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Comment by PaulHoule | Hacker News Reader

Economic indicators tell a clear story in good times but go crazy when there is a crisis.

I psychology of inflation is different than the past, because people have so little experience with it and don’t really believe in it.

It used to be that inflation fueled spending because people figured they should buy it now because it will cost more later. They’d figure there is no point in saving because the value of money will get eroded.

Today people see a Big Mac meal costs $9.99 at McDonalds and think “I can’t afford that!”, gas is $4.99, diesel is close to $7 and people think they have to stop the bleeding by hitting the brakes on consumption.

I think supply chain problems are taking a bite out of demand. I have wanted to buy equipment for my photography/art hobby and I can’t get it. I am saving money until it is available, not buying something else.

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The Big Mac is $9.99 for the person unwilling to download the McDonald's app and use the digital coupons. More broadly, we are very quickly entering a world of personalized pricing, and the best prices go to those willing to jump through whichever hoops sellers create. It's a K-shaped recovery, but it's also K-shaped pricing. So you're seeing more "MSRP" type pricing in places we're not used to seeing it -- kind of like how list prices for college go up and up every year, yet the net price is relatively flat [0].

[0]: https://d3f7q2msm2165u.cloudfront.net/aaa-content/user/files...

Everyone has realized what colleges and "enterprise" sellers realized years ago - nobody will pay $10 for a Big Mac if you sell it for $6, but if you price it at $10 and offer even really easy coupons to get it down to $6, you will sell a decent amount of $10 Big Macs.

"Here's a coupon for a free Hash Brown!" oh great! hmm, while I'm here I might as well spend $5

You are right. With that said I absolutely hate the fact that I have to load my phone with privacy invading apps for every place I shop. I go to 7-11 and they ask if I have a membership card for discounts, when I asked for one they said its an app and I have to install it...

Similar is gas pricing. 10 cents cheaper if you have the app or gas station CC.

The limit case is Spirit Airlines.

Sure they're cheaper, but do you really want to feel like you're going to court getting on the plane, arguing over how many personal items you're allowed, their size, etc? There is in fact a limit to what many people (including me) will put up with, at some point, you just want no change fees, no baggage fees, etc and pick Southwest.

Incidentally, when people talk about schools and healthcare, and suggest a one-size-fits-all model, I'm shocked they don't see how much peoples' preferences vary. If we can have so much choice and variety when it comes to something as stupid as air travel, it seems crazy we wouldn't want the same thing in healthcare.

I am good with the Spirit model. You know exactly what you going to get and can buy what you need. It would be great if US healthcare was the same way. Clear, upfront pricing is much friendlier than handing over money for a service for which you don't know the price or extent.

I’m fine with incremental pricing aspect of Spirit, but the associated environment of chaos/hostility makes the whole experience very unpleasant.

This surgery center lists their procedures and prices. Cash ... full payment, no insurance.

https://surgerycenterok.com

I was told they have great results in preventing complications like infections, as they would not be able to bill additional costs to insurance.

Nobody asked for Spirit Airlines.

I feel like they are a by-product of fare deregulation and the movement to self-directed online bookings. Like vermin before the invention of germ theory, they just appeared spontaneously on the market and nobody really planned it.

Deregulated fares eliminated the need and most of the opportunity for carriers to compete on experience. If PHX-ORD was the same price on every carrier, you're going to see all the marketing devoted to things like "nicest cabins, best food, most free amenities, most convenient schedule". That's a very hard message to maintain when 95% of customers start at a brand-neutral booking system and searches by price. I sort of wonder if they'd have succeeded in the age of agent-driven bookings, because agents would be disincentivized to recommend a carrier that's likely to yield bad reviews or loss of repeat business.

I think Southwest and JetBlue have done a moderate job of beating that cycle-- creating loyalty by promising "reliably slightly worse than awful". I know I'd preferentially book Southwest if I needed a flight just because I know I'm not going to be nickel-and-dimed with luggage fees.

Conversely, I don't think people's tastes for health care and education are as broad as you'd expect. There isn't anywhere near as much opportunity to "unbundle" features to try to hit a price target. Nobody says "well, if we can save $250 this year, let's not teach Timmy how to subtract", or "I want my surgery done by Steve, who just finished a three-week Coursera Tonsillectomy Bootcamp, rather than paying full price for Johns Hopkins."

