Default, inflation and stock market

[gbear]

Inflation:

Inflation as it relates to currency means a dollar today will buy less than the same dollar tomorrow. If one expects inflation, where should one keep money to maintain purchasing power. In the past, people wanting to preserve currency tried putting their money into things perceived to have intrinsic value. For example, gold has long been a constant. The desire people have for precious metals seems to be constant.

However, people have been putting their money into gold for years in anticipation of massive inflation. If one believes the price of precious metals is too high, is there a better option?

I think to answer this question one should first look at why gold and other precious metals have maintained their value relative to houses and food regardless of inflation. They maintain their value because there perceived value relative to other goods is unchanged regardless of how much the other good cost. If an ounce of gold = 200 hamburgers which have doubled in price, then the price of gold has doubled. In a free market, the value of gold can be in dollars or hamburgers. None of this answers the "what to do if one expects inflation and believes the cost of the metals is higher than their intrinsic values."

I note the stock prices have dropped this week as the U.S. plays brinkmanship games with whether or not to default. What I am unsure of is why? If there is a default, then the value of the U.S. currency, the dollar, should go down. If the value of the dollar drops, everything bought with the dollar should cost more dollars meaning inflation. If one follows this line of thinking and believes inflation is a likely outcome, then one should be looking to maintain the purchasing power of money already held. If one believes metals have been bid up too high by those looking at standard currency hedges, why not look at the maker of hamburgers? I say hamburgers only because of the example. The point is we assign value to our currency by looking at what it can buy. If it costs 200 hamburgers for the ounce of gold, that trade won't change with inflation. So wouldn't the production of goods and services be the logical place to put money to preserve its purchasing power? Eventually, the price to earnings for stocks seem to come back in line. If a hamburger costs two times what it did last year and hamburgers are still selling, eventually the stock should be priced roughly two times what it was last year as income doubles. So as stocks stabilize, can I not then sell my stock maintaining the purchasing power I had before inflation?

If this is true, why has the stock market reacted so negatively to the possible default? I ask because I honestly don't understand.

[DRSmith]

You know what is sad id the folks who think a tax increase will hurt things will see the real harm when interests rates start to raise and inflation becomes real.

Money is moving into countries that have a solid triple A rating like Canada Norway Sweden and Germany

[Larry]

I think the guy would have more credibility if he's quit talking about precious mettles, and the way they hold there value.

[DeaconTheVillain]

You know what is sad id the folks who think a tax increase will hurt things will see the real harm when interests rates start to raise and inflation becomes real.

OMG this so much.

People just don't understand. You wanna finance a car, well I hope you are prepared to pay 40% interest instead of 12%.

[Thiebear]

"The second quarter disappointed, but the first-quarter downward revision is more disturbing. It advances the pangs of concern. The debt ceiling nonsense is not going to help us. We're already in an economy that is subpar," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

[DRSmith]

OMG this so much.

People just don't understand. You wanna finance a car, well I hope you are prepared to pay 40% interest instead of 12%.

But they kept taxes low on the rich

It seems no matter what the folks with money will be winners here.

[gbear]

I think the guy would have more credibility if he's quit talking about precious mettles, and the way they hold there value.

OK, I wrote this late last night before going to bed. :snore: I never could spell, and for some reason spell check thought it was OK. lol. fixed & thanks.

I was also just forwarded this from a friend, http://weakonomics.com/2010/02/22/why-inflation-doesnt-bother-me/

So I guess I am not completely alone in my thinking.

Note, my thoughts had nothing to do with the impact on our economy of a default. My thoughts are more on maintaining purchasing power of money already saved in the event of default and inflation. A default will play havoc of a like not seen by my generation.

[Larry]

OK, I wrote this late last night before going to bed. :snore: I never could spell, and for some reason spell check thought it was OK. lol. fixed & thanks.

Oh. I assumed you were quoting someone else, a professional writer.

I apologize for pointing it out. I try not to point out things like that from ES members. Glass house, don't ya know.

[DRSmith]

OK, I wrote this late last night before going to bed. :snore: I never could spell, and for some reason spell check thought it was OK. lol. fixed & thanks.

I was also just forwarded this from a friend, http://weakonomics.com/2010/02/22/why-inflation-doesnt-bother-me/

So I guess I am not completely alone in my thinking.

Note, my thoughts had nothing to do with the impact on our economy of a default. My thoughts are more on maintaining purchasing power of money already saved in the event of default and inflation. A default will play havoc of a like not seen by my generation.

Youhave talk radio selling gold as a safe investment and of course people will believe it.

Of course these often times were the same folks who encouraged reverse mortgages and that did not work out well either

Commodities measured in US dollars will go up as the US dollar goes down

[gbear]

Woohoo! I fooled somebody into thinking I was a professional writer. I just pulled from my blog written too late last night.

Thanks Larry, and I never mind being corrected for being stupid.

Talk radio selling anything should be cause for pause. One may get in low, but if one is listening to radio instead of trying to figure out logically where the economy as a whoe has to go, I would think it very easy to be the bottom of a pyramid scheme. I just keep asking myself questions about the economy as a whole trying to figure out what approach is most likely to meet my future goals.

[DRSmith]

Woohoo! I fooled somebody into thinking I was a professional writer. I just pulled from my blog written too late last night.

Thanks Larry, and I never mind being corrected for being stupid.

Talk radio selling anything should be cause for pause. One may get in low, but if one is listening to radio instead of trying to figure out logically where the economy as a whoe has to go, I would think it very easy to be the bottom of a pyramid scheme. I just keep asking myself questions about the economy as a whole trying to figure out what approach is most likely to meet my future goals.

Slow steady conservative growth is always good avoid splashy situation where everyone is running to it, if you invest think longterm.