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Comment by RC_ITR | Hacker News Reader

IDK why everyone on HN thinks that the affluent have debt, when in fact, the bottom 50% of Americans hold less that 4% of wealth because most of them are in net debt, largely to entities owned by the affluent.

Maybe it's because inflation is actually bad for the moderately affluent who made a disproportionate share of their income early in life and want to live off that nest egg while no longer working (which I assume to be overrepresented on HN).

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For a lot of it this comes down to mortgages. Someone who has a $4million mansion with a $1million loan has more debt in an absolute nominal number sense than someone with no assets and a $10k credit card debt. That said as household debt increases (due to things like credit cards) we are having a shift whereby many people on net own less than zero. For this group higher inflation won't be as bad as the impact on wealth as far as the debt/assets side of things goes. However it will still likely be bad for the poorest because wages tend to lag behind inflation and if the poorest people need their wages to service their debts they might still be falling behind more as a result of inflation. As always inflation will still be bad for anyone who is attempting to save money. On top of all this we have things like the Cantillon effect, so I just don't think higher inflation is as good for the poor - even with their newfound indebtedness - as people might be claiming.

>Someone who has a $4million mansion with a $1million loan has more debt in an absolute nominal number sense than someone with no assets and a $10k credit card debt.

You are completely ignoring equity and are therefore incorrect. I was speaking about net worth, not whatever concept you're talking about ('outstanding cash-denominated leverage?')

>we are having a shift whereby many people on net own less than zero.

Yes, c. 50% of Americans, all of whom benefit from (wage) inflation in that scenario

> it will still likely be bad for the poorest because wages tend to lag behind inflation and if the poorest people need their wages to service their debts they might still be falling behind more as a result of inflation.

Source? This chart [0] seems to run counter to your claim, wages for non-supervisory employees move pretty in-line with inflation...

>As always inflation will still be bad for anyone who is attempting to save money.

Inflation and savings account interest rates have a complex relationship. For example, you could get 8%+ on a CD in 1990[1], when inflation was at about 6% (2% real yield). In the famously low inflation 2010's, you could maybe get 2% (0.5% real yield).

>On top of all this we have things like the Cantillon effect, so I just don't think higher inflation is as good for the poor - even with their newfound indebtedness - as people might be claiming.

Poor Americans being in debt is not new and not related to inflation. An re:Cantillon, a lot of work on pricing has been done since then, but I'm assuming from the above it's not really worth getting into here.

[0]https://fred.stlouisfed.org/graph/?g=Jc6L [1] https://www.depositaccounts.com/blog/historical-cd-rates.htm...

> IDK why everyone on HN thinks that the affluent have debt, when in fact, the bottom 50% of Americans hold less that 4% of wealth because most of them are in net debt, largely to entities owned by the affluent.

The wealthiest people by definition have more equity than they do debt (which is why they are wealthy) but that doesn't mean that they don't hold debt. I think this is why most people think the affluent have debt obligations and frankly in the current markets there are incentives to have debt when real rates are this negative. Poorer people are also holding more debt, basically there's a lot more debt everywhere these days.

Regarding the chart CPI is not the same as monetary inflation but yet CPI is frequently used to make inflation-adjusted securities. And since CPI does all sorts of intellectually dishonest mental gymnastics with regards to "hedonic adjustments" these days its a less reliable metric than it was in the past of how cost of living has changed over time: https://wolfstreet.com/2019/12/05/what-worries-me-about-hedo...

The affluent are invested in companies. Maybe I’m wrong but I’m going to guess American companies have multiple orders of magnitude more debt then the bottom 50% you’re referring to; just not nearly as much relevant to their greater assets. Some percentage of each company value is linked to their ability to take cheap debt, use that for further investments/acquisitions, and have inflation mitigate the damage (directly) or risk (indirectly via bailouts).

None of the above conflicts with your point about wealth but they seem like completely different metrics that aren’t inherently related.

What is important is how much debt you have that cost you less than inflation. Governments and wealthy individuals have tons of 2% interest (or less) debt. Inflation at 4% erodes that debt pretty fast. The poor and middleclass have debt at 10-30% and inflation at 4% is doing not much to erode it.

That's not true. Regardless of the interest rate, all loans' principle is inflated at the same rate. You can argue that the poor are more likely to have their principle grow due to underpayment, but that's a separate point.

Whats your idea of underpayment? If a student loan takes 20 years to pay off at allowed monthly payments, that's not underpayment, but lord that is a weight on your neck.

You say that but if your debt is on credit cards at 20%, believe me, you don’t feel like inflation is your best friend. If you’re the government, it’s a very different scenario.

Didn't we just hear this whole story about how billionaires don't pay income or capital gains tax because all the dollars they keep on hand derive from low-interest fixed-rate loans taken out against their shares?

When someone is poor, they're really limited in how much debt they can take on. Credit cards and payday loans have massive interest rates that make inflation irrelevant, and fairly low absolute limits anyway. (This can still be very hard to escape at a low income level but it's not likely inflation will help, because with a debt trap, that high-interest debt is being drawn to pay bills and buy consumer goods, not invested in assets).

