Inflation is as corrosive to investing as it is to the real economy
economist.com
economist.com
Inflation so low as it has been kept the past decades has created a fantastic environment for investing. But it seems that has taken away any chances for average people to make a living. Hyper-inflation is bad, but low inflation is equally bad when it helps to concentrate wealth in a few hands.
I see many people demonizing inflation because it will hurt "investments". Maybe, it is time that something else than salaries hurt for a change.
What you describe benefits people who overextended themselves and got lucky. Not really the thing i care about encouraging
Because you cant get a loan. Lending is much more risky if the borrower doesn't have a down payment and their current income is meaningless in comparison to the loan interest compounded over 10-30 years.
Edit: another fact to consider is that in an economy where your only option is to borrow, you pay a premium to the lender and have no option
> In an ever inflating economy, ...
Inflating the economy has been working over the course of the last century or even longer.
What many people appear to be oblivious of is that this growth has been fundamentally based upon a few factors: (a) very useful innovations in science/technology, (b) population growth and (c) almost limitless and thus cheap fossil energy in combination with ecosystems as basically humanity's landfill for all the waste streams of our ignorant and half-assed make-a-quick-buck-products.
(a) may very well continue delivering efficiency/productivity gains over decades to come or forever.
(b) and especially (c) are hitting ceilings right now.
I think this "ever inflating economy" has only been possible without much more frequent financial collapses because there was all this extra potential for use/misuse of natural resources available. This is what kept filling in actual consumable value/goods for all the inflated $.
With this extra potential becoming smaller and used up I very much doubt the current economic model can be kept running for more than another 15-20 years.
And with modern monetary theory MMT economists enticing politicians and naive optimists with their "yes, there is free lunch for everyone, don't you all worry about running deficits" message, the whole economic system is set up for hitting the ecological limits with the foot still on the accelerator.
What he describes is risk taking which is generally praised here.
However risk taking on housing has historically turned out bad for individuals and the economy
What are you basing that on? The GFC may be the most recent major crisis but home ownership is the American dream post-WWII.
Post-WWII a guy without a high school education was able to get a job at the steel plant, buy a house, raise a family, buy a rental in Florida, and retire with a pension.
The post-WWII U.S. economy was an anomaly - having half the worlds GDP. So many other industrialized countries were bombed and needed to rebuild. The U.S. was the factory of the world for a couple/few decades. We had security, capital, demographics, and productivity gains all in our favor during that time.
We no longer live in that economy. Members of today's millennial generation struggle to save for housing while paying down student loans. Many are still living with their parents. For those who want to have kinds it is common that both parents need to work. Wages have been stagnant for several decades. The government has subsidized 30 year fixed rate low interest mortgages, and the accumulated asset wealth this realized has benefited older generations, making housing much harder to afford for everyone else, a greater multiple of their incomes. Younger generations don't expect to do better than their parents. Maybe this explains the rise in populism. Is this sustainable? Can housing keep increasing in value? Or do we need to make changes?
My parents did the same thing - they'd buy something expensive on loan and the loan would reduce with time in effective value. Great right? But what about the other side? The person /business that sold you that car or furniture or whatever is basically left hanging.
Worst part of inflation is that it makes saving impossible. There's no effective way to prepare for anything. Any money or earnings you have is basically slipping inexorably through your fingers as grains of sand.
Salary too! Unless my salary goes up with inflation (rare!) I'm literally getting paid less every month and every year. You may pray and hope somebody somewhere will provide for you (government or whatever) but as far as I can see, inflation comes for everybody eventually. It's a Gian game of chicken and race that tends to explode.
That doesn't mean that we can't and shouldn't have discussion what level of inflation may be "good", given myriad conflicting and contradictory goals and consequences and timelines. Deflation is bad for other reasons.
So, it is the change in inflation, the raise, what makes it bad. If you ask for a loan when interest rates are at 15% your house price is going to be lower than when interest rates are at 1%.
So, you are right that "an inflationary period" as "increasing inflation" may be bad. But, maybe, the problem was that interest rates got to 1% . Such low interest make that just getting to a low 5% you are paying x5. Print more money, keep interest rates at 10% and unless they go up to 50% you are not so bad as people is nowadays.
In a stationary scenario, yes. But in a scenario where interest rates just jumped up after being very low for decades, it's likely that prices haven't come down in reaction to IR up. How long it takes for prices to react depends on other factors.
Without the taxpayer subsidy, I doubt any lender would offer those terms.
