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Comment by hayst4ck | Hacker News Reader

Inflation is a tax on idle money. Inflation is generally around 3%, so it costs 3% of your money for it to be "liquid" (idle). This means most people aren't going to keep around liquid cash.

Additionally (I am a layman, but this is my understanding), to get around taxes, rich people take out loans using their assets as collateral.

This means the rich probably have very little liquid cash, but incredibly large lines of credit.

In regards to spending, what's the difference between cash in hand and credit?

So from my probably poorly informed position, this question doesn't make very much sense.

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It makes sense to me because Elon or Bezos couldn’t cash out a fraction of their stock without crashing it. I’d be interested in who is truly wealthy and liquid and diversified.

Wealthy and diversified is different from holding a bunch of cash.

This is true but holding cash while this happens isn’t great either.

https://fred.stlouisfed.org/series/M2SL

I guess I’m looking for who is exceeding inflation and still making gains while not exposed to being decimated by a stock crash and definitely not almost all their net worth tied to one stock of a business they own.

Add a chart with monetary velocity next.

I guess the most wealthy man is the one who can get the biggest loan? The stock market however is an inflated balloon, if you just look at revenue the stock is mostly air/speculation.

It's a good thing to wonder about, but it's like asking the exact position of an electron at a given time. There will never be a single numerical answer.

Sure they could cash out without going through the public market. It's "easy enough" to arrange sales of large numbers of shares in private transactions. For Musk levels of money there's have to be more than a few such arrangements. Depending on the buyer's desire for that stock, it can even be profitable, as they similarly couldn't publicly buy such a large quantity without wild market swings.

The rich keep 10% of their portfolios liquid to react quickly during "fire sales" like right now when house prices fall.

The rich have very little cash as a percentage of net worth, they still have higher absolute levels than the not rich. I don't know why this internet meme is so popular. If all the rich people don't have money than who are the people with money if they aren't rich? Did we somehow manage to wealth equality with money? By cash I also include cash equivalents like treasuries with very short durations.

Also, as counterproductive as it might sound, banks give more loans to those who already have money, so if you assume that the rich have enormous lines of credit it is precisely because they have liquid cash in case their debt based investments perform less than than they hoped.

What you are right about is that central banks want people to use cash as a medium of exchange so 3% inflation is basically a "circulation safeguard". The problem with this inflation is that it only exists because you cannot charge a 3% fee on cash directly. If you could do that then 0% inflation would be optimal.

> like right now when house prices fall

Please specify which market you're talking about.

Anecdotally, there's a 20%+ drop from the highs of last winter in the Greater Seattle Area.

> The rich keep 10% of their portfolios liquid

While it's true most rich do keep a proportion of their portfolio in liquid assets, this doesn't imply cash:

> Cash equivalents are typically investments that have short-term maturities of less than 90 days and are considered liquid assets because they can be readily converted to cash.

> Stocks and marketable securities

> U.S. Treasuries and bonds

> Mutual funds

> Money-market funds

https://www.investopedia.com/ask/answers/032715/what-items-a...

> somehow manage to wealth equality with money

Certainly the gini coefficient of actual cash is lower than what it is if you take into account other assets.

> The problem with this inflation is that it only exists because you cannot charge a 3% fee on cash directly. If you could do that then 0% inflation would be optimal.

My understanding is that because the US Dollar is the reserve currency of the world we can devalue it via inflation to effectively take value from other countries by reducing the value of what they hold as well as reducing the "cost" of our debt. Since trades are conducted in dollars, dollars will still be purchased, even though they are a "poorly performing" asset?

So we can effectively fund the war in Ukraine directly with inflation. A tax was levied in the form of inflation, it was tolerated because it's not a "tax," and that tax is an extremely regressive tax on liquid cash. Inflation has effectively made labor cheaper too, making it even more regressive.

I guess what I'm asking is, why is 0 optimal? Isn't it more of a choice with consequences? Isn't optimal inflation probably not 0 if we are the reserve currency?

(I'm definitely throwing around some ideas I barely have a grasp of).

Trade is only about a quarter of the U.S. GDP. It would be kind of silly to manage domestic inflation solely to create financial international advantage. The U.S.’s strongest international advantage is our strong domestic economy (the business that Americans do with each other). Inflation is managed to support that.

