One thing that inflation does that is rarely talked about is how it affects time preference (long-term orientation) of the population as a whole. As inflation rises, low time-preference folks are punished, and high time-preference are rewarded. high-debt w/ little savings is smart, YOLOs are natural.
A 22 years old now that saved 10% of his salary toward an index fund with 4-5% expected returns over a decade is disadvantaged versus someone who just spending his money for material rewards now (in 7%+ inflation long-term environment.)
It infects everything in society and absolutely not some benign monetary problem that the markets will adjust too.
"Low time preference generations produce prosperity, which produces high time preference generations, who bring ruin, which produces low time preference generations."
An index fund isn't going to return 4%-5% over a decade in a 7% inflation environment. Stocks offer a degree of protection against inflation (obviously if prices are going up then revenue is going up). There's other vehicles that can offer some degree of inflation protection.
The other thing is that as inflation goes up you'd expect interest rates to go up. Going into something like bonds at the height of that cycle can get you higher real rates than at any other time.
So what matters isn't inflation but rather real rates and valuations (P/E), certainly there are times where people are more motivated to save and there are times where they're more motivated to spend but I don't think it's as simple as saying that you shouldn't save at a 7% inflation environment.
What inflation does do is it motivates you to buy sooner. If you know the price of something is going higher, and you have no options to get a good return in the short term, and you want it, then you want to buy it sooner.
Yep. Real glad I bought my home before all of this pandemic/inflation craziness. Its estimated value is now up 33% from where it was four years ago. If I had waited until now to buy it would have been more difficult, as even though I've switched jobs and I'm making more money now I probably wouldn't have increased my savings enough for what I'd need for a downpayment and would have to dip into my investments to pay for it.
The value of saving 10% of your income isn’t only about what rate of return you can get for it. It’s also about normalizing your expected standard of living to 90% of your salary, instead of >105% as most people do.
If you get to old age having spent every penny you earned, your standard of living will fall off a cliff when you can’t or won’t work anymore. Someone who saved has both a larger budget and lower expectations of burn rate.
People who can’t fathom having a 6 month emergency fund are somewhat self perpetuating. People with 3 months will find they’ve moved the goalposts closer, and they just need time to get there, but less than they expected when they had 1 month in the bank.
Honestly thinking you will save your way to a great lifestyle is a middle class and very flawed concept. Nickel and diming your life by not going to starbucks and living in a cheaper apartment does nothing.
In our demographic there are a lot of people who struggle far longer and harder than they need to. But there are also a lot of people struggling to stay in the middle class, and some of the same advice applies.
The watershed moment for me was when I realized I could pay for a burst pipe or a dead transmission or a spontaneous road trip without reaching for credit cards. Not just financially but emotionally. Money stress leads to more money stress, on and on in a loop. Had front row seats for that my entire childhood. That thread runs through my entire life. I'd rather find a way to improvise around not owning a specific tool than buying a cheap one. The "best" one is often the third most expensive, but occasionally it's the third least expensive. Making the time to think it over saves me at least as often as not.
$5 on Starbucks has different connotations for different people and in different contexts. If you can't pay your bills and have a daily Starbucks habit, then the Starbucks is a sign of a real problem you need to look at. But if it's the glue that maintains important social rituals, then maybe you keep it. If you have white coat syndrome, and that $5 Starbucks is your reward for getting that thing on your arm checked out, then spend it. Get a scone too. Because that could be the best $10 you spend in your entire life. Same for your favorite ice cream or perfume or steak after asking for a raise, or doing an interview that intimidates you.
Hedonism is not your undoing. It's the treadmill that undoes many people.
Counting pennies doesn't save anyone, no. In fact it's my r/unpopularopinion that counting calories doesn't make you lose weight either. It's the mindfulness about calories or money that works, if in fact anything dues. Treating food or spending as an emotional bandaid doesn't work and creates a greater need in the future. Fad, elimination diets suck all the fun and pageantry out of consuming food. Which is why so many impossible ones seem to work for some people. Food and money aren't fun. They're fuel. Where can you get with them?
You're mathematically incorrect, unless you consider a typical worker saving 25% of their take-home "doing nothing".
A typical take-home for a month's work in US might be $3000. Cheaper rent could net you $300-$600 more, which is between 10-20% of your take-home. Not going to Starbucks every day, saving $5 a day let's say, works out to 5*30 = $150 bucks a month, a full 5% of the take-home pay.
