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Comment by 01100011 | Hacker News Reader

At what point does the massive pile of money injected into the economy translate into large price increases(i.e. inflation)? IIRC, inflation is the money supply multiplied by the velocity of money, so if the economy slows, will we suddenly see the current asset bubble turn into a price bubble? What then? Does it all just work itself out because we devalue the currency and inflate away our debt and asset bubbles, or do we get slammed by stagflation?

For those of us in the tech industry accumulating absurd salaries, what do we do to defend our wealth? Normally when inflation is coming, I'd think real estate or commodities would be a safe bet, but they're already in a bubble. It seems like jumping into them at this point might be better than nothing, and maybe that's all we can hope for at this point in the economic cycle?

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It depends on what you expect to happen and what your goals are. If you are trying to 'batten down the hatches' in preparation of a recession + a surge in inflation, then you can invest in TIPS[1]. You can also invest in safe short-term bond funds (if you live in CA, Vanguard has tax-exempt muni bond funds that might be a good solution). You aren't going to make a killing with these investments, but if they keep you ahead of inflation by a few % while all other asset classes are tanking, you would be in a pretty good spot.

On the other hand, if you aren't expecting a recession and are only worried about inflation, probably better to just stay broadly exposed to the stock market (low cost index funds). And if recession is your only concern, then cash or safe bond funds would probably be the best bet.

Personally, I am not too worried about inflation. If you look at where the strongest growth has happened in the last decade, it has been largely concentrated into a handful of 'super' cities (SF, Seattle, etc...) plus China. In the case of the latter, density puts downward pressure on consumption (you can only fit so much crap in a small apartment). And China's 'consumer class' has yet to really materialize. The one caveat, is that due to the wealth imbalance, I think we have seen inflation in things that wealthy people buy (real estate, stocks, art, etc...). But post-globalization, it will likely take a really broad surge in consumer demand to move the needle.

[1] https://www.treasurydirect.gov/indiv/products/prod_tips_glan...

Buying your first piece of real estate will provide you with a neutral stance on the housing market. Buying REITs like Camden, or another REIT from this REIT list also works if you don't overpay: https://www.reit.com/investing/reit-directory. Buying a consumer goods seller like Apple stock or Target stock helps if the concerning inflation happens only in the consumer goods sector. I'm not a fan of large allocations of TIPS because the returns are so low.

There is inflation because of the increase in money supply, but it is not in consumer goods - it is in financial assets

Yep. Inflation visible in this graph:

https://www.macrotrends.net/2488/sp500-10-year-daily-chart

Money is created by the central banks but it doesn't instantly appear in people's pockets as cash. That would be required to create instant consumer inflation but the path is much more winding than that.

The money goes into the financial system primarily via banks and bond purchases. CBs buying up debt then gets translated into share buybacks, share buybacks push up stock prices, higher stock prices make the middle class feel more wealthy and so they spend more on middle class things like houses, pushing up house prices, higher house prices get translated into more income going to builders and builders buy things at the store. Traditional measures of inflation like bread or chocolate bar prices are at the end of a very, very long pipeline of money.

This is the best analysis of the subject I have seen - https://news.ycombinator.com/item?id=22234042

It makes for long, but delightfully rewarding reading. Ray Dalio's thinking on the subject is also worth checking out

Link to Ray Dalio write-up?

This touches on it:

https://www.linkedin.com/pulse/world-has-gone-mad-system-bro...

And you can get his free book on debt cycles here:

https://www.principles.com/big-debt-crises/

Why do higher stock prices make the middle class feel more wealthy? Is it really that common to own enough stocks to make up a significant portion of your wealth?

As far as I can tell its essentially just a useless hobby unless you have significant savings. The only people I know that are into stocks are also into things like horse racing etc, and they make/lose about as much from it.

>Why do higher stock prices make the middle class feel more wealthy? Is it really that common to own enough stocks to make up a significant portion of your wealth?

At least in my country the stock market is basically you're retirement fund unless you're one of the few people with a Government pension.

Most companies here offer a matching program to invest for your retirement. This is dumped into the stock market for general growth, with the idea that it's there when you retire.

Maybe so, but I can't imagine the day-to-day contractions or growth spurts in the economy have much of an effect on your retirement planning, or your general consuming habits.

day-to-day no, however it means people are more keen to pay attention to market news. After all, choosing bad investments that earn you say 4% y/o/y return, vs 15% y/o/y results in _massive_ changes on the scale of 20-40 years.

>A once-every-three-years study by the Federal Reserve Board found that in 2016, 51.9 percent of families owned stocks, either directly or as part of a fund.

https://www.politifact.com/california/statements/2018/sep/18...

I would add that there is so much total stock wealth, even though the top 10% own 84% of said wealth, the remaining amount is very very large.

Presumably most of that is in pensions?

I just can't imagine many people following the financial market with any interest.

Are you including 401k index funds/ general retirement funds in your definition of pensions? That is a typical source of stock ownership for many Americans.

You don't have to actively follow the stock market to be an owner of stocks. Buying and holding index funds or mutual funds in general is a great way to build wealth with little effort. Many households in the middle class are stock owners through this method. Most large employers offer retirement plans that include this.

Pensions are very uncommon in modern America.

401(k) investments, on the other hand, are available and pushed heavily onto nearly everybody with a white-collar job. And 401(k) investments are stocks. So a huge percentage of people hold stocks, or at least funds which contain stocks.

