoted from Wikipedia:
In 1978, Congress amended the Internal Revenue Code by adding section 401(k), whereby employees are not taxed on income they choose to receive as deferred compensation rather than direct compensation. The law went into effect on January 1, 1980 ...

    Bookmark   February 24, 2009 at 5:17PM
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