Is 25% really nothing? Maybe you make so much money that $450 bucks a month isn't a big deal, but most people don't see the insidious nature of costly habits and how they're spending thousands per year on their quality of living.
Sure, Starbucks is negligible, but that much rent (assuming you're not in San Fran) makes the difference between a nice apartment in a nice location or a bad one in a bad location (or some such mix) in many place. There's all sorts of other implications that come with a better place that we can't necessarily chalk as simply extravagant unneeded spending.
I think where people get into trouble with fractions and especially where money is concerned, is in not realizing that lowering an expense by 1/4 means that the same money lasts 1/3 longer.
I can't count the number of times I've had to explain to someone, especially in project roadmap discussions, that ±20% doesn't cancel out. 1.2 x 0.8 != 1.0. ±5% almost does, and people extrapolate to larger numbers and make strategy based on it.
Let's say you forego your $5 Starbucks just one day per week and put it into mutual funds. $5 * 52 weeks = $260 extra invested per year.
Let's say you keep doing that each year from the age of 20 until you turn 60. Assuming an average annual rate of return of 8%, that Starbucks money would be worth ~$73,000.
Even though you only put in $260 * 40 = $10,400 total over that 40 years. Just accumulated compound interest over time works out to that.
Do it for 10 more years (50 years total), and a $13k total investment will grow to $161k.
So I'd say it does more than nothing. You don't have to go nuts with it, but even just starting early and putting in money every month, will eventually add up to a lot more than you put in.
By the way, it doesn't HAVE to be a Starbucks coffee you forego, it could be anything, or just a certain amount set aside for the investment, it's just a common luxury that's easy to replace (make coffee for a tenth of that at home) and cheap enough for illustrative purposes, which is why they use it a lot as an example. Keep the Starbucks and eat out one less time per week, or buy one less video game per month, or whatever.
If you're poor and don't really have the room in your budget for $260 a year, do whatever you can afford. Even $60 a year ($5/month) would become ~$37k after 50 years (for only $3000 put in). And hopefully over time you can better your circumstances and afford to put in a little bit more.
Disclaimer: Assumes global stability, no WW3, no environmental devastation in 40 years, etc...which is starting to look less likely.
Did pretty much that for twenty years (more than one kid) - I considered it a positive 'nickel and dime' expense that has paid off with kids graduating (honours) without a dime of student loan debt. Initially it was driven by 'not having that opportunity ourselves (spouse & I) and looking into the future and deciding that whatever education choices our kids made it wouldn't be lost value to save a bit.
One thing I'll note is that like a coffee habit, after the first year or so the concious thought of the expense disappeared - 'out of sight, out of mind'.
If your kid isn't a dummy, they don't need a college fund. If the kid is a dummy, they also, don't need a college fund, because they shouldn't be going.
I had no idea scholarships were a thing until I was well into university. No one ever mentioned them to me and I had no idea of the concept so I didn’t ask.
That said I wouldn’t have got one anyway because my life started falling apart in the last couple years of high school. Still got a physics degree though.
What an asinine take. I was only able to afford college because of the post-9/11 GI Bill, and even then I still walked away with student loan debt.
I'd be in a much better position today if I didn't have to spend time in the military and income today to pay for college. So I'm ensuring that my kids won't have to do the same. Why would I ever want to burden my kids like that.
I got a job in college that opened a lot of doors for me later in life, but at the time what mattered the most is that I could work fewer hours and still pay my bills, allowing me to pay more attention to school work and the other life skills that going away to college are supposed to teach you.
I had friends who made it all work far better than I did, juggling a job and studies and extracurriculars, but only a fool couldn't see that they were walking around with a handicap in the form of having to pay as they went.
Not working at all in school ends up being a liability when you graduate, but if the alternative is being forced by necessity to work to graduate, I'm not sure how much better the cure is than the disease.
This guy almost certainly makes more money off his blog now than he did before "retired", so he's not a good example (although there's some good information on that site).
Proper retiring at 30 (not just "I'll keep hustling but in an unconventional way, i.e. having a popular blog" requires a lot more savings or a much more austere than people assume. And often doesn't take into consideration future medical expenses (especially in the US).