With a government job, you may have a pension and a 457b plan, which is much like a 401k.

It's often mentioned that one of the biggest investors in the US (and I assume the world) is CalPERS, which manages pensions for California state employees. You may not be particularly in tune with the stock market just because you have a state pension, but indirectly it matters to you.

How is "inflation in financial assets" different from deflation? The only way you can tell stuff is inflating or deflating is by comparing it to something.

Immediately post crisis, inflation was a big worry with the increase in the money supply. The concern was that the government would be too slow to turn the tap off and wed be back to the 1970’s with inflation in the teens.

Incredibly the inflation has been limited to only a few assets.

If we do see a spike in inflation watch out for housing prices to plummet. It won’t necessarily make them any more affordable because a mortgage payment of $3000 per month stays the same borrowing $500k at today’s rates or $200k at 10% interest (made those numbers up, but you get the point).

> Immediately post crisis, inflation was a big worry with the increase in the money supply.

Only amongst right-wing politicians and their economic lackeys.

People who actually looked at the models concluded it was nothing to worry about:

> Except that those who knew their Hicks declared that this time was different, that in a liquidity trap the rise in the monetary base wouldn’t be inflationary at all (and that the relevant history was from Japan since the 1990s and from the 1930s, which seemed to confirm this claim). And so it proved, as shown by the red marker down at the bottom.

* https://krugman.blogs.nytimes.com/2015/05/17/money-inflation...

A 2000 paper explaining Japan, monetary supply, and inflation:

> Those who use Hicks's famous diagram as the point of reference for evaluating monetary policy will recall that at some low rate of interest the horizontal portion of the LM curve emanating from the vertical axis is meant to represent the lack of influence of expanding the money supply on the rate of interest; monetary policy thus does not shift the intersection of the LM curve with the IS curve that determines the equilibrium level of output. Since monetary policy has no impact on the level of output along this horizontal portion of the LM curve, debt financing of government expenditure remains the only policy capable of influencing output.

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=219494

In 2009 US entered the same situation Japan has been in since the 1990s ('zero' interest rates), and so the knowledge was transferable across the Pacific to those who weren't blinded by political ideology.

The liquidity trap goes back to Keynes:

* https://en.wikipedia.org/wiki/Liquidity_trap

Are these the same models that said the mortgage CDS’s are all AAA?

No, there are no models needed for that, just some desire to actually investigate things.

Though there were for the general housing bubble:

> In July 2001, Paul McCulley, an economist at Pimco, the giant bond fund, predicted that the Federal Reserve would simply replace one bubble with another. "There is room," he wrote, "for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing."

> As Mr. McCulley predicted, interest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst.

> Now the question is what can replace the housing bubble. [...]

> But although the housing boom has lasted longer than anyone could have imagined, the economy would still be in big trouble if it came to an end.

* https://archive.is/0xZDj

* https://www.nytimes.com/2005/05/27/opinion/running-out-of-bu...

And then 2007-8 happened.

No. Default correlation models and liquidity trap macro concepts don’t have anything to do with each other except you will find math in both.

Anything with real intrinsic value will do well. For equities, that means value stocks over growth stocks.

Value stocks might not be what you think. They are stocks that are under-valued by the market relative to its "real" value... But that doesn't necessarily imply that those companies are inherently valuable.

Why would we have stagflation and not just stagnation?

A slowing economy would only slow money velocity.

I dunno... seems if we've injected money into the economy it's out there swirling around. As long as the velocity is high, everything is fine. If the economy slows, we lose velocity and with a fixed supply of money(or an increasing supply, if QE is attempted) we see inflation as too many dollars chase too few goods. I never did well in econ though, so I'm happy to be told I'm an idiot.

Are you saying real estate in the Bay Area are not inflated?

> At what point does the massive pile of money injected into the economy translate into large price increases(i.e. inflation)?

A burger at a nice restaurant in Seattle can now cost you $18-$20. Maybe we're already in an era of more intense inflation and just don't realize it yet.

I went to buy a chocolate bar at Target yesterday. What used to be $3 for 3.5oz is now $3.98 for 3.15oz. I think it's been creeping up in some areas for a while now, but I don't see it as inevitable, across the board inflation just yet. Gas is still cheap. Utilities haven't gone up much for me. Rent is definitely up in CA, but I'm not sure how things are in the rest of the country. Generally, I haven't noticed inflation in most things I regularly purchase.

Honestly, I work in tech and have a large, fixed alimony payment, so I could personally use some inflation.

>I went to buy a chocolate bar at Target yesterday. What used to be $3 for 3.5oz is now $3.98 for 3.15oz.

Are you sure the price increase is really because of the cost of chocolate increase or the rent of Target within your area or labour of your area increased?

How about housing?

Definitely a bubble. I wonder though, it seems, at least in CA, that the prices are up but sales volume is down. People, perhaps, aren't converting the market increases into liquid assets. Maybe they're pulling refi's? Otherwise, a bubble in real estate may not be translating to any sort of broader economic gain?

That's just caused by a lot of high earning tech people moving to Seattle.

But there are tons of different groups that track inflation and all of them come up with pretty much the same answer. There isn't much inflation right now.

Based on my businesses (and household expenses), there are two USs. Certain locales have increasing costs of for just about everything every year, and certain locales are stagnant.

Wealth inequality.

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