Specifically, the goal of the Fed is to create stability, which major businesses need to do long term planning. It is more stable to “err” consistently on one side of the origin or the other; the Fed errs slightly on the side of inflation because it creates an incentive to invest.

You can look back at historical inflation rates and see the crazy volatility that existed before the Fed: swings of as much as 10% from inflation to deflation and back again. This made it very hard for people and businesses to make long-term financial decisions.

> Inflation is a tax on idle money. Inflation is generally around 3%, so it costs 3% of your money for it to be "liquid" (idle).

I hear this all the time. Inflation measured by CPI is not a tax on the cash held by the rich. The basket measured by CPI is a rounding error to that level of wealth. If you held even $1 million in cash, you need to look at the things you buy with that cash as investments and compare how those values have been changing.

For example, if you were a tech investor, you’ve seen far greater than CPI level inflation in the assets you buy over the last 5 years, so holding as cash wasn’t very smart. But if you blindly dumped cash into tech this year to avoid “inflation tax” then you missed out on massive deflation in the asset you buy.

Zooming out to the wealthy, consider commodities, real estate, bonds, stocks, etc. most asset classes have crashed, so holding cash isn’t necessarily a bad idea (at least, it certainly isn’t a bad idea because “inflation is running hot”).

Over time stocks tend to beat inflation. Looking at one small window of time is just wrong.

Plus if you just look at liquid assets you miss how these people actually made their money.

Plus if you look at the long term 3% compound inflation is seriously corrosive. That's over 30% of your wealth gone in 10 years. How long before things like food and bills become serious concerns?

> Over time stocks tend to beat inflation. Looking at one small window of time is just wrong.

It is wrong only if someone is sitting in cash for long periods of time. A poor person needing to buy groceries every week is seriously affected by CPI inflation. A rich person holding onto significant cash because they view asset prices to decline is actually experiencing deflation in the thing they want to buy and CPI for that person is utterly irrelevant. The long term return of stocks is irrelevant to this discussion.

> Plus if you just look at liquid assets you miss how these people actually made their money.

Not sure what you are getting at here, but it is beside the point I am making that CPI is not relevant to the wealthy holding cash.

> Plus if you look at the long term 3% compound inflation is seriously corrosive. That's over 30% of your wealth gone in 10 years. How long before things like food and bills become serious concerns?

Again, this isn’t something that affects the wealthy. If a wealthy person wanted to buy META a year ago, the price has declined 70% since then, so the asset you wanted to buy has experienced deflation giving you a better entry point, regardless of CPI inflation. Replace META with almost any other asset and the same statement is true over the last year or so.

>It is wrong only if someone is sitting in cash for long periods of time

It's wrong because you don't know ahead of time when assets are going to fall.

All we know in that the long term inflation will average out to X and stock price growth will average > X, and that inflation will erode the value of cash.

Someone with a million dollars in 1900 was very wealthy. Do you think their family that kept all their wealth in cash is still wealthy? No.

I am not suggesting anyone can judge ahead of time when assets are going to fall (though there are certainly indicators). I am stating that CPI inflation is not a “tax” on the cash held by the wealthy. It isn’t relevant. Their “basket of goods” purchased differs dramatically from what CPI measures and largely includes financial assets which have seen deflation. This is objectively a “cash is king” situation despite inflation running hot.

What wealth do you think you needed to hold to be in the 1% 100 years ago?

Can we agree that it is a lot less than today?

The 1% back then didn't have to worry about the price of milk back then either. They still have to worry about inflation though, because if they dont.if their wealth doesn't keep up with inflation they are getting less wealthy. If you have 100 million today you can't just sit back and not worry about your family ever working again, because eventually a house will cost 100 million. Then the car will, then eventually the milk will too. If you have 100 million in the bank and a pint of milk costs 100 million you are no longer wealthy, it doesn't matter what basket of goods they buy.

Never if you are wealthy. That's the point. The things needed to survive are what inflation is based on, for a wealthy person that amount of spending is so much less than 1% it's negligible. You only lose the 3% of your money if you need your billion dollars to buy food and gas and general consumer goods. The cost of luxury items fluctuates wildly and isn't part of inflation.

But you still need that money to keep up with inflation.

If you have a billion dollars under the mattress and inflation is 3% you've lost 30 million dollars in spending power. That dwarfs anything you would spend on food yes. And the next year another 30 million, and the next year.