Joe wins one game of musical chairs once in a while, but the banks won't lose money lending money, they will get their dues, and with the uncertainty of inflation they will err on the safe side and the other Joes will lose.
> Maybe, it is time that something else than salaries hurt for a change
Low and middle class people are the most affected because wages and salaries aren tied to an inflation index. Rich people have easier access to inflation resistant investments.
This wouldn't be a huge problem if it was a mistake by freely operating private creditors, who theoretically, would realise their error and try not to issue long term loans fixed at a rate lower than inflation. One could see this as a "bet" by the creditors that the inflation rate will decrease in the future and they'd make a profit. The problem is when state-backed creditors are forced to issue low-rate loans as a government policy of homeownership. There, a country's tax base ends up funding people who can access these loans, while everyone else ends up further from owning a home. This is what happened in Turkey in 2020.
Where I live getting fixed rate loan is in banks propositions but they will never give fixed rate to people.
They will claim that with your income you don’t qualify and you qualify for adjustable rate loan - which is only good for banks when inflation shoots up and previous years we had almost no inflation until it hit 20% out of nowhere. So all of it was calculated by banks and normal people who had it good for last 10-15 years now had to pay up.
People living and to mouth aren't hurt by inflation as long as salaries track, but that's not the same as saying that it helps them.
Housing was cheap in the '70s because people couldn't save up to buy a house. Of course it worked out great for those that did, but that isn't the typical story
https://www.cbpp.org/research/poverty-and-inequality/a-guide...
Significant wealth inequality gaps and the lack of wage growth, in relation to inflation, coincide. There's a lot of data on this subject, but getting specifics on how the data is collected is very difficult (given the data collection is often decades old).
*The average homeowner
Since my call on general inflation was so far off, I rode quite modest investment returns from 2001. Then when COVID stimuli finally brought the long awaited bump in inflation, my rental returns took off, tripling my average rate over the prior 17-19 years.
I don’t see how the continued bout of modest inflation would be bad for asset investments. Indeed, I’m seeing what remains of my fixed rate mortgages fade away rapidly while rents keep getting bid up by tenants. My debt load fell so fast in the past three years that I’ve had to relever up to ride the inflation wave. Quite a ride since. Meanwhile, I’m pleasantly surprised that I’m totally on the mark about the reversion of the suburban exodus during COVID as tenants are throwing out far more in rent than I could have imagined.
Yes, this inflation bump sucks for anyone living on fixed investment incomes or salaries, but for any half competent investor, it’s fulsome times and I can’t imagine having the balls to whine about it to the masses on the economist. The smarter play has been to promote the fiction of rich-cession, even if that’s too fanciful for millennials and gen Zs to swallow.
Clearly inflation is now because companies are raining prices. But is it because of costs, or profiteering?
One source of data that might be useful is this:
https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile...
I find it especially funny when people complain about retailers “profiteering” when their net profit margins are as low as ever in the low single digits.
Edit: here is an updated report of profit margin changes over time by industry:
https://www.yardeni.com/pub/sp500margin.pdf
Edit 2: nvm, above link is not so useful since it is showing operating profit margin, not net profit margin
That isn't clear at all.
If companies are raising prices, why didn't they raise them before?
A) in a stationary scenario a company can't raise its prices arbitrarily because it will lose market share to its compatitors. Competition keeps prices low benefiting consumers while investors still get some profit. Capitalism works great!
B) on sudden changes, textbook conclusions can't be trusted because they are arrived at for stationary scenarios 99.99% of the times, at least that's how I think. You have to go case by case and make your best judgement. The current narrative is that as consequence of the pandemic, when you have "supply chains are collapsing" fearmongering, even if partially true, sellers figured that customers would be more tolerant to price raises, or at the very least, that their competitors would reason in the same way and so everyone can raise their prices and customers don't have a choice anyway. Personally I find it believable that companies would make such a calculation.
If the argument is that inflation drives prices up, which allows businesses flexibility to raise them even further, then I won't argue against that.
But the price increases above inflation, aren't real inflation (which is defined by an across the board decrease in the value of money).
The same thing happens when sales taxes are increased. Singapore just increase their GST and many businesses just increase prices well above the increase in tax.
However, I would also posit that it just doesn't matter since the feds will continue (as they've said and shown) to take action so long as the inflation rate isn't at their target rate, so cofactor A automatically implies cofactor B and we just have to deal with that fallout.
If instead it puts more onus on the state to invest as the only major player who would.. then that's also great.