The majority of debt that people outside of the 1% are likely to hold is probably mortgage debt, and that only applies to homeowners, who are still likely the wealthier contingent and will benefit from inflation (as long as interest rates don't rise).

I cannot emphasize this enough. Mortgage debt is offset by equity and generally has a positive impact on peoples' net worth calculations (house prices are at an ATH).

If you want to walk through the NY Fed's data on this happy to, but the bottom 50% are in student debt, credit card debt, and auto debt. Full stop.

I don't think that's inconsistent with what I said, so as much as you can emphasize it with a full stop, I think it's somewhat tangential to my point. I agree that homeowners will benefit (as long as rates stay low). But they're in the asset-owning class. The more hard assets you have, the more you'll benefit, and those who can draw low-rate lines of credit against their appreciating hard assets will benefit the most. But that does not describe the bottom 50%.

Inflation is definitely not going to help anyone who is struggling with credit card debt, for reasons that should be obvious. It might help those who have student debt, but likely only for one contingent because tuition will probably continue to outpace wage growth as it has for years. It might help some people repay their old auto loans, but not today's buyers when automobile price growth is outpacing inflation.

>The majority of debt that people outside of the 1% are likely to hold is probably mortgage debt

This is a demonstrably false statement [0] The bottom 50% hold 57% of the outstanding credit debt. [1] The bottom 50% hold 33% of all other liabilities.

I don't know how to make it more clear to you that the average balance sheet of the bottom 50% is no assets, many liabilities. Sorry if the full stop hurt your feelings.

[0]https://www.federalreserve.gov/releases/z1/dataviz/dfa/distr...

[1] https://www.federalreserve.gov/releases/z1/dataviz/dfa/distr...

EDIT: Again as a reminder, mortgages aren't 'net debt.' when they are less than the house's worth.

> I don't know how to make it more clear to you that the average balance sheet of the bottom 50% is no assets, many liabilities.

... Yes? Again, I think we agree on this fact. You're stating a lot of facts as though they were things that I argued against, when in fact, they support my thesis.

> The bottom 50% hold 57% of the outstanding credit debt

But that wasn't what I was disagreeing with. Your link also states that the bottom 50% hold only 32% of all liabilities. While the bottom 50% does have most of the credit debt (which I agreed with), a much larger overall liability is mortgage debt (2.6x larger), which they have very little of (22.5%). You say mortgages aren't "net debt" but that seems hardly relevant to the question of whether someone benefits or loses from inflation, because their debt is fixed while their assets float.

Edit: maybe you think that I'm arguing that affluent individuals have negative net worth? I'm certainly not saying that. I'm saying that they have a large quantity of mostly fixed-rate debts, backed by an even larger quantity of assets that appreciate with inflation.

Again, I can't emphasize this enough, the bottom 50% holds 32% of liabilities and nearly 100% of NET liabilities.

We just are clearly at an impasse on that though. You can sell a house to pay off a mortgage so it's not harmful debt because it is OFFSET BY ASSETS THAT ALSO INFLATE (In fact, the brief period where that wasn't true caused the largest financial crisis of our lifetimes). What do you sell to pay off credit card loans/student loans/etc.?

(Further response just to clarify): by "the wealthier contingent outside the 1%", I am of course referring to the 50% to 99% percentile, who do collectively hold almost three-quarters of all mortgage debt, and that mortgage debt also comprises the vast majority of their debt.

You are ignoring their largest asset, which is their future labor / income.

The bottom 50% don’t count their future labor / income as wealth. However the top 10% do count as wealth future cash flows from business which is dependent on the bottom 90%’s labor. So once you setup an equation between future income and wealth, the situation is not so bleak for the bottom 50%. Their future labor is worth much more than their 4% wealth + some amount of debt in mortgages / student loans / credit cards.

> Maybe it's because inflation is actually bad for the moderately affluent who made a disproportionate share of their income early in life and want to live off that nest egg while no longer working (which I assume to be overrepresented on HN).

But I am guessing that group has equities, which are somewhat inflation proof (especially if growth focused).

Only some equities are inflation proof. Other equities will be crushed by inflation because inflation will put pressure on higher interest rates and companies with high debt loads will get crushed by higher rates.

High debt loads are relatively easier to carry as inflation spikes. Inflationary pressures on interest rates will only hurt companies who need to roll over their debt. Most companies will realize that going to the market by issuing new stock is a cheaper cost of capital.

>But I am guessing that group has equities, which are somewhat inflation proof (especially if growth focused)

Trust me, with my own portfolio, I wish that were true, but future expectations of inflation force you to discount future cash flows more, making (all else equal) growth worth less.

The real problem the 'HN rest and vest' crowd has with inflation is that while wages have shown a great ability to adjust (upward) to match inflation, stock market returns are less likely to do so.

Equities of "quality" companies are inflation proof. Exclusively growth focused companies tend to die out during the next recession. That's why value investing outperforms the market over the long term and underperforms it over the short term.

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