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To: William Tell

Under your second e-mail, depending on how you invest, monetary inflation should not effect the relative value of your real investment. As the dollar inflates, the relative value of the investment should also. Thus, it will yield more inflated dollars and you maintain investment status quo.

Under your 1st e-mail, the purchasing power of “fixed” government payouts diminishes. This is, in my opinion, not a bad thing. It is a financial incentive for people to move off reliance on government handouts. That’s a good thing.


14 posted on 01/17/2008 12:44:13 PM PST by henkster (The koran is "Mein Kampf" written in funny curlie-Q's)
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To: henkster
henkster said: "Thus, it will yield more inflated dollars and you maintain investment status quo."

In an unchanging economic environment, that might be the case.

But the transition from a period of low inflation to one of high inflation presents some very serious challenges.

With 0% inflation, a reasonable price-to-earnings ratio for a given stock might be 16, representing an inflation adjusted return of about 6%.

As inflation increases, earnings might increase at the inflation rate,but the price of the stock must adjust to reflect a more reasonable price-to-earnings ratio. If inflation, for example, is 6%, then earnings rise 6%, but the price-to-earnings ratio for the stock must adjust such that the inflation-adjusted return is still 6%. That means that twice as much money must be earned, not just 6% more, in order for the stock price to remain constant.

The typical case is that the stock price cannot remain constant, but instead drops to one-half of its pre-inflation value, for a price-to-earnings ratio of 8, restoring the inflation-adjusted return of 6%.

Economics is not my field, and there may be more to take into account, but a government policy of inflation is certainly not free. Somebody pays.

15 posted on 01/17/2008 2:03:00 PM PST by William Tell (RKBA for California (rkba.members.sonic.net) - Volunteer by contacting Dave at rkba@sonic.net)
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