The consumption party goes on
My
first conscious experience with inflation was when I was a kid and the
price of bulk candy, back then sold separately at R-Kioski so that you
tell the clerk what candies you want and she (for some reason, it was always
a she) counts them and puts them in the bag for you, suddenly overnight
doubled from 10 pennies to 20. Dang! I didn't like that development at
all. Ever since, I grew used to things gradually becoming more
expensive each year. For the generation that came before me, inflation
was actually a beloved thing, because it eventually chipped their debts
down to nothingness. Debtors and other morally suspicious people thus
love inflation, whereas creditors and other responsible people love
deflation.
But now we live in better times, and off the top of my head, I can name only a few things that have become noticeably more expensive since we moved to Canada in 2001. The price of a donut at Timmys has gone up from 75 cents to 80, but that's about it. I believe we have Wal-Mart to thank for this general trend. I remember wondering why it seems no natural that there is so little visible inflation.
My wife watches West Wing, but I do not. However, I remember a few years ago I overheard some character defending a $700 tax cut by saying that she knows better what to do with that money, and she would use it buy a DVD player. This must have been quite a few seasons ago, since these days DVD players sell for what, $30 or something like that? If there is one certain thing that you can bet on, it is that all electronics keep becoming cheaper at a reverse exponential rate.
I have to wonder where the opponents of deflation stand in all this. Such a massive rate of deflation should be really bad for economy and electronics manufacturers, right? But for some reason, it just doesn't seem to be. Now, I am not an economist nor do I play one on TV, but I can't see what exactly is supposed to be bad about deflation and lower prices. Because as far as I can tell, every person absolutely loves deflation in his own life, at least for the products and services that he buys. For example, if the price of gas went down to half of what it is now, would many people be sad? Heck no, step on the pedal and clear the road for me all the way up to heavens! Vroom vroom! A digital camera that used to cost $500 now costs only $100? Snap snap! Wal-Mart selling more of everything for less? Bring it on! If anything, deflation is something to cheer while we are on the road towards the singularity.
One important exception to this general trend of prices are is housing, where prices keep climbing with no end in sight. This time it will really be different and the prices will keep rising forever! As soon as someone buys their first home, they start wishing that the housing prices continue to climb to high heavens. But is this really a good thing? What if the bubble burst and took away a third of the price of the average home? I actually think that this would be a good thing. Everyone has to live somewhere, so they don't really benefit from the increased value of their homes unless they trade down. You can sell your home for profit, yes, but then you have to live in a place that costs more, taking away the benefit. (Any loan that you take against the value of your home has to be paid back eventually, with interest.) A person who bought a home whose value has decreased still gets to live in it, with the exact same costs of mortgage and maintenace as before, so there is no difference. Besides, if the average housing prices fell, it would be easier for people to switch to bigger and better homes. The only people who would lose in this would be those who want to switch a smaller and worse home.
Another thing that puzzles me is when the price of some stock falls along with the stock market in general. I find this quite strange. Of course, for every "I buy some stock now and wait until it becomes more expensive and then sell it to a bigger fool and pocket the profit" speculator, the drop in the stock price would be a bad thing. But for people who invest in the long term, the falling stock price should be a positive thing, since they get to buy more shares with the same money. If the dividend per share each year is $1, why would you want to pay $50 for each share, if you could get them for $20/share, which still is not that great P/E ratio? I mean, what is the grand problem here?
But now we live in better times, and off the top of my head, I can name only a few things that have become noticeably more expensive since we moved to Canada in 2001. The price of a donut at Timmys has gone up from 75 cents to 80, but that's about it. I believe we have Wal-Mart to thank for this general trend. I remember wondering why it seems no natural that there is so little visible inflation.
My wife watches West Wing, but I do not. However, I remember a few years ago I overheard some character defending a $700 tax cut by saying that she knows better what to do with that money, and she would use it buy a DVD player. This must have been quite a few seasons ago, since these days DVD players sell for what, $30 or something like that? If there is one certain thing that you can bet on, it is that all electronics keep becoming cheaper at a reverse exponential rate.
I have to wonder where the opponents of deflation stand in all this. Such a massive rate of deflation should be really bad for economy and electronics manufacturers, right? But for some reason, it just doesn't seem to be. Now, I am not an economist nor do I play one on TV, but I can't see what exactly is supposed to be bad about deflation and lower prices. Because as far as I can tell, every person absolutely loves deflation in his own life, at least for the products and services that he buys. For example, if the price of gas went down to half of what it is now, would many people be sad? Heck no, step on the pedal and clear the road for me all the way up to heavens! Vroom vroom! A digital camera that used to cost $500 now costs only $100? Snap snap! Wal-Mart selling more of everything for less? Bring it on! If anything, deflation is something to cheer while we are on the road towards the singularity.
One important exception to this general trend of prices are is housing, where prices keep climbing with no end in sight. This time it will really be different and the prices will keep rising forever! As soon as someone buys their first home, they start wishing that the housing prices continue to climb to high heavens. But is this really a good thing? What if the bubble burst and took away a third of the price of the average home? I actually think that this would be a good thing. Everyone has to live somewhere, so they don't really benefit from the increased value of their homes unless they trade down. You can sell your home for profit, yes, but then you have to live in a place that costs more, taking away the benefit. (Any loan that you take against the value of your home has to be paid back eventually, with interest.) A person who bought a home whose value has decreased still gets to live in it, with the exact same costs of mortgage and maintenace as before, so there is no difference. Besides, if the average housing prices fell, it would be easier for people to switch to bigger and better homes. The only people who would lose in this would be those who want to switch a smaller and worse home.
Another thing that puzzles me is when the price of some stock falls along with the stock market in general. I find this quite strange. Of course, for every "I buy some stock now and wait until it becomes more expensive and then sell it to a bigger fool and pocket the profit" speculator, the drop in the stock price would be a bad thing. But for people who invest in the long term, the falling stock price should be a positive thing, since they get to buy more shares with the same money. If the dividend per share each year is $1, why would you want to pay $50 for each share, if you could get them for $20/share, which still is not that great P/E ratio? I mean, what is the grand problem here?
You should note that P/E isn't same as P/div. Usually companies invest part of their earnings and don't give all of it to owners as dividents.
Posted by Anonymous | 3:30 PM
Also another thing is that sometimes companies do share buyback schemes instead of giving money to investors as dividents. All this makes stock prices important factor.
Posted by Anonymous | 5:47 PM