5 ms·

How does inflation help the rich? Doesn't that devalue their net worth?

beiller 5y ago
If everyone's bank account balance goes up by 50% uniformly, lets say one person has 100,000 and another has 10,000. After the increase they now have 150,000 and 15,000 respectively. But the low end item costs also go up due to inflation, so food now costs 50% more lets say. The thinking is that this eats into the lower bracket much more than the higher one. So inflation would increase the divide between rich and poor. I think this makes sense, interested if I am wrong here please let me know your thoughts!
- donmcronald 5y ago
  I don't think so. Both still have the same percentage of the money, so it should be even. If a rich person thinks inflation is coming they can buy fixed assets, invest in resource companies, invest in companies that provide critical services (food supply, communications, etc.). The problem for the poor is that it's hard to invest in things that benefit from inflation, especially if you don't have any money to invest. It's unlikely the paycheck-to-paycheck wages of poor people are going to go up enough to cover any kind of increase in (ex:) housing prices. Or you have people like my parents whose (defined benefit) pensions aren't going to do well against inflation. They'll get to watch the value of their retirement income drop like a rock at the same time they've seen millionaires with "small" businesses pocket hundreds of thousands of "bailout" dollars they didn't really need. Those millionaires will be the ones creating inflation by buying up fixed assets with their free government money. My parents will at least benefit from increased value in their house. Me and the generations after me that can't afford houses and don't have many fixed assets will get screwed really badly. I can see it coming and there's not much I can do for myself :-(
- tchalla 5y ago
  You're essentially describing the Cantillon Effect :-)
qaq 5y ago
asset inflation
amelius 5y ago
Only if they didn't invest it in real estate etc.
rolobio 5y ago
The rich own assets like real estate/stocks that will hold their value through inflation. People with savings or no assets/savings are hurt most by inflation.
aqme28 5y ago
Inflation on its own isn't helpful, but when you print money just to pour it into the stock market, you help wealthy people disproportionately. You raise stocks while devaluing currency. Poorer people have a higher proportion of their wealth in cash, and are often paid in static amounts.
gimmeThaBeet 5y ago
The implication there is that equities are long term an adequate hedge against inflation.
speeder 5y ago
high inflation but not enough to trigger hyperinflation instead lead to quickly rising asset prices, like stocks, land, and so on. Also rich people can sometimes take loans with interest lower than inflation, this is basically free money.
- donmcronald 5y ago
  > Also rich people can sometimes take loans with interest lower than inflation, this is basically free money. In Canada you can borrow well below 2% and housing prices in hot markets have been going up well over 10% YoY with a lot of predictions of 20%+ this year. Free money indeed. You just need $1 million+ to play the game.
ska 5y ago
It's not going to help directly. But if the inflation was a) produced by printing money that b) disproportionately ended up in the pockets of a subset of the population, one way or another, then it amounts to a wealth transfer.
garmaine 5y ago
Inflation is regressive. The rich don’t literally hoard cash, and their investments are likely to appreciate, or at least not suffer as badly as real inflation. Have you seen how much the stock market went up in the last year?
lotux 5y ago
yes, most rich people can get good loans with low rate during this time, as inflation goes up, the value of asset that they bought with loan goes up and debt value goes down, so the get richer twice again that is why for example bill gates became biggest land owner during covid, I guess he bought lots of land with cheap loans
- tasssko 5y ago
  Bill Gates has a team of people in a ‘family office’ managing his money the reality he probably had a windfall last year and needed to do something with it. Usually when you have a windfall you buy treasuries because they can be liquidated easily when new opportunities are available. Buying treasuries is a bad idea at the moment, they have negative yields when you factor in inflation. He probably had no good stock opportunities and there may have been more opportunities in farm land. Would he have used a loan… maybe I don’t know the details but also maybe not his investment funds don’t need the loans. My point is he has a good team managing his wealth and it will most certainly grow as a result and this team will also find good opportunities for him to grow his wealth. This should not be surprising.
  - lotux 5y ago
    the point is, he or his fund can also get cheap loans when rates are historic low by land and win twice by inflation
forgithubs 5y ago
Net worth does not need to be kept in the form of paper currencies
dehrmann 5y ago
It helps people who are in debt (there's the student loan reduction Biden's been asking for). In theory, it's a wash for assets like stocks and real estate. It hurts bondholders, so especially retirees.
- grey-area 5y ago
  The last 10 years have seen massive asset inflation, unrelated to economic activity.
- donmcronald 5y ago
  > It helps people who are in debt Does it really though? It definitely helps people who used low, fixed rate debt to buy assets that will appreciate with inflation, but does it really help the average person with $100k in student loans that isn't going to see a wage increase that comes anywhere close to the increased cost of living? IMHO the answer is no.