In just about every store that lets you use a phone number you can use the “Jenny” number as someone has signed it up: (XXX) 867-5309

Either use the local area code or a common one like NY (212) or LA (213).

7-11 is the best for this as there’s tons of people using it. At one point they had a free coffee every 10 promotion so every time you buy a coffee it was a 1/10 gamble to get a free one.

I used to use BellSouth Ringback lineman numbers for this. If anyone ever called it, it'd call them right back.

"7-11 is the best for this as there’s tons of people using it. At one point they had a free coffee every 10 promotion so every time you buy a coffee it was a 1/10 gamble to get a free one."

This is brilliant!

They still have that promo. It's actually every 7th cup is free.

Along these lines, during the pandemic some restaurants were using QR codes for digital menus for "safety reasons". Scanning the code would pull up a prompt to download their app, or a third-party app. Hopefully that nonsense fades away quickly, but I doubt it.

"My phone's dead."

A physical menu magically appears.

Do you have the original source for that graph? Very useful for pushing against the "college prices go up and up!" claim.

Appreciate the lead, but it's still a kind of inflation when you have to jump through more hoops to get the good price.

I had planned a vacation 2 years ago before the pandemic. Obviously had to shelve that. Now the price for the same ticket has increased by 2.5x

I still paid for it and justified it in my head that this is the first time I’ll be traveling in two and a half years.

But if I had to do it again, I can’t justify it at all. There has to be some level of “spite spending” from two years of pandemic as well - people who know that they’re overpaying but they do it anyway because they’ve been locked up for two years.

I'm 37 now and this idea of "collective psychology" really fascinates me. Mention age because I'm just old enough to start seeing these large-scale "shifts of mood" over my own life. In hindsight (US perspective here), I can now see how the mid/late-90s were a happy time, 9/11 was a complete "shock", optimism kicked back in around 2005 leading to the 2008 financial crisis (huge run-up in house prices, sloppy mortgage underwriting, etc), but 2008 was a bomb, and now 14 years on, the way I'd describe the last decade is "slow-burn turbulence". We know it's getting more chaotic, we see it, politics is more fragmented, but it's hard pointing to one particular event as "it" the way we could with, say, 9/11.

I mention this because I think these cycles have profound effects on economic variables like spending, credit use, etc. Your commend about "spite spending" fits perfectly with this--yes, household balance sheets are deteriorating, but people are just sick of covid, they want to take a vacation, and get outside.

I think a similar thing drove housing in the 50s, actually. It's easy to look back on the mid-century dynamic as "boring", "sterile" even, but WWII ended in the mid-40s, and if I'd spent a year of three getting blown up in Europe or Japan, a quiet house in the suburbs is exactly what I'd want.

I'm 34 and feel the same way. You can feel the zeitgeist change every 8-10 years. Its like the world has a collective consciousness (even though I largely think that's just based on the media you consume.)

The thing is, it's hard to tell apart a change in the zeitgeist and a change in your life.

How is eldavido supposed to tell the societal impact of 9/11 apart from the fact he graduated high school that year?

no way to be objective at all. Its just a "gut feel" and they are usually wrong.

I'm not saying I can predict this stuff looking forward, that's borderline impossible.

But it's more than just a feeling. Keynes was writing in the 1920s/1930s about "animal spirits" driving the business cycle. Read Ray Dalio's stuff on credit cycles. Collective psychology drives a lot of carefully measured phenomena, things like savings rates, credit growth, unemployment, etc.

I spend probably 4-6 hours/week reading professionally edited, long-form journalism. In all honesty, I'm not sure it's a great use of time, but I can tell you all about things like the UK's no confidence vote on Boris Johnson, or why the "Red wall" situation in the UK reminds me of Michigan and Pennsylvania in the US, north vs south Europe's views on the EU's 750 billion NGEU stimulus, the performance of Nordic sovereign wealth funds, or why the expiry of the US's child tax credit was catastrophic in terms of poverty reduction.

Point being, if you really immerse yourself in good news for a couple decades (I've been reading at this frequency for ~20 years), it trains you toward a healthy baseline of what's "normal" vs. exceptional.