Couldn't find anything for 30 specifically, but here's for 35. Assume even higher numbers for retiring at 30:
"To retire early at 35 and live on investment income of $100,000 a year, you need to have at least $5.22 million invested on the day you leave work.
If you reduce your annual spending target to $65,000, you'll need a starting balance of about $3.25 million in a taxable investment account."
Edit: I think your point still stands though. In situations where inflation is out of control or where you don't have access to stable investments, then spending your income as soon as you get it could be more rational than saving it.
Good point. Related- stocks are traditionally considered a good inflation hedge. Even this article partially debunking that idea shows positive real returns in all inflation regimes, and suggests that inflation up to 5% doesn't hurt stock real returns. Long term inflation over 5% has happened and could happen again, but it would be very surprising to most economists.
That's a great resource. I'd argue that inflation isn't "real" until it gets to around the 5% mark.
High inflation attracts Fed interest rate increases which attracts bond investment over equity investment.
In the US, we now have a triple whopper of post-pandemic supply chain adjustment, tight labor market due to early Boomer retirement, and now war-related energy cost increases. I don't think the economists have updated their model fast enough. I'm thinking we're going to have "real" inflation for a while now.
The last 25+ years of American history prove this wrong.. and it’s not like the last administration was concerned with massive deficits, adding $7T during strong economic times. It seems a bit odd to blame progressives for this one…
It's the opposite, our deficit is the way we run our worldwide financial empire that easily absorbs inflation. Your econ101 household analogies are for other little baby economies.
Instead, inflation comes from energy shocks (70s) or supply chain shocks (now). And the current one is mostly because everyone started online shopping due to being stuck at home.
This isn't my personal theory here, it's the standard explanation.
It basically only happened once. One reason is that preventing deflation is the Fed's job and they've been doing it. Another is that for a wage-price spiral you need both things to increase; in the 70s we had wage spirals because we had a lot more union workers with automatic cost of living increase contracts. Losing those means inflation doesn't happen as fast, and workers don't exactly expect wage decreases the same way, so it's assymetric. (Japan does have wage decreases, and has been stuck in deflation for decades.)
It’s “stable prices and maximum employment” ie preventing both. They mostly fail to cause inflation, which is why we undershoot the 2% target more often than not.
Compare to Argentina for a country that really fails at it.
> You can't have trillions in deficits without massive inflation
You empirically can, because the US has at times done so, but progressives (particularly MMT practitioners) not only recognize the relation between government spending balance, they hold up monetary effects like inflation as the only valid constraints on government spending balance, rejecting the idea that spending balance ought to be governed by the pretense of a fix purse that must be filled by tax or borrowing (the “fiscal” approach), while monetary concerns are controlled exclusively elsewhere on the system.
That assumes all the other variables remained the same. The 2008 banking collapse may have resulted in deflation without the big spending program, which just countered the deflation.
And in periods when investment returns are especially low, it can be better to invest some of that money in yourself, to improve future prospects. Anything from taking classes to going to conventions to paying down debt.
> A 22 years old now that saved 10% of his salary toward an index fund with 4-5% expected returns over a decade is disadvantaged versus someone who just spending his money for material rewards now (in 7%+ inflation long-term environment.)
I would disagree here. This now 32 year old was saving their income during one of the longest booms in American history, and depending on where he invested, now has multiple years worth of investments producing solid returns.
Also, this 22 year old was in a better position to buy a house or car because they also lived through a bust time where lending was much more restrictive in the past. No savings means no house.
The person who went into debt still has all that debt, but now will be buried in a rising interest rate environment. Since they never saved, they are facing rising rents, plunging them further into debt.
People with assets benefit from high inflation environments. People spending more than they earn aren't in a position to acquire assets.
For example, I know people that were scared to take out massive mortgages in past years and instead saved. That turned out to be the wrong move. In our money printing world, it has been much better for folks to buy as much house as they can. The house appreciates and the debt is wiped away by inflation.
Yes if you saved in a savings account, you were screwed. If they instead bought the S&P 500, over the last 5 years they would be up 80%. Still having the bigger house is better than not buying anything at all, but there are many assets that are effectively as liquid as cash, which the government has bent over backwards to protect.
You're forgetting about how leveraged housing is though.