  - dehrmann 5y ago
    Federal student loans have a fixed interest rate. Assuming inflation makes its way to wages, that makes the education an appreciating asset.
cm2187 5y ago
Depending what it is invested in. Money printing lifts asset prices up: stocks, houses. That's typically the sort of assets owned by the upper middle class, you don't keep a $1m balance in a savings account, particularly when rates are at zero or negative.
grey-area 5y ago
The rich have assets and large debts secured on them, the poor have wages and small debts. Both assets and large debts are an advantage if inflation arrives.
wskinner 5y ago
New money does not reach all people at the same time. Those who get it first benefit more. This is known as the Cantillon Effect. https://fee.org/articles/the-cantillon-effect-because-of-inflation-we-re-financing-the-financiers/ https://fee.org/articles/the-cantillon-effect-because-of-inf...
- donmcronald 5y ago
  Yep. Basically whoever gets the free money first get to buy / invest before anyone else even realizes the money supply has been diluted. The way money is printed and given directly to the rich via the financial industry needs to stop. If the money supply needs to be increased every year it should be done by giving it directly to the masses via UBI or similar. I'm starting to have the opinion we've been getting scammed with hidden inflation since the 80s.
  - coliveira 5y ago
    Well, the system we now have was designed by the same people who are now becoming super millionaires and billionaires. How should it be different?
    - donmcronald 5y ago
      50 years of trickle up economics would be a good start IMO.
Mike86534 5y ago
It depends on where the new money is injected into the economy to start with. The _flow_ of newly created money tends to benefit the rich, as the initial injection of new cash is pumped into their assets / companies. That money becomes old and trickles through the economy devaluing the currency after the rich have already spent/used/invested/gained from it.
akomtu 5y ago
When I reached the entry level wealth and cap gains started to dominate in my income, I realized one thing: there are two types of money, one for the poor (dollars) and one for the rich (stocks, assets). The gov keeps deflating dollars and thanks to complicated behind the scenes mechanics, that wealth gets transferred to assets that magically appreciate in value. When a recession hits, the gov evacuates the assets and leaves the dollars to their own devices. The poor can't get off the dollars because they have to spend everything they earn - another intentional arrangement in our economy. Moreover, cap gains aren't taxed. Only when you sell a small bit of them (or better: take a low interest loan), that small bit is taxed at laughable 20%. That's welfare for the rich. There's really no reason why cap gains (all gains, not just realized ones) can't be taxed at a progressive rate, as if it was income.
- lotsofpulp 5y ago
  > There's really no reason why cap gains (all gains, not just realized ones) can't be taxed at a progressive rate, as if it was income. How would the mechanics of this work? Suppose I had 1 share of publicly traded stock A. Others sell and buy stock A at $x at end of day on Jan 1, 2021, and $x+$10 at end of day on Dec 31, 2021. Am I now potentially forced to sell some of my stock A to pay taxes on unrealized gains? Is this basically property tax, except applied to all securities?
  - akomtu 5y ago
    Exactly. A middle class person doesn't cry wolf that he needs to sell a portion of his house to pay the property tax, while the rich do. For example, Bezos owns 10% of Amazon voting shares would pay 0.1% per year in the form of a lien (or a loan) that lets him retain voting rights, but takes the tax when he sells or transfers his wealth (e.g. to heirs). If capital taxes existed, the rich wouldn't be able to lazily sit in the sp500 index, they would have to chase good investments (they'd have to, God forbid, take risks and do some work).
eecc 5y ago
No because it just increases the price of stocks and real estate, while maintaining their value, while your cash deposit stays the same.
karmasimida 5y ago
Inflation on necessities like food/transportation will cause social issues and destabilize society. If you mass printing money, then such money needs to find a place to park themselves, most likely target would be the assets.
quickthrowman 5y ago
Companies can raise prices and avoid the effects of inflation so equities will continue to rise, while cash deflates in value. Real estate values keep pace with inflation, generally speaking. Any borrowed money can be paid back cheaper (debt devalues with inflation) which helps anyone who is leveraged on their investments crank up the ROI even more. I’m sure I could come up with more but those are the main three that came to mind. FWIW, 98% of my net worth is in stocks, the other 2% is cash
- nixgeek 5y ago
  No property at all?
b9a2cab5 5y ago
Wages are not as liquid as assets. You generally get a raise once every 6 months to a year, and it's time consuming to find a new job to get competing offers to get leverage for market-level wages. In contrast assets change prices every day, and as COVID as shown, adapt very quickly to the printing of money. At the low end wages are also capped by the minimum wage, which doesn't go up with the important inflation metrics (healthcare, housing, assets, education) but instead with regulation or CPI.

If everyone's bank account balance goes up by 50% uniformly, lets say one person has 100,000 and another has 10,000. After the increase they now have 150,000 and 15,000 respectively. But the low end item costs also go up due to inflation, so food now costs 50% more lets say. The thinking is that this eats into the lower bracket much more than the higher one. So inflation would increase the divide between rich and poor. I think this makes sense, interested if I am wrong here please let me know your thoughts!

donmcronald 5y ago
I don't think so. Both still have the same percentage of the money, so it should be even. If a rich person thinks inflation is coming they can buy fixed assets, invest in resource companies, invest in companies that provide critical services (food supply, communications, etc.). The problem for the poor is that it's hard to invest in things that benefit from inflation, especially if you don't have any money to invest. It's unlikely the paycheck-to-paycheck wages of poor people are going to go up enough to cover any kind of increase in (ex:) housing prices. Or you have people like my parents whose (defined benefit) pensions aren't going to do well against inflation. They'll get to watch the value of their retirement income drop like a rock at the same time they've seen millionaires with "small" businesses pocket hundreds of thousands of "bailout" dollars they didn't really need. Those millionaires will be the ones creating inflation by buying up fixed assets with their free government money. My parents will at least benefit from increased value in their house. Me and the generations after me that can't afford houses and don't have many fixed assets will get screwed really badly. I can see it coming and there's not much I can do for myself :-(
tchalla 5y ago
You're essentially describing the Cantillon Effect :-)

qaq 5y ago

asset inflation

amelius 5y ago

Only if they didn't invest it in real estate etc.

rolobio 5y ago

The rich own assets like real estate/stocks that will hold their value through inflation. People with savings or no assets/savings are hurt most by inflation.

aqme28 5y ago

Inflation on its own isn't helpful, but when you print money just to pour it into the stock market, you help wealthy people disproportionately. You raise stocks while devaluing currency. Poorer people have a higher proportion of their wealth in cash, and are often paid in static amounts.

gimmeThaBeet 5y ago

The implication there is that equities are long term an adequate hedge against inflation.

speeder 5y ago

high inflation but not enough to trigger hyperinflation instead lead to quickly rising asset prices, like stocks, land, and so on. Also rich people can sometimes take loans with interest lower than inflation, this is basically free money.

donmcronald 5y ago
> Also rich people can sometimes take loans with interest lower than inflation, this is basically free money. In Canada you can borrow well below 2% and housing prices in hot markets have been going up well over 10% YoY with a lot of predictions of 20%+ this year. Free money indeed. You just need $1 million+ to play the game.

ska 5y ago

It's not going to help directly. But if the inflation was a) produced by printing money that b) disproportionately ended up in the pockets of a subset of the population, one way or another, then it amounts to a wealth transfer.

garmaine 5y ago

Inflation is regressive. The rich don’t literally hoard cash, and their investments are likely to appreciate, or at least not suffer as badly as real inflation. Have you seen how much the stock market went up in the last year?

lotux 5y ago

yes, most rich people can get good loans with low rate during this time, as inflation goes up, the value of asset that they bought with loan goes up and debt value goes down, so the get richer twice again that is why for example bill gates became biggest land owner during covid, I guess he bought lots of land with cheap loans

tasssko 5y ago
Bill Gates has a team of people in a ‘family office’ managing his money the reality he probably had a windfall last year and needed to do something with it. Usually when you have a windfall you buy treasuries because they can be liquidated easily when new opportunities are available. Buying treasuries is a bad idea at the moment, they have negative yields when you factor in inflation. He probably had no good stock opportunities and there may have been more opportunities in farm land. Would he have used a loan… maybe I don’t know the details but also maybe not his investment funds don’t need the loans. My point is he has a good team managing his wealth and it will most certainly grow as a result and this team will also find good opportunities for him to grow his wealth. This should not be surprising.
- lotux 5y ago
  the point is, he or his fund can also get cheap loans when rates are historic low by land and win twice by inflation

forgithubs 5y ago

Net worth does not need to be kept in the form of paper currencies

dehrmann 5y ago

It helps people who are in debt (there's the student loan reduction Biden's been asking for). In theory, it's a wash for assets like stocks and real estate. It hurts bondholders, so especially retirees.

grey-area 5y ago
The last 10 years have seen massive asset inflation, unrelated to economic activity.
donmcronald 5y ago
> It helps people who are in debt Does it really though? It definitely helps people who used low, fixed rate debt to buy assets that will appreciate with inflation, but does it really help the average person with $100k in student loans that isn't going to see a wage increase that comes anywhere close to the increased cost of living? IMHO the answer is no.
- dehrmann 5y ago
  Federal student loans have a fixed interest rate. Assuming inflation makes its way to wages, that makes the education an appreciating asset.