I was talking to my wife last week, telling her that at this point, at least as it pertains to economics, I usually know what "normal" means (e.g. GDP growth, unemployment, etc), and I know what's "weird" about the present day, but what I haven't yet figured out is what stays the same over time vs. what changes. Take US interest rates. The 10-year treasury note was around 1.00% 18-24 months ago. That was low. Now it's in the 3s, which is still fairly low. What I can't figure out is whether this "lowness", which is historically bizarre, will continue this way, or if there's some permanent structural change (e.g. more elderly savers relative to young users of capital) that has permanently altered the equilibrium. That does seem pretty hard, though.

The change is that we will go through a credit lengthening process, again, as soon as we figure out that tightening, as a policy, doesn't work anymore. If I had to make a guess, I would say 9 months, at most. Why, just my guess, or it ...

> I think supply chain problems are taking a bite out of demand. I have wanted to buy equipment for my photography/art hobby and I can’t get it. I am saving money until it is available, not buying something else.

There's another aspect of this one..

There are people buying right now despite not being able to get their item because they're afraid it will cost much more later. Then they wait.

On the retailer's side, the responsible ones hold the money and count it as a liability (ha!) while the normal ones count it as revenue right now and spend accordingly.

The complication comes in later if that retailer goes out of business. Suddenly you're out the money and the item gets delivered to an entity that no longer exists.. and then goes to a liquidation auction getting sold for a fraction of the price to clear the retailer's debts. (Technically, you'd be on that list but so far down it doesn't matter.)

This isn't hypothetical either. If you know where to look, you can get some AMAZING deals right now.

Any suggestions on where to look? Feel free to contact me discreetly if that's a concern.

Same, i'm discreet too.

> It used to be that inflation fueled spending because people figured they should buy it now because it will cost more later. They’d figure there is no point in saving because the value of money will get eroded.

I highly doubt this was ever the case, rather than what some orthodox econ types told themselves without evidence.

People totally do that with housing price inflation

Fair, but buying a long lived asset to both save money and get a larger capital gain is different than rushing to buy depreciating goods because one is worried their prices will go up further.

More broadly, if there was price stability for single family homes, buyers would be outraged!

As a homeowner I’d be fine with price stability. I don’t see why the price should go up (and that just increases my tax burden). I certainly don’t want to be in the hole if I sell though.

I agree, I bought my house as a home, I really don't need or want it to go up in value. I think many people would be better of if we had policies discouraging residential housing as an investment.

My home's value has gone up over 30% since I bought it around 18 months ago (and 50% since 3 years ago) - I couldn't afford to buy my own home if I were house shopping today.

Oh don't get me wrong, I would love a world with housing price stability. Renting with a land value is good.

> More broadly, if there was price stability for single family homes, buyers would be outraged!

If there was price stability for homes, people buying them for living in rather than as investments would be happy, since affordability would increase with real (or even nominal, depending on the sense of “stability”) wages.

In fact, there would hardly be any reason to by them. Just rent!

If you can find a long-term, fixed-price lease, sure.

There are reasons to buy besides price appreciation.

Microecnomically, sure. Macroecnomically, if housing prices were stable, I am pretty sure the other reasons would evaporate.

We did that in Q4 2021/Q1 2022 amongst my friend group. Literally hundreds of thousands of dollars in spending among us in land, tools, etc. Stock market looked high, don't want to stay in the dollar.

It's not a complex economic environment out there. You can look at a very small set of numbers and get the picture; buffet-index (total market value to GDP) and GDP growth in dollar terms says the market is high. CPI, M1 money supply, and debt-to-GPD says the dollar will reduce in value. So where else you going to park your money? If there's machines you can use, that was a good time. Most people don't need machines so it's all about houses and land and anything not showing as much peak. Not academic; critical to maintaining the value a person has put into savings from all that labor.

> Stock market looked high, don't want to stay in the dollar.

If you are looking to cache out of the stock market, that's quite different: you were worried about both inflation and the stock market falling after a bubble.

Most people have negligable liquid savings. Even if they wanted to, they lack the means to do what you did. Your behavior is anomalous and not representative of a broader macroeconomic trend.