If you bought a 500k house five years ago with 100k down, and now it's worth 1m -- you've effectively gained a 500% return on your 100k, maintained your principle, and you could live in your investment to boot. A house with 20% down (or less) in many housing markets would have blown the S&P out of the water in the past several years.
Yes, you can leverage in the stock market too -- but rarely at a 4:1 ratio -- and if you did leverage up too much, you would have been wiped out by a margin call in 2020.
Leverage, and refinancing. It's not like taking a mortgage locks you at that market rate. With refinancing, you can take advantage of market rates to improve your leverage even more.
I refinanced last year to a 15-year mortgage at a sub-2% rate. The math happened to work out that my payments didn't change, but it halved the amount of my payment going to interest each month. Which, in turn, accelerates my payoff date by about 10 years.
Yeah, but those other assets don't let you live in them. You have to subtract out the cost of your rent for those other assets if you want to compare it to a house.
My mortgage for my house I just bought costs me $7k a month including taxes and insurance. Of the $5.3k I pay a month to service the debt, ~$3k just interest on the debt. Only $2k goes towards paying down the principal.
Which means that I'm forced to pay down this mortgage by $2k every month instead of investing it into stocks. If my house value goes up 50%, that's fine, but if it doesn't or goes down, then that could be a big missed opportunity.
People need to live somewhere. You're either gradually buying yourself property or you're gradually buying your landlord property. Your scared friends weren't saving that money. They were just paying rent instead of making mortgage payments. If you're referring to the down payment, the only economic difference between holding $X in cash versus holding $X in home equity is home equity is going to appreciate faster in most decades. They're certainly punished even more by inflation, but they were already being punished.
Its an example of a possible scenario so not really possible to be suspect. All you need understand is that if inflation is greater than expected return potential you are in the described scenario. It can come about from either lever: confidence in returns is lost causing no one to invest, or inflation outstripping expected returns for a significant period of time (like in Venezuela).
> Its an example of a possible scenario so not really possible to be suspect.
This doesn't follow. I would expect any financial planner worth their salt to consider many different scenarios and make decisions based on which scenarios they think are likely... not based on which scenarios they think are possible.
The fact that it's possible for a decision to put you in a disadvantageous position does not mean that you made the wrong decision. It may just mean that you made a reasonable decision but failed to predict future market behavior.
The idea of using a 40-year high for inflation to do your long-term planning sounds like some pretty outrageous incompetence to me.
It seems pretty unreasonable to take Vanguard’s equities return projections over the next 10 years and simultaneously ignore their inflation projection from that same source.
Equity returns and inflation are not independent and the assumptions that led to their equities prediction are embodied in their inflation prediction.
> 10 year returns in the range of 2.3%-4.3%. And inflation is at 7% right now.
Usually those sorts of estimates are on real returns, so factor in inflation (i.e. 2.3%-4.3% above inflation). That is about right in historical data over most 10 year periods.
That said there have been periods of negative real return, but are you sure this is what Vanguard is predicting?
Annualized returns for the S&P from 2013-2021 was ~15% per year. For 2019-2021 the average was 24% per year.
The idea is that future returns will be lower because those some of those expected future "real" gains (i.e. gains from growth and dividends) are already reflected in the current price (i.e. speculative gains). That these recent years of high returns are due to speculation is clear from the abnormally high PE ratio.
Of course, Bogle has been saying stuff like this for awhile, so who knows. He was saying that future gains would be lower back in '17, and look where we are now.
If I cast the slide ruler over these numbers it suggests the period of time is decreasing, while the returns for said period are increasing. Thus the next values in the series are as follows;
Full year 2022 +33%, H1 2023 +42%, Q3 2023 +51%, August 2023 +60%, first 10 days of Sep 2023 +69%
During the 1970s real returns were negative. Inflation-adjusted S&P 500 was 632 in 1970; it was 395 in 1980. After the 1970s it shot up; it was 788 in 1990, and then 2322 in 2000.
I've seen some academic papers remark that investors tend to undervalue the earnings side of inflation. They will discount future earnings by the high interest rates that go along with inflation, but they will fail to account for earnings growth that goes along with having a profitable business in a high-inflation environment, and for the changes in competitive dynamics that follows inflation. (When rates and expenses rise, it tends to flush out the more marginal and unprofitable firms, which means dominant firms have less competition.) Warren Buffett made a large portion of his fortune by investing in businesses with little competition during times of high inflation.
Basically, it's good to be a stock buyer in times of inflation, and bad to be a stock seller*.
That makes intuitive sense because stock valuations depend on interest rates. Long periods of low interest rates -> high P/E. Long periods of high interest rates -> low P/E.
How reasonable is it to expect a 22 year old to be able to take out a mortgage, given their age and likely lack of any meaningful down payment?
When I was 22 all I had was about $5K in savings, less than a year of experience at my first full-time salaried position and student loan debt to pay off. I imagine any reasonable loan officer would deny me on the spot for a mortgage given my liabilities and lack of proven ability to make payments.
For most of the '60s, inflation was below 2%, while interest rates were 3 to 5%. Inflation started picking up north of 3% in 1967, and interest rates climbed along with it, to 8%.
High interest rates (especially above inflation) create an incentive to save money, and keep property prices low. The higher borrowing costs keep the bid prices of property down, and the positive real interest rate means people don't need to speculate on assets like real estate to save their money.
I see similar arguments with vehicle prices, where vehicles are more expensive, but they are higher build quality, have more features (heated seats, blind-spot warning, etc.), so it's not technically correct to use the term "inflation" since the product is different.
But it still feels wrong to say that this isn't a concern and to dismiss it with that argument, since people still need entry-level options, even if we tout the new bells and whistles we've added to the houses or vehicles over the past few decades.
Saying "housing prices are ridiculous" followed by, "but you get more features!" is no consolation to the family looking to get their foot in the door of the housing market.
Do you have a citation for that claim? I searched for it but didn't find a great source - the one I found put homeownership at ~22yo in 1960 at less than 20%.
Also, it's quite a risky assumption as an individual that one's able to make a long-term profitable bet against an army of professional investors that dedicate lots of resources towards making profitable bets in the same market.
As an individual, one is most likely to outperform other non-commercial individuals. It's rather likely in a complex investment environment that money will flow upward from the less well informed and less well equipped investors towards the big players.
Which is why individuals should be extremely cautious where they invest .. lots of options can probably be summed up as: individual lends big player their money gets negligible real return, while big player makes orders of magnitude bigger return.
Why would asset diversity be considered prudent rather than being an incompetent means to chase mediocre returns?
It's not necessarily high leverage, since you don't know anything about the person's balance sheet. It matters a lot more how much (and what type of) debt the person has, not so much how much debt the real-estate has. Their monthly debt payment to income ratio may be low for example, such that the mortgage isn't a problem at all (and it's an inexpensive way to borrow while inflation is high and mortgage rates are well below that rate of inflation, which is a historical oddity for the US).
Diversification-as-mantra is for people that don't know what they're doing and don't know where to focus. This is what morons on television preach, and other pop investment experts, because they too have no idea what they're doing, they just know that spewing out "diversify" won't get them fired and it seems safe (mediocre returns are anything but safe).
The typical person is incapable of being an expert at many asset categories. It is possible, over time, to become an expert at one or a few however, including real-estate. If you acquire competency at real-estate investing, it will pay off handsomely over time (as with equity investing). Unless you're born wealthy or acquire a lot of money in some other way, you're going to start off buying one property. Certainly one can reasonably debate the amount of down-payment to start with on that first property, depending on personal finances.
The most prudent investment path is to focus on an area narrowly, concentrate at becoming good at a thing, develop as much skill at something as possible. That competency is your safety, not diversification (which is primarily useful when you have little to no skill and need to spread your investments around widely because you don't know what to focus on to generate superior returns for yourself; this is why someone like Warren Buffett advises the average person to just buy a low cost index fund, it's because they're incompetent investors ill suited to managing anything on their own - they simply do not have the skill to do so - and the index fund provides relatively safe generic diversification in the stock market, and the matching returns for that as well).
Asset diversification is important because we don’t get the average expected return from a portfolio, we get the actual returns from only one roll of the dice.
Since you can be foreclosed upon and walk away, your downside is capped at the money you put into the property (and however much you value your credit rating for the following seven years). Your upside isn't strictly capped. So for certain high-earning, low-net-worth individuals (say, a 22yo programmer), the expected value for such a risk is high enough that there's a good argument for rolling the dice.
only in non-recourse states, of which there are twelve. if you don't live in one of those, the downside is still capped, but it's the full purchase price of the house.
it's not a good idea to yolo invest like this unless you really know what you're doing.
