7 ms·

IDK why everyone on HN thinks that the affluent have debt, when in fact, the bottom 50% of Americans hold less that 4% of wealth because most of them are in net

by RC_ITR 5y ago

IDK why everyone on HN thinks that the affluent have debt, when in fact, the bottom 50% of Americans hold less that 4% of wealth because most of them are in net debt, largely to entities owned by the affluent. Maybe it's because inflation is actually bad for the moderately affluent who made a disproportionate share of their income early in life and want to live off that nest egg while no longer working (which I assume to be overrepresented on HN).

foobar2021 5y ago
The affluent are invested in companies. Maybe I’m wrong but I’m going to guess American companies have multiple orders of magnitude more debt then the bottom 50% you’re referring to; just not nearly as much relevant to their greater assets. Some percentage of each company value is linked to their ability to take cheap debt, use that for further investments/acquisitions, and have inflation mitigate the damage (directly) or risk (indirectly via bailouts). None of the above conflicts with your point about wealth but they seem like completely different metrics that aren’t inherently related.
- human 5y ago
  What is important is how much debt you have that cost you less than inflation. Governments and wealthy individuals have tons of 2% interest (or less) debt. Inflation at 4% erodes that debt pretty fast. The poor and middleclass have debt at 10-30% and inflation at 4% is doing not much to erode it.
  - RC_ITR 5y ago
    That's not true. Regardless of the interest rate, all loans' principle is inflated at the same rate. You can argue that the poor are more likely to have their principle grow due to underpayment, but that's a separate point.
    - stainforth 5y ago
      Whats your idea of underpayment? If a student loan takes 20 years to pay off at allowed monthly payments, that's not underpayment, but lord that is a weight on your neck.
    - human 5y ago
      You say that but if your debt is on credit cards at 20%, believe me, you don’t feel like inflation is your best friend. If you’re the government, it’s a very different scenario.
ivalm 5y ago
> Maybe it's because inflation is actually bad for the moderately affluent who made a disproportionate share of their income early in life and want to live off that nest egg while no longer working (which I assume to be overrepresented on HN). But I am guessing that group has equities, which are somewhat inflation proof (especially if growth focused).
- JanisL 5y ago
  Only some equities are inflation proof. Other equities will be crushed by inflation because inflation will put pressure on higher interest rates and companies with high debt loads will get crushed by higher rates.
  - abduhl 5y ago
    High debt loads are relatively easier to carry as inflation spikes. Inflationary pressures on interest rates will only hurt companies who need to roll over their debt. Most companies will realize that going to the market by issuing new stock is a cheaper cost of capital.
- RC_ITR 5y ago
  >But I am guessing that group has equities, which are somewhat inflation proof (especially if growth focused) Trust me, with my own portfolio, I wish that were true, but future expectations of inflation force you to discount future cash flows more, making (all else equal) growth worth less. The real problem the 'HN rest and vest' crowd has with inflation is that while wages have shown a great ability to adjust (upward) to match inflation, stock market returns are less likely to do so.
- imtringued 5y ago
  Equities of "quality" companies are inflation proof. Exclusively growth focused companies tend to die out during the next recession. That's why value investing outperforms the market over the long term and underperforms it over the short term.
JanisL 5y ago
For a lot of it this comes down to mortgages. Someone who has a $4million mansion with a $1million loan has more debt in an absolute nominal number sense than someone with no assets and a $10k credit card debt. That said as household debt increases (due to things like credit cards) we are having a shift whereby many people on net own less than zero. For this group higher inflation won't be as bad as the impact on wealth as far as the debt/assets side of things goes. However it will still likely be bad for the poorest because wages tend to lag behind inflation and if the poorest people need their wages to service their debts they might still be falling behind more as a result of inflation. As always inflation will still be bad for anyone who is attempting to save money. On top of all this we have things like the Cantillon effect, so I just don't think higher inflation is as good for the poor - even with their newfound indebtedness - as people might be claiming.
- RC_ITR 5y ago
  >Someone who has a $4million mansion with a $1million loan has more debt in an absolute nominal number sense than someone with no assets and a $10k credit card debt. You are completely ignoring equity and are therefore incorrect. I was speaking about net worth, not whatever concept you're talking about ('outstanding cash-denominated leverage?') >we are having a shift whereby many people on net own less than zero. Yes, c. 50% of Americans, all of whom benefit from (wage) inflation in that scenario > it will still likely be bad for the poorest because wages tend to lag behind inflation and if the poorest people need their wages to service their debts they might still be falling behind more as a result of inflation. Source? This chart [0] seems to run counter to your claim, wages for non-supervisory employees move pretty in-line with inflation... >As always inflation will still be bad for anyone who is attempting to save money. Inflation and savings account interest rates have a complex relationship. For example, you could get 8%+ on a CD in 1990[1], when inflation was at about 6% (2% real yield). In the famously low inflation 2010's, you could maybe get 2% (0.5% real yield). >On top of all this we have things like the Cantillon effect, so I just don't think higher inflation is as good for the poor - even with their newfound indebtedness - as people might be claiming. Poor Americans being in debt is not new and not related to inflation. An re:Cantillon, a lot of work on pricing has been done since then, but I'm assuming from the above it's not really worth getting into here. [0]https://fred.stlouisfed.org/graph/?g=Jc6L https://fred.stlouisfed.org/graph/?g=Jc6L [1] https://www.depositaccounts.com/blog/historical-cd-rates.html https://www.depositaccounts.com/blog/historical-cd-rates.htm...
jbay808 5y ago
Didn't we just hear this whole story about how billionaires don't pay income or capital gains tax because all the dollars they keep on hand derive from low-interest fixed-rate loans taken out against their shares? When someone is poor, they're really limited in how much debt they can take on. Credit cards and payday loans have massive interest rates that make inflation irrelevant, and fairly low absolute limits anyway. (This can still be very hard to escape at a low income level but it's not likely inflation will help, because with a debt trap, that high-interest debt is being drawn to pay bills and buy consumer goods, not invested in assets). The majority of debt that people outside of the 1% are likely to hold is probably mortgage debt, and that only applies to homeowners, who are still likely the wealthier contingent and will benefit from inflation (as long as interest rates don't rise).
- RC_ITR 5y ago
  I cannot emphasize this enough. Mortgage debt is offset by equity and generally has a positive impact on peoples' net worth calculations (house prices are at an ATH). If you want to walk through the NY Fed's data on this happy to, but the bottom 50% are in student debt, credit card debt, and auto debt. Full stop.
  - jbay808 5y ago
    I don't think that's inconsistent with what I said, so as much as you can emphasize it with a full stop, I think it's somewhat tangential to my point. I agree that homeowners will benefit (as long as rates stay low). But they're in the asset-owning class. The more hard assets you have, the more you'll benefit, and those who can draw low-rate lines of credit against their appreciating hard assets will benefit the most. But that does not describe the bottom 50%. Inflation is definitely not going to help anyone who is struggling with credit card debt, for reasons that should be obvious. It might help those who have student debt, but likely only for one contingent because tuition will probably continue to outpace wage growth as it has for years. It might help some people repay their old auto loans, but not today's buyers when automobile price growth is outpacing inflation.
    - 5y ago
naveen99 5y ago
The bottom 50% don’t count their future labor / income as wealth. However the top 10% do count as wealth future cash flows from business which is dependent on the bottom 90%’s labor. So once you setup an equation between future income and wealth, the situation is not so bleak for the bottom 50%. Their future labor is worth much more than their 4% wealth + some amount of debt in mortgages / student loans / credit cards.