There is some evidence that spending habits during high inflation do vary across incomes and between durables and nondurables. Believe it or not, people actually study this sort of thing.

As your post highlights, it gets more complicated the more factors one considers, like disposable income, stock ownership, etc. What you're describing here is rudimentary, not some groundbreaking, econ-slaying assertion.

https://www.federalreserve.gov/econres/feds/why-do-we-think-...

I would say it is pretty damning.

That is a working paper written in casual form that isn't vetted. I could probably cherry pick a better paper to support your case myself.

Moreover, even if we had a good paper that corroborated what you have here, I'm sure you probably realize that it takes more than a single paper, or even a handful of papers, to declare some truth finalized. "Pretty damning." Come on, dude.

I picked it because it is someone who wasn't taught this sort of thinking, and who took a job where they didn't until recently do this sort of thinking on the main.

Yes, the paper itself isn't a turning point, but the claims of the paper, if one chooses to accept them, are damning. A science should never confuse theoretical prediction and empiric evidence.

Indeed, other agencies like the FDA make the opposite mistake e.g. insisting on endless RCTs for e.g. JJ + mRNA booster vaccine when the theory-based extrapolation from other evidence is simple, and the opportunity cost of waiting non-negligible.

It is bad and quite odd given the overall trend of science towards "mindless empiricism" that Econ has the opposite problem!

Generally an interesting and thoughtful post. But:

> Most people don't need machines so it's all about houses and land and anything not showing as much peak.

You didn't see housing as showing as much peak?

The thing is, last time inflation was this bad in the 70s and 80s, per capita income was also going up. And maybe real income was not going up, but it was somewhat blunting the full effect of inflation.

If you look at per capita income from 2019 to 2020 it actually went down. BUT we only really have 2 data points right now(2019 and 2020) so I don't think we will see a full picture until 2024 or 2025.

Personal data point, but psychologically I am definitely cutting spending on things like restaurants and groceries. I can afford that fast food meal for 20$, but I don't value it at that price, so I just don't buy it. I'm not really crying 'boo hoo inflation', I just kind of pass on it and go on about life.

Source: https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?end=2020...

Same here. There is a valuation expectation from 20 years of low inflation and food culture that has completely upended eating out for me.

I am trying to flip this to a positive with eating less in general and eating less meat.

> They’d figure there is no point in saving because the value of money will get eroded.

I would figure investing it is better than buying crappy food or holding dollars that are losing purchasing power. Maybe there was no VOO or VCSH decades ago, but it is an easy no brainer nowadays.

Investing in what ? If you bet on tech in the last 6 months you lost 50 percent of your investment.

You would have to wait for stocks to double to break even, which can be a long time.

Of course it's easy to cherry pick in hindsight. But we're talking about people with cash right now, they are investing at current valuations not valuations from 6 months ago.

So where are you putting your cash now?

A mix of tech and broad (global) stock ETFs

There are plenty of non-tech equities at reasonable P/Es. There’s also shorting the market. ARK may be down but SARK is up…

That is 1 sector over a short time frame. Stocks can also double in a short time.

You could keep buying.

Your argument always assumes you pick a point in time and never consider new information or fundamental information. Such as, there were less computers doing things in the world yesterday than today and there'll be more tomorrow. Seems like a reasonable investment over the medium term.

Who's "investing" for only 6mo? My tech holdings are off over the last 6mo, sure (lots of stuff is) but I'm still up from 1996.

After the massive ramp up we had, it can very well take years, even a decade before we hit another new all time high.

Well, if you bet on tech you are stupid. All world indices are still up 3% in the last 12 months and have only lost like 10% in the last 6 months.

People in the 1960's thought inflation would be benign for stocks because earnings go up with inflation but the 1970s was a bad decade for stocks.

The 2010s were a great decade for stocks, the 2020s might not be. That too changes the psychology.

The good times in stocks were supported by very low interest rates, which some people call "financial repression" -- despite that there was tremendous demand for "stablecoins" (government bonds) even at negative real interest rates.

Even if you believe conditions are right for technological and social progress, interest rates will be a headwind for the stock market if they revert to the mean.