True, but those twelve comprise a large portion of the country (mainly since they include Texas and California).
Honestly, in most states your greater risk is likely that a renter just stops paying and you have limited or slow recourse options. But like most undiversified investments, it's possible everything could go to zero (see Detroit).
Right now, you can borrow a large amount of money (larger than pretty much any other loan type) at a low fixed interest rate and pay the bank back less than what they loaned you in inflation-adjusted terms. It's basically free money at this point, and one if the reasons I don't sweat my rapidly deflating salary as much as I otherwise would be.
Oh yeah - that's generally a horrible investment compared to the market as a whole. In essence, you end up losing so much of your profit through taxes and you've managed to take on a business now that requires your time. Land lording is generally a terrible investment unless it's done at a scale and professionally. Not saying you don't make money on it - but that same money is probably better in an index fund for 30 years.
Because in the long term, property values can only go up, given the political power of NIMBYs, all levels of government bending over backwards to protect paper wealth of boomers, and low interest rates.
especially now where in all likelihood you are going to overpay for the property, and at anytime the government just decides that your tenants can stop paying rent for a year or more, but you still need to make your mortgage payments, property tax payments and keep insurance and the heat on etc.
Some people do well with rental properties over the long haul, I wouldn't touch it with a ten foot pool these days - especially if you live in a state where tenants have more rights than the owners of the property.
Monetary inflation is a nominal phenomenon. It's not the returns to investment that are changing (that is determined by the free market) it's just the returns to holding cash. It's the measuring stick for value that is changing.
You can still save and get real market returns through owning real private assets like stocks.
> It's not the returns to investment that are changing
How so? Quantitative easing controls the yield on bonds, and stock prices adjust accordingly to keep their yields consistent with the bond yield + risk premium. We've seen the earnings yields on stocks plummet as a result. After a short-term rapid climb (caused by the step change in interest rates), low interest rates can cause the long term growth of stocks and other assets to also remain depressed, even while consumer prices climb. This is the "stagflation" scenario and is a very real possibility.
This is working as intended. See "the paradox of thrift". You can't eat money. Inflation means money is less valuable than presupposed, because productivity is lower than presupposed, and people need to create more value now.
Losing savings to inflation means you sod your labor in a market that was oversupplied with labor, and spent it in market that is under supplied.
Economicaly, to optimize returns, you should have taken time off from selling labor when inflation was low, instead of hoarding cash.
If you have a good use for your money, you can invest it to beat inflation. Otherwise, you are just seeing the correction for your inflated (ha!) estimate of the value of money.
Inflation isn't bad, it is merely the messenger of the previously hidden misallocation of resources -- either "printing money" (not your fault, but blame the printer, not inflation, or accept it as a wealth tax), or real economic destruction like a natural disaster (Covid) and arguably the political respite to it, or war.
This is only true if you consider financial savings the only type of savings.
Preppers, for example, are very low-time-preference people who have chosen food storage, energy capture and storage, machines, tools, land, structures, raw materials, cabling, conduit, lumber, etc as their mode of savings. They will tend to do very, very well in high-inflation environments.
This also ignores the fact that many assets owned by low-time-preference people (and/or the funds they hold) are leveraged, whether it be real estate leveraged by long-term mortgages, or 4% dividend-paying equities leveraged by 2% margin accounts. Inflation helps these people quite a bit.
Slight nitpick -- I think that's only true as long as interest and investment returns don't rise to keep up with inflation + real return + tax levels on investment income. But, not relevant here, since they're definitely not keeping up.
> One thing that inflation does that is rarely talked about is how it affects time preference
I don't really understand how you got there - it may be left implicit in some conversations, but essentially the entire discussion about monetary policy wrt inflation rates is about managing this preference trade off. The general consensus seems to be that swinging too hard in either direction is a bad thing, hence targeting nominal 2%-ish.
Yea, that's the conversation among academic economic paper, but not among normal people. It's unfortunate that the accepted dogma is that the economy can be managed optimally by making savings unattractive.
There is down-stream effects from the population becoming high-time preference. Spending might go up (thus stimulating the economy), but so would be a lot of undesirable behaviors.
