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Biggest problem I see: Is low inflation actually good for normal people? The financial crisis of 2008 was an absolute slog, lots of normal people suffered... BU

Biggest problem I see: Is low inflation actually good for normal people? The financial crisis of 2008 was an absolute slog, lots of normal people suffered... BUT inflation was low and stocks soared -- but the blowback was significant.

duxup 5y ago
I feel like that question raises the issue of trying to orchestrate some things that can't be all orchestrated at once. Like "Well I'd like to see moderate inflation but control the stock market, oh and ..." Usually I think governments just flip a lever in hopes of getting one thing done, maybe, hopefully.
imtringued 5y ago
Low inflation (far below 2%) actually makes it easier for stocks to soar as people are willing to save more money which then subsequently gets lent out in a way that ends up in housing and stock valuations. The lower inflation, the more desperate the central bank and the more exotic the policies it has to come up with. Decent inflation makes it easier to manage the economy as people cease selfish behavior.
ethdkreuoreuc 5y ago
Inflation increases asset prices and increases inequality. Deflation reduces asset prices and reduces inequality. Keynsians do not like deflation because people save money during a deflationary period, and saving money reduces aggregate demand. They will tell you that deflation is equivalent to a recession for that reason, and point to the great depression as an example. I would point out that after the deflationary period of the great depression, the US became a much more equitable society, and was followed by three decades of healthy growth (until bretton woods ended...). Money has a natural ebb-and-flow. When people have no savings, they are less willing to part with money. The price of money (the interest rate of borrowing) increases. When people have lots of savings, they are more willing to lend it out. The price of money decreases. These ebbs-and-flows were small when commodities stood for money. Fiat currency allows banks to practice price controls with money, so the ebbs-and-flows are more extreme, and last for longer periods of time. Deflation rewards those with savings, because their savings can purchase more over time. Inflation rewards borrowing, because borrowers can repay a loan with money that is worth less. Understand, then, that the US government is a debtor. A deflationary period would be intolerable to them, because they would not be able to make payments on their debt. Expect inflation to continue apace, regardless of its effect on normal people.
milesvp 5y ago
If stocks soared, then you’re missing inflation. Risk adjusted, an all market stock index fund should never return more than 4% above inflation (ignoring that even 4% must also include risk). So, as a general rule, whatever your stock portfolio is doing, inflation is roughly annual return minus 4%. By my accounts inflation has actually been double or triple the fed’s 2% target for the better part of a decade.
- jpadkins 5y ago
  > all market stock index fund should never return more than 4% above inflation why? what is special about 4%?
  - milesvp 5y ago
    It's sort of a historic adjusted return for annualized stock data. It also roughly matches a healthy 3% GDP growth of a "developed" country and still have some room for added risk. If you want to sort of gross rank investments in terms of returns, I was taught in my econ classes, you first look at government bonds as the lowest risk, and expect to make less than 0.5% return after inflation. Next you look at the company bond market where you can expect to 0.5%-1.5% but take on considerably more risk. Then you look at company stock markets where you can expect to make 3-4% after inflation but at the cost of even more risk. After that you start getting into things like junk territory, where you can make a killing, but more likely you'll lose your investment. These numbers may not hold in any given year, and certainly don't apply to markets that are able to sustain greater than 3% GDP growth for multiple decades in a row (usually because they are able to play "catch up" technologically). But once you're at the top of the S curve, competition sort of drives down the returns you can realistically get in investment markets.

duxup 5y ago

I feel like that question raises the issue of trying to orchestrate some things that can't be all orchestrated at once. Like "Well I'd like to see moderate inflation but control the stock market, oh and ..." Usually I think governments just flip a lever in hopes of getting one thing done, maybe, hopefully.

imtringued 5y ago

Low inflation (far below 2%) actually makes it easier for stocks to soar as people are willing to save more money which then subsequently gets lent out in a way that ends up in housing and stock valuations. The lower inflation, the more desperate the central bank and the more exotic the policies it has to come up with. Decent inflation makes it easier to manage the economy as people cease selfish behavior.

ethdkreuoreuc 5y ago

Inflation increases asset prices and increases inequality. Deflation reduces asset prices and reduces inequality. Keynsians do not like deflation because people save money during a deflationary period, and saving money reduces aggregate demand. They will tell you that deflation is equivalent to a recession for that reason, and point to the great depression as an example. I would point out that after the deflationary period of the great depression, the US became a much more equitable society, and was followed by three decades of healthy growth (until bretton woods ended...). Money has a natural ebb-and-flow. When people have no savings, they are less willing to part with money. The price of money (the interest rate of borrowing) increases. When people have lots of savings, they are more willing to lend it out. The price of money decreases. These ebbs-and-flows were small when commodities stood for money. Fiat currency allows banks to practice price controls with money, so the ebbs-and-flows are more extreme, and last for longer periods of time. Deflation rewards those with savings, because their savings can purchase more over time. Inflation rewards borrowing, because borrowers can repay a loan with money that is worth less. Understand, then, that the US government is a debtor. A deflationary period would be intolerable to them, because they would not be able to make payments on their debt. Expect inflation to continue apace, regardless of its effect on normal people.

milesvp 5y ago

If stocks soared, then you’re missing inflation. Risk adjusted, an all market stock index fund should never return more than 4% above inflation (ignoring that even 4% must also include risk). So, as a general rule, whatever your stock portfolio is doing, inflation is roughly annual return minus 4%. By my accounts inflation has actually been double or triple the fed’s 2% target for the better part of a decade.

jpadkins 5y ago
> all market stock index fund should never return more than 4% above inflation why? what is special about 4%?
- milesvp 5y ago
  It's sort of a historic adjusted return for annualized stock data. It also roughly matches a healthy 3% GDP growth of a "developed" country and still have some room for added risk. If you want to sort of gross rank investments in terms of returns, I was taught in my econ classes, you first look at government bonds as the lowest risk, and expect to make less than 0.5% return after inflation. Next you look at the company bond market where you can expect to 0.5%-1.5% but take on considerably more risk. Then you look at company stock markets where you can expect to make 3-4% after inflation but at the cost of even more risk. After that you start getting into things like junk territory, where you can make a killing, but more likely you'll lose your investment. These numbers may not hold in any given year, and certainly don't apply to markets that are able to sustain greater than 3% GDP growth for multiple decades in a row (usually because they are able to play "catch up" technologically). But once you're at the top of the S curve, competition sort of drives down the returns you can realistically get in investment markets.