Until just a little while ago a fear of deflation was all the rage. In-the-know types nodded their heads gravely and showed erudition by expressing a fear of something that hasn’t been a problem in this country for 75 years. And they were right to fear it. Deflation is a really nasty thing. More than anything else, it is what made the Great Depression great. But as it happens, our guy at the monetary controls, Ben Bernanke, is a particular expert on deflation and the Great Depression. He may or may not succeed in steering our economic ship clear of the shoals, but deflation is one particular rock he is sure 
not to hit.
Prices did decline in the fourth quarter of 2008, down –3.3% as measured by the Consumer Price Index. Annualized out, that’s a very scary –12.4%. But, knock on wood, that was a brief episode that is now over. The Fed has been working furiously to pump as much money into the economy as possible, doing everything short of handing out bags of the stuff on street corners. Prices were up in both January and February, totaling +0.7%, which is a +4.3% annual rate.
So the Informed Consensus Fear has shifted from being focused on deflation to an uncertain fear of both deflation and inflation. Personally, I predict inflation. Maybe not in 2009, but in 2010 and beyond.
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I put a passing reference to The Millionaire Next Door in my post Wednesday on The Tragedy of Impulse Saving. A commenter asked about it and actually followed up to say that he would love to hear my opinion on the book. I can’t bring myself to write a proper review of a 13 year–old title, but on the flimsy pretense that one person who comments must represent thousands of silent readers who feel the same way, let me share why I don’t like it. (That’s the problem with leaving comments here, I just read what I want to.)
To start with, Millionaire Next Door is poorly written. Large sections just dump information on the reader without drawing any conclusions or giving any advice. And the authors’ choices of topics, and how much ink to use on them, is peculiar, as if they just threw together the book from notes they happened to have had lying around. So, for example, 70 pages (of 245 in my paperback copy) are spent on giving money to your children. 36 pages cover buying cars. There isn’t much of anything on buying houses. There’s a big section on selecting financial advisors, but little on investing as such.
The core advice in the 70 pages on giving money to your children is that you shouldn’t give money to your children. Not only will it make you poorer, but it is bad for the kids. They will amuse themselves by spending it and not learn to be frugal like you. The authors cite data that shows that adult children who get money from parents are in general poorer and argue that giving your kids money will have the opposite of the intended effect. Unremarkably, they do not consider the possibility that maybe those children got money from their parents because they were poorer, not the other way around.
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Two weeks ago Trent at The Simple Dollar had a post in which he quoted at length from a pretty hostile email attacking him for not having any particular qualification to give personal finance advice. Of course, to a blogger like Trent that’s a slow hanging curve, and he proceeded to yank it into the bleachers in post that got 225 mostly supportive comments.
His defense of his right to give advice was not “Hey, maybe I don’t have a lot 
of credentials, but I know what I’m talking about” nor “Look, I’ve been doing this for three years and more than 100,000 people read this blog every day, so my advice must be pretty good.” Instead, Trent essentially said what most bloggers say, that he is not a guru but an ordinary guy doing his best. “All I can do is share my experiences and what I’ve learned along the way.”
Similarly, in the Get Rich Slowly post that discussed this blog (and led many of you to discover it) my current hero j.d. wrote that he had been thinking of updating his disclaimer and had settled on borrowing the text from The Digerati Life:
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As any reader of this blog knows, I enjoy nothing more than tweaking the nose of personal finance conventional wisdom. Well, joy of joys, yesterday’s New York Times had an article, in the science section no less, that spits in 
conventional wisdom’s face, knees it in the groin and then kicks it as it rolls on the ground.
The piece discussed the work of Ran Kivetz and Anat Keinan, two professors of marketing from Columbia and Harvard Business Schools respectively. (Marketing professor is, incidentally, the same line of work as the authors of The Millionaire Next Door.) They have discovered a new malady to avoid: saver’s remorse. It’s just what it sounds like: that sad feeling you get with money in your pocket that you could have spent in some enjoyable way but, in a moment of weakness, chose to save.
This is just so awesome.
The sober professors don’t call it saver’s remorse. I think John Tierney, The Times’ science guy, came up with that. They use the term hyperopia, literally excessive farsightedness. Sufferers of hyperopia “deprive themselves of indulgence and instead overly focus on acquiring and consuming utilitarian necessities, acting responsibly, and doing ‘the right thing.’” (K&K 2006 p.274)
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AIG is (was?) one of the largest insurance companies in the world, with a finger in nearly every line of business that could be called insurance, including, fatally, credit default swaps, or CDSs. A CDS is a form of insurance in which the issuer (AIG) guarantees that a bond will be paid off even if the borrower defaults. AIG wrote massive amounts of this insurance on bonds backed by American residential mortgages, allowing holders of these bonds to treat them as very safe and stable AAA rated investments. In the clarity of hindsight,
AIG was amazingly foolish. They apparently did not consider that if the real estate market went south then all those mortgage bonds would be in trouble at the same time.
Of course it did go south, and AIG had hundreds of billions of dollars of insurance claims that it could not pay. This being one of the most extreme examples of Too Big To Fail that could be imagined, the US Government stepped in, took AIG over, and proceeded to pump in enough money to make good on its debts. There may have been, at first, a hope that AIG could be saved as a going concern, but it soon became clear that the only practical game plan was to stabilize the situation long enough to sell off the many sound operations that AIG owns and wind down, in as orderly and cheaply a way as possible, the CDS business. The money thus raised and saved won’t be enough to make the taxpayer whole, but it’s a lot better than nothing.
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not to hit.
Economics, Investing | Frank Curmudgeon | 
March 30, 2009 6:00 am | 
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