I am reminded of a recent US official who said people not commuting to work and thus not needing a whole suit of services such as restaurants are “bad for the economy.”
What you’re describing is basically the need for monetary policy. When the fed raises rates to combat inflation, this makes debt more expensive and makes yield expectations higher on investments (by raising the risk-free yield of bonds).
> "Low time preference generations produce prosperity, which produces high time preference generations, who bring ruin, which produces low time preference generations."
Inflation severely disincentivizes savings and rewards consumption. This affects the behaviors of entire generations of people. If you really want an example, look at the USA post ‘71 (up to this very day) and its ever-increasing rate of consumption.
This is an horrible example given that since 71 the este of inflation in the US has gone down, not up, while at the same time during the post warn, and during the strong keynesian period it is considered to be a golden age where anyone could buy a house, while at the same time the inflation rates where the highest
What op doesn't mention is that high inflation doesn't per se desincentivize saving, rather it encourages to invest in high returns endeavors, or in assets which don't strongly devaluate, as for example housing, of which most people on the planet being able to own their own small home is their biggest investment of their lifetimes, and again, part of what made "the American dream" what it was, sadly all of that is dead now, so we have millions living in tents in Cali
You’re missing the long term. The inflation went down after having changed buying patterns, and that inflation didn’t disappear. Hence, it is (in general) always better to operate on debt than on cash as long as your interest rate is low (which has been the case for 30 years now). This drives up consumption patterns over-all.
Next, while this does drive the purchasing of investment class assets, those are not necessarily high-return. The reason the stock market keeps going up is not that everyone is suddenly making double the revenue. The stock market has turned into a ponzy-esque scheme where the higher and higher valuations are driven only by people seeing the numbers go up. The actual returns per share are not rising as quickly as the share prices.
Funny you should mention housing, as the housing market predictably crashed in 2008 (Ron Paul called it quite well, as did those who bet against the market). It will happen again as many of the same mistakes have been made. Even without derivatives on property, or even the easy lending, people have been taking massive loans due to interest rates, and this has driven a dramatic rise in housing costs. As more and more people are priced out, and rents continue to increase the potential buying/renting pool shrinks which will eventually cause another crash even if nothing else does.
>Funny you should mention housing, as the housing market predictably crashed in 2008 (Ron Paul called it quite well, as did those who bet against the market). It will happen again as many of the same mistakes have been made. Even without derivatives on property, or even the easy lending, people have been taking massive loans due to interest rates, and this has driven a dramatic rise in housing costs. As more and more people are priced out, and rents continue to increase the potential buying/renting pool shrinks which will eventually cause another crash even if nothing else does.
If you want to avoid housing bubbles and crashes, you have to legalize building more houses.
Also building up. Higher density housing should be the norm in most places. In the US it's the exception and leads to poor public transport, the need for a car, long commutes, etc...
Actually, 2008 was supposed to be the end of the economic system. It should have resulted in a great depression and a massive increase in political polarization and violence. Yet for some strange reason, we are merely limping away from it and that event is becoming a faint memory in another decade.
People didn't take on massive loans due to interest rates, banks were handing out massive loans and this forced them to lower interest rates.
People save first, then the money must be invested, either directly in stocks or indirectly through loans where the borrower invests in his company.
If there is a flood of savings, then there will be a flood of loans as well.
The problem with Keynes is that he dismissed Silvio Gesell's idea of having expiring bank notes. Yes, a modern implementation will probably look very different, no stupid stamps but the principle is much better than attempting to eliminate liquidity preference with inflation.
>Inflation severely disincentivizes savings and rewards consumption.
Good. We've been suffering from deflationary policies that led to demand shortages and low productivity growth since the 1980s. There's a healthy balance, but ultimately there's no moral virtue in economic austerity.
Just to make sure I’m understanding, is the suggestion that people who lived through that high inflation period became more inclined to spend and less inclined to save, culturally, to this day? Do you have any links discussing this further?
If you have the money to buy, e.g., an Xbox, saving it will not neccesarily return you the same amount of money to buy an Xbox in the future, because inflation raised the console's price more than the extra money you got in return of your investments.