cm2187 5y ago

Depending what it is invested in. Money printing lifts asset prices up: stocks, houses. That's typically the sort of assets owned by the upper middle class, you don't keep a $1m balance in a savings account, particularly when rates are at zero or negative.

grey-area 5y ago

The rich have assets and large debts secured on them, the poor have wages and small debts. Both assets and large debts are an advantage if inflation arrives.

wskinner 5y ago

New money does not reach all people at the same time. Those who get it first benefit more. This is known as the Cantillon Effect. https://fee.org/articles/the-cantillon-effect-because-of-inflation-we-re-financing-the-financiers/ https://fee.org/articles/the-cantillon-effect-because-of-inf...

donmcronald 5y ago
Yep. Basically whoever gets the free money first get to buy / invest before anyone else even realizes the money supply has been diluted. The way money is printed and given directly to the rich via the financial industry needs to stop. If the money supply needs to be increased every year it should be done by giving it directly to the masses via UBI or similar. I'm starting to have the opinion we've been getting scammed with hidden inflation since the 80s.
- coliveira 5y ago
  Well, the system we now have was designed by the same people who are now becoming super millionaires and billionaires. How should it be different?
  - donmcronald 5y ago
    50 years of trickle up economics would be a good start IMO.

Mike86534 5y ago

It depends on where the new money is injected into the economy to start with. The _flow_ of newly created money tends to benefit the rich, as the initial injection of new cash is pumped into their assets / companies. That money becomes old and trickles through the economy devaluing the currency after the rich have already spent/used/invested/gained from it.

akomtu 5y ago

When I reached the entry level wealth and cap gains started to dominate in my income, I realized one thing: there are two types of money, one for the poor (dollars) and one for the rich (stocks, assets). The gov keeps deflating dollars and thanks to complicated behind the scenes mechanics, that wealth gets transferred to assets that magically appreciate in value. When a recession hits, the gov evacuates the assets and leaves the dollars to their own devices. The poor can't get off the dollars because they have to spend everything they earn - another intentional arrangement in our economy. Moreover, cap gains aren't taxed. Only when you sell a small bit of them (or better: take a low interest loan), that small bit is taxed at laughable 20%. That's welfare for the rich. There's really no reason why cap gains (all gains, not just realized ones) can't be taxed at a progressive rate, as if it was income.

lotsofpulp 5y ago
> There's really no reason why cap gains (all gains, not just realized ones) can't be taxed at a progressive rate, as if it was income. How would the mechanics of this work? Suppose I had 1 share of publicly traded stock A. Others sell and buy stock A at $x at end of day on Jan 1, 2021, and $x+$10 at end of day on Dec 31, 2021. Am I now potentially forced to sell some of my stock A to pay taxes on unrealized gains? Is this basically property tax, except applied to all securities?
- akomtu 5y ago
  Exactly. A middle class person doesn't cry wolf that he needs to sell a portion of his house to pay the property tax, while the rich do. For example, Bezos owns 10% of Amazon voting shares would pay 0.1% per year in the form of a lien (or a loan) that lets him retain voting rights, but takes the tax when he sells or transfers his wealth (e.g. to heirs). If capital taxes existed, the rich wouldn't be able to lazily sit in the sp500 index, they would have to chase good investments (they'd have to, God forbid, take risks and do some work).

eecc 5y ago

No because it just increases the price of stocks and real estate, while maintaining their value, while your cash deposit stays the same.

karmasimida 5y ago

Inflation on necessities like food/transportation will cause social issues and destabilize society. If you mass printing money, then such money needs to find a place to park themselves, most likely target would be the assets.

quickthrowman 5y ago

Companies can raise prices and avoid the effects of inflation so equities will continue to rise, while cash deflates in value. Real estate values keep pace with inflation, generally speaking. Any borrowed money can be paid back cheaper (debt devalues with inflation) which helps anyone who is leveraged on their investments crank up the ROI even more. I’m sure I could come up with more but those are the main three that came to mind. FWIW, 98% of my net worth is in stocks, the other 2% is cash

nixgeek 5y ago
No property at all?

b9a2cab5 5y ago

Wages are not as liquid as assets. You generally get a raise once every 6 months to a year, and it's time consuming to find a new job to get competing offers to get leverage for market-level wages. In contrast assets change prices every day, and as COVID as shown, adapt very quickly to the printing of money. At the low end wages are also capped by the minimum wage, which doesn't go up with the important inflation metrics (healthcare, housing, assets, education) but instead with regulation or CPI.