So you need to invest to protect it from inflation, so inflation is relevant. The percentage they spend on food and stuff today is negligible. But you invest to keep it that way. Because once it becomes non negligible it's too late.

Their point is that inflation measures consumer goods such as milk. How much milk do you need to buy in your lifetime?

Wealthy people don’t use their money to buy milk, they use it to invest in businesses and to buy real estate, asset prices which don’t track the inflation rate at all (currently inflation is up and assets are down).

The parent opened with "I hear this all the time. Inflation measured by CPI is not a tax on the cash held by the rich. "

Which suggests that inflation will never hurt the rich. But it will yes they are spending much of that cash on milk today. But the price of milk is rising whereas money kept in cash isn't, or at least not at the same rate. If you have a job with good pay today, would you be happy if you were told it would never rise? Sure you may be happy today, but what about in 20 years when the price of everything has doubled.

The rich doesn’t care about the price of milk. They care about the price of stocks, bonds, real estate, etc. which make up the bulk of their purchases. These assets have experienced deflation over the period you are pointing to the price of milk inflating. CPI inflation isn’t a tax on the cash held by the wealthy.

What time period? My position is that you don't know ahead of time what assets will rise and fall, but in the long term stocks will beat inflation. And if you want to preserve your wealth so you don't have to worry about the cost of milk you will need to beat inflation.

They care about stocks, bonds, and real estate precisely because of inflation. Because if they don't beat inflation they get poorer every year.

If you don't invest you are guaranteed to lose to inflation, that's why people invest in riskier assets. They don't do it because it's fun.

This is terrible advice.

Cash never returns to a previous value. There is constant inflation.

All the other assets are temporarily reduced in value and the value is not realized until the asset is sold.

What are you taking as “advice”? I am stating what should be the un controversial observation that CPI measures things that make up a large percentage of a poorer person’s costs, whereas for the rich, inflation per CPI is meaningless and that their “basket of goods” purchased in a year is primarily financial assets, which have objectively seen deflation over the last year.

Which part of that statement is unclear to you?

> temporarily

Are they though?

It's still more complicated than this though, isn't it. Our inflation numbers are essentially polled perceptions of how much average prices rise. Depending on your lifestyle and what you spend on, you may not necessarily spend as much more per month as inflation percentages suggest.

A family living cheque to cheque will feel the burn a lot more since the majority of their purchases go to groceries and things that do go up with inflation. But a billionaire whose cash expense is marginal compared to their worth probably wouldn't notice - or have cause to care.

For example, if your liquid cash is going to pay things that are not rising in price, but your other cash is in a savings account earning interest, wouldn't you be relatively less affected by inflation?

Even if what you say is true it is probably still interesting to know how much liquidity people keep around at most

It will probably be spikey. Someone gets loads of cash from selling X and before buying Y. Probably people getting out of crypto at the top would be on such a list for a week or two.

questions for plato and pablo escobar (at his prime)

Huh? Is this stack overflow?

OP asked a very specific thing, not for this (very) amateurish lesson on "rich people and taxes".

In particular, even if you don't have stock in your own company, you'd still likely want to invest most of your assets. I would guess that a list of people holding large quantities of cash would, roughly speaking, contain two groups: people who don't manage their wealth very well, and currency traders/speculators who are holding cash itself as an asset.

Doesn't Warren Buffett have like $60 billions in cash?

Who knows? Seriously, think about this for a moment. Who could have such information, and why would they divulge it?

The bank, the government, the tax authorities. In this country, Norway, the last of those does indeed divulge it because anyone can access anyone else's tax return.

1. Even if he'd be mad enough to put 60B in one bank(-account), it's strictly forbidden for anyone who could access such information to divulge it. In reality, people who need to hold very large sums of liquidity (which is a very rare requirement if you really think about it) use short term treasuries and/or the money market.

2. What's the relevance of Norways idiosyncratic laws in this discussion? In almost every other country in the world (including the most of Europe) the government / tax authorities consider such information strictly private.

The relevance is making people aware that secrecy is a choice not a natural law. And while it is not common it is not only Norway that does this, it's a Nordic thing, with the exception of Denmark (which has had tax scandals that would have been found out sooner had the records been public!).

Do you mean Berkshire Hathaway, the public company he owns stock in?

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