If you buy the console right away, you can be sure that your asset is "One Xbox" in value, no matter the amount of inflation.
the assertion, as I understand it, is that if you lived through a period of inflation your generation will be spending more, and not saving as much, for _the rest of life_, meaning even in low inflation periods like the 2010s
Interesting. I’ve lived in the opposite (my entire adult life has been in the low inflation period following the 2008 recession) so I can’t personally relate
Why save money today when tomorrow it will be worth a fraction of what it's worth today? You're better off spending it on anything. Inflationary currency sucks by design, you're supposed to get rid of it as soon as possible.
I’m sure people more educated than I can debate about this all day, I’m just saying that in the system we have as it exists today, the expectation is that the federal reserve will increase interest rates to combat inflation, and in turn this makes debt more expensive and increases the risk free yield rate
Edit: and just to be clear where I’m going with this, the market adjusts along these expectations. Why has the housing market been so insanely hot for a year now? In part because money is easy, and everyone believes inflation is coming/here, so getting a 30 year loan on 3% interest is a killer deal. Consequently home values are through the roof. But this counterbalances: you end up with a higher principle and lower interest for the same monthly home payment, and take on the risk that you will be underwater on your mortgage if asset values crash when rates rise.
You are assuming a simulated environment without permanently increasing entropy. Gold doesn't really suffer from increasing entropy but humans do. That's the fundamental problem that makes it impossible to maintain a gold standard or a fixed supply currency that does not account for entropy.
If you were to account for increasing entropy with a negative interest rate then you could maintain a fixed money supply though I would recommend price level targeting to adjust the money supply to the population and economic growth because of psychological biases.
A fixed supply demurrage currency (negative interest) that is deflationary could in principle work just as well as one that does price level targeting however, the need to adjust prices would remain which is undesirable because we suffer from money illusion.
So no, monetary policy is not what is causing inflation. Inflation is a backwards way of representing an increase in entropy. By that I mean the exponential x% creeping monetary inflation. A supply shock can obviously cause an arbitrary amount of inflation within an arbitrary time span.
This is an absurd conclusion. Time preference is a function of wealth, not the other way around.
If you are a billionaire and can't even spend all your money without being completely reckless then your wealth will grow by the sheer nature of the exponential function, i.e. you spend 3% of your wealth but it grows by 6% so your wealth will grow by 3% forever until the economic system collapses since you have completely absorbed it.
Your time preference is basically 0% as you are unable to spend the vast majority of your wealth.
The time preference of poor people is very high, because their fixed costs like shelter and food massively outweigh the capital gains they earn. Yet every single cent they spend is partially paying the capital gains of the rich.
This has nothing to do with not doing YOLO or being smart or being rewarded, the system is simply rigged.
If this was a free market the interest rate would fall below time preference. In fact, the interest rate would actually have to go negative, not because time preference can be negative, but instead because time preference is actually unable to capture the nature of interest to begin with. It's a complete myth that time preference and the interest rate are the same thing. It's fundamentally impossible as time preference can only exist relative to the highest risk free interest rate minus time preference.
What is the highest risk free interest rate? Fucking 0%. Why is a 0% interest floor terrible? Because the real world undergoes a permanent increase in entropy and requires a perpetual energy input to stand still. So, getting 0% interest actually requires someone, anyone, to pay a non zero interest rate which represents the amount of energy that was added to the system to keep it standing still. In other words, the interest floor is below 0% and we simply forced it to be 0% by decree, against the will of the vast majority of humans on the planet. This is not a free market, it's an oppressive and coercive market.
Obviously, it is impossible for us to simply declare entropy increase nonexistent. The dust we have swept under the rug is still there. It's accumulating. You can see a little mountain forming under the rug. Yes, I'm talking about inflation. Because we refuse to face reality, we either have to perpetually grow the economy to make the mountain of money seem appropriate or we implement negative interest rates through the backdoor, with inflation where people start noticing the dust mountain getting in their way.
No, a gold standard does not solve the fact that we are mortal. It's just another way of ignoring entropy by decree.
A 22 years old now that saved 10% of his salary toward an index fund with 4-5% expected returns over a decade is disadvantaged versus someone who just spending his money for material rewards now (in 7%+ inflation long-term environment.)
It infects everything in society and absolutely not some benign monetary problem that the markets will adjust too.
"Low time preference generations produce prosperity, which produces high time preference generations, who bring ruin, which produces low time preference generations."