> People in the 1960's thought inflation would be benign for stocks because earnings go up with inflation but the 1970s was a bad decade for stocks.

I hear this a lot. Its true that stock returns relative to inflation weren't great, but what was better? I mean, cash lost a huge percentage of its value. Stocks seemed to pace inflation.

Were bonds a better investment during this period?

Gold was the best investment of the 1970s.

Harry Browne, who ran for president as a libertarian suggested using gold as a hedge

https://www.investopedia.com/terms/p/permanent-portfolio.asp

The "all weather" fund from Bridgewater is similar in thinking but substitutes inflation-protected bonds for gold.

Thank you, that makes a lot of sense and is a perspective that I hadn't thought about.

Makes me wonder about the fate of all these unprofitable startups

If you couldn’t turn a profit during practically the best time for tech startups in 2020-21, I can’t see how you can turn a profit when money is much tighter.

> If you couldn’t turn a profit during practically the best time for tech startups in 2020-21

Online/software-heavy services, tend to be fairly short runway (nothing like the decade plus typical for biotech firms), but still aren't generally zero runway to profitability.

It will be the same as the .COM bubble. Most will die and a few major players will emerge. Especially the startups that were built to be acquired will have a problem.

Not to mention the Fed's balance sheet https://fred.stlouisfed.org/series/WALCL

4 trillion more and doubled since the start of 2020 is crazy.

Holding dollars was a a better investment than holding assets these past few months.

Holding dollars is always a better investment if your investment time horizon is a few months. In an FDIC insured account.

If it’s a year to a few years, high quality bond ETFs likes VCSH should do the job.

If it’s further out than that, then sink the money into broad market equity ETFs.

Assuming you sold at the top. But the S&P500 is at March '21 values.

And, who knows, we may have already experienced the bottom.

OP states people are looking at food and not buying it because it's too expensive. @lotsofpulp suggests these same people invest their money. I don't think people who can't afford that much food are going to be investing that much. 'Have you tried not being poor?'

I thought PaulHoule was referring to people eating BigMacs and buying gas for leisure, hence the decision to not splurge on those things in contrast to previous decades where they may have.

> I would figure investing it is better than buying crappy food or holding dollars that are losing purchasing power.

Isn’t that more of a class distinction than a decision for most people? The rich will invest either way, and the poor won’t. Both will buy food. The economy still runs on consumption (which is kinda required for investment to even work, right?)

> it is an easy no brained nowadays

I’m a little skittish on making new investments at the moment, and it seems to be going around? You’re saying that’s obviously foolish and people should be investing right now despite potential indicators of a recession?

> Isn’t that more of a class distinction than a decision for most people? The rich will invest either way, and the poor won’t. Both will buy food.

There are more than two classes. The bottom 60% might be running on fumes, but the 60% to 70% might be thinking about foregoing spending $2k on a road trip that they can choose to invest instead, and the 70% to 80% might be thinking about a $4k Hawaii trip that they would forego. And the 80% to 90% might avoid $10k on an international destination. And the 90% to 95% might choose to invest $5k in the market instead of buying first class seats and put an extra $50k in an IRA as opposed to a new car.

> You’re saying that’s obviously foolish and people should be investing right now despite potential indicators of a recession?

Yes. Buy low, sell high. If you need to sell within a few years, then stick to cash or bonds. Although, what I actually meant by “easy no brainer” is that it is dead simple to invest in all equities at basically no cost due to the availability of extremely low cost broad market ETFs like VOO. Anyone can invest in the whole market for cheap within seconds of logging into their brokerage account.

As I wrote in another comment, for money you need within a year or two, stick it in an FDIC insured saving account, for money within a few years, put it in VCSH, and for money you do not need for a long time, put it in VOO or VTI or similar and forget about it.

Yes of course there are more than two classes, but usually the line between having enough free cash to invest or not is pretty binary, what’s what I want to say I meant there by ‘rich’ and ‘poor’ ;). I’m sure most of us here are in one of the middle classes, but speaking personally, my investments have really never rested on having excess income, and I very much doubt that it does for most people above the, say, 70% line. Investments and savings are made in advance of tallying play cash. When I forego a vacation, the money gets dispersed among other optional uses, maybe a stay-cation and a PlayStation and dropping a little extra in the kids’ savings accounts.

On the flip side, eating at McDonalds in the first place is generally speaking a class indicator. I assumed that was the reason @PaulHoule used McDonalds. Foregoing McDonalds is quite unlikely to result in having enough cash to invest in something else. You still have to eat, and a lot of foods are more expensive than McDonalds even from a typical grocery store.

Businesses and services that were absolutely overrun a year ago are now dead quiet. You go to change a car title or renew your license and you will be seen right away instead of waiting 2 hours. Same thing with restaurants and bars. I went the other night and was pleasantly surprised that it was just me and the barman. People are already reflexively pulling back on discretionary items. It won't be long before we have a surge in car repossessions and foreclosures. Kind of hard to justify paying on a car you can't even afford to put gas in.

Local repoman is now doing AAA auto service and towing because repossessions completely dried up during covid with deferrals, etc.

I suspect that's going to start up again soon.

> psychology of inflation is different than the past... It used to be that inflation fueled spending because people figured they should buy it now because it will cost more later... Today people see a Big Mac meal costs $9.99 at McDonalds and think “I can’t afford that!”

Apparently homo economicus has an interesting digestive system. Does the Econ dept have an Anatomy book explaining how folks can eat 2x this year and then not eat next year?

As glib as your comment is, the answer is that people will probably start eating at home. I'm not saying they will eat higher quality foods, but they won't be eating fast food as much. The value proposition isn't there.

I see this in my own life. I've eaten out for about 80% of my dinners. Taco Bell use to be $0.89 a taco. Now it's around $2. It took me 15 minutes round trip to get Taco Bell. My time (including fuel for the car) and food costs are now at or below $2 per taco (where I would get at least 3 for myself, two for my wife and 2 burritos betwixt us). I can eat steak and potatoes for the same total cost of a meal.

Homo economicus still has a digestive system. It's now considering the amount of energy (money) required to gather the food. Similar to the homo sapiens idea of, "Should I eat these nuts or get a pack of people to take down a bison?"

Food at home is up 11%; food away from home is only up 7%.

You have to keep in mind gas to get the food. Now if you stop on your way, you can call is 0 total. If you go home first, do things, then go get food, you need to include the cost of fuel.

This only strengthens my point. Going to the grocery store in nearly every household's weekly/biweekly cadence, but most people drive to go out to eat. If we include additional energy costs, the spread in inflation between food at home and food away from home is even larger.

It doesn't take an econ degree to understand that there are cheaper alternatives to a $9.99 Big Mac meal.

Maybe this will help people to eat healthier. You can get a pound of deli meat and a loaf of bread for around $15 here. That makes about a week's worth of sandwiches. I certainly know I could stand to eat better.

If people generally perceive that

1) They will not earn more money in the future to offset the price increases.

and

2) Their savings will outpace inflation.

Then they will react to inflation by saving more and deferring consumption. In order for this to change, saving/investment must generally be a bad deal for the average consumer - or they have to have the expectation that future earnings growth will offset inflation.

After 50 years of flat wages, it should be unsurprising that the average consumer does not believe 1 will be true.

> psychology of inflation is different than the past, because people have so little experience with it and don’t really believe in it.

This is called second round effect and it will come later, when people will spend and demand wage raises no matter what actual inflation rate would be then...

This is excatly what central banks are trying to avoid by cooling economy before inflation expectations got anchored and lead to inflaton spiral (in economic lingo)

I doubt the average consumer was ever motivated by inflation to spend. Its a nice story economists tell, to advocate for their inflationary policies

Just moved into a new apt & found a broken window frame. The owner was wanting to upgrade several other windows at the same time - only to hear a six-month leadtime for new windows.

Poof. There goes (I'm guessing) $2K of window demand.

The issue with inflation and supply chains is renegotiation. Inflation force organizations and people to renegotiate deals and that take time which slow down the supply chains performance.

At some point you just run out of money, which happened before the inflation really got started.

What evidence do you have that demand is down historically?

Economic indicators tell a better story when they are not manipulated.

In particular the impact of Fed QE policies on these rates is sufficient that I would not trust them to tell a comparable story now to what they did before QE started in 2009.

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