by RC_ITR 5y ago

foobar2021 5y ago

The affluent are invested in companies. Maybe I’m wrong but I’m going to guess American companies have multiple orders of magnitude more debt then the bottom 50% you’re referring to; just not nearly as much relevant to their greater assets. Some percentage of each company value is linked to their ability to take cheap debt, use that for further investments/acquisitions, and have inflation mitigate the damage (directly) or risk (indirectly via bailouts). None of the above conflicts with your point about wealth but they seem like completely different metrics that aren’t inherently related.

human 5y ago
What is important is how much debt you have that cost you less than inflation. Governments and wealthy individuals have tons of 2% interest (or less) debt. Inflation at 4% erodes that debt pretty fast. The poor and middleclass have debt at 10-30% and inflation at 4% is doing not much to erode it.
- RC_ITR 5y ago
  That's not true. Regardless of the interest rate, all loans' principle is inflated at the same rate. You can argue that the poor are more likely to have their principle grow due to underpayment, but that's a separate point.
  - stainforth 5y ago
    Whats your idea of underpayment? If a student loan takes 20 years to pay off at allowed monthly payments, that's not underpayment, but lord that is a weight on your neck.
  - human 5y ago
    You say that but if your debt is on credit cards at 20%, believe me, you don’t feel like inflation is your best friend. If you’re the government, it’s a very different scenario.

ivalm 5y ago

> Maybe it's because inflation is actually bad for the moderately affluent who made a disproportionate share of their income early in life and want to live off that nest egg while no longer working (which I assume to be overrepresented on HN). But I am guessing that group has equities, which are somewhat inflation proof (especially if growth focused).

JanisL 5y ago
Only some equities are inflation proof. Other equities will be crushed by inflation because inflation will put pressure on higher interest rates and companies with high debt loads will get crushed by higher rates.
- abduhl 5y ago
  High debt loads are relatively easier to carry as inflation spikes. Inflationary pressures on interest rates will only hurt companies who need to roll over their debt. Most companies will realize that going to the market by issuing new stock is a cheaper cost of capital.
RC_ITR 5y ago
>But I am guessing that group has equities, which are somewhat inflation proof (especially if growth focused) Trust me, with my own portfolio, I wish that were true, but future expectations of inflation force you to discount future cash flows more, making (all else equal) growth worth less. The real problem the 'HN rest and vest' crowd has with inflation is that while wages have shown a great ability to adjust (upward) to match inflation, stock market returns are less likely to do so.
imtringued 5y ago
Equities of "quality" companies are inflation proof. Exclusively growth focused companies tend to die out during the next recession. That's why value investing outperforms the market over the long term and underperforms it over the short term.

JanisL 5y ago

For a lot of it this comes down to mortgages. Someone who has a $4million mansion with a $1million loan has more debt in an absolute nominal number sense than someone with no assets and a $10k credit card debt. That said as household debt increases (due to things like credit cards) we are having a shift whereby many people on net own less than zero. For this group higher inflation won't be as bad as the impact on wealth as far as the debt/assets side of things goes. However it will still likely be bad for the poorest because wages tend to lag behind inflation and if the poorest people need their wages to service their debts they might still be falling behind more as a result of inflation. As always inflation will still be bad for anyone who is attempting to save money. On top of all this we have things like the Cantillon effect, so I just don't think higher inflation is as good for the poor - even with their newfound indebtedness - as people might be claiming.

RC_ITR 5y ago
>Someone who has a $4million mansion with a $1million loan has more debt in an absolute nominal number sense than someone with no assets and a $10k credit card debt. You are completely ignoring equity and are therefore incorrect. I was speaking about net worth, not whatever concept you're talking about ('outstanding cash-denominated leverage?') >we are having a shift whereby many people on net own less than zero. Yes, c. 50% of Americans, all of whom benefit from (wage) inflation in that scenario > it will still likely be bad for the poorest because wages tend to lag behind inflation and if the poorest people need their wages to service their debts they might still be falling behind more as a result of inflation. Source? This chart [0] seems to run counter to your claim, wages for non-supervisory employees move pretty in-line with inflation... >As always inflation will still be bad for anyone who is attempting to save money. Inflation and savings account interest rates have a complex relationship. For example, you could get 8%+ on a CD in 1990[1], when inflation was at about 6% (2% real yield). In the famously low inflation 2010's, you could maybe get 2% (0.5% real yield). >On top of all this we have things like the Cantillon effect, so I just don't think higher inflation is as good for the poor - even with their newfound indebtedness - as people might be claiming. Poor Americans being in debt is not new and not related to inflation. An re:Cantillon, a lot of work on pricing has been done since then, but I'm assuming from the above it's not really worth getting into here. [0]https://fred.stlouisfed.org/graph/?g=Jc6L https://fred.stlouisfed.org/graph/?g=Jc6L [1] https://www.depositaccounts.com/blog/historical-cd-rates.html https://www.depositaccounts.com/blog/historical-cd-rates.htm...

jbay808 5y ago

Didn't we just hear this whole story about how billionaires don't pay income or capital gains tax because all the dollars they keep on hand derive from low-interest fixed-rate loans taken out against their shares? When someone is poor, they're really limited in how much debt they can take on. Credit cards and payday loans have massive interest rates that make inflation irrelevant, and fairly low absolute limits anyway. (This can still be very hard to escape at a low income level but it's not likely inflation will help, because with a debt trap, that high-interest debt is being drawn to pay bills and buy consumer goods, not invested in assets). The majