A Patriots Manifest July 10 2008
By; William White
In a thread on another forum dealing with inflation it became clear that the simple explanations from the 70s of why inflation doesn’t work had been forgotten. So here are some reminders for when you run into someone who believes in the Philip’s curve: that jacking up prices so everybody needs a second job is a good idea.
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Inventory. Rather than be sadistic and go into details I will just say ever more sophisticated inventory accounting is needed as inflation distorts inventory values. If first in first out is used in accounting then 10 widgets model 1.3 $200 ea. at the start of the year and 10 widgets model 1.3 $400 ea. at the end of the year =$4,000 in taxable income even though no non-inflationary income has happened. Getting rid of that tax on ghost income runs up accounting costs. Weighted average cost inventory reduces inflationary distortion best but is also the highest cost solution and it is a material expense in its own right for large selection inventories.
Customer service: refund, restocking, return and warranty ( r) costs are costs and r is the slang term I learned. Taking the above widget example the $200 ea. Original inventory will sell for about $600 in order to obtain the same aftertax, after r costs, after inflation income as $300 sell price at stable costs.
Wages. Without indexing, taxation on ghost inflationary income (cola=Cost Of Living Adjustments). Cola income has no real benefit except to borrowers.
Debt. In the 70s it was possible to find idiots who would lend money without inflation adjustment that is why ARM mortgages, Credit card fees for breathing and so on have become so common. Once the lenders found out that they were being screwed they took corrective action. In case you get called on this the formula is: desired rate of return/1-tax rate/(1/1+ expected inflation rate)/1- expected default rate = interest rate charged (includes fee income). As inflation continues that formula expands, which is the why for all of those “Give me your first-born child” fine print clauses in loan agreements.
One of the main reasons for European decadence and Latin America ineffectiveness is inflation, much higher inflation rates than that ever seen in America. The interest rate charged is a function of inflation and interest rate charged has a strange effect on psychology. 1/interest rate charged is the economic time horizon or to be technical Duration (D) or the weighted average of discounted returns. At 1% D= 100 years; at 2% 50 years; 3% 33.3 years; 4% 25 years and so on. The longer inflation runs the more behavior conforms to expected results of calculating D because punishment for too long of a time horizon becomes more automatic. The increased death rate and birthrate deficit caused by inflationary collapse usually exceeds that of deflationary downturns. For example the 1860s greenback inflation was followed in less than 40 years by 3 of the 4 presidential deaths due to assassination in American history. The coups of 1783, the Confederation, and 1789, the current republic, were the result of the hyperinflationary Continental dollar ruining the economy. Regardless of how you feel about the result 3 republics in 6 years is right on the border of political joke.
I hope you find this recap of arguments helpful.
Customer service: refund, restocking, return and warranty ( r) costs are costs and r is the slang term I learned. Taking the above widget example the $200 ea. Original inventory will sell for about $600 in order to obtain the same aftertax, after r costs, after inflation income as $300 sell price at stable costs.
Wages. Without indexing, taxation on ghost inflationary income (cola=Cost Of Living Adjustments). Cola income has no real benefit except to borrowers.
Debt. In the 70s it was possible to find idiots who would lend money without inflation adjustment that is why ARM mortgages, Credit card fees for breathing and so on have become so common. Once the lenders found out that they were being screwed they took corrective action. In case you get called on this the formula is: desired rate of return/1-tax rate/(1/1+ expected inflation rate)/1- expected default rate = interest rate charged (includes fee income). As inflation continues that formula expands, which is the why for all of those “Give me your first-born child” fine print clauses in loan agreements.
One of the main reasons for European decadence and Latin America ineffectiveness is inflation, much higher inflation rates than that ever seen in America. The interest rate charged is a function of inflation and interest rate charged has a strange effect on psychology. 1/interest rate charged is the economic time horizon or to be technical Duration (D) or the weighted average of discounted returns. At 1% D= 100 years; at 2% 50 years; 3% 33.3 years; 4% 25 years and so on. The longer inflation runs the more behavior conforms to expected results of calculating D because punishment for too long of a time horizon becomes more automatic. The increased death rate and birthrate deficit caused by inflationary collapse usually exceeds that of deflationary downturns. For example the 1860s greenback inflation was followed in less than 40 years by 3 of the 4 presidential deaths due to assassination in American history. The coups of 1783, the Confederation, and 1789, the current republic, were the result of the hyperinflationary Continental dollar ruining the economy. Regardless of how you feel about the result 3 republics in 6 years is right on the border of political joke.
I hope you find this recap of arguments helpful.
The views expressed by William White are his and his alone and may not be the views expressed by A Patriots Manifest. Thank you .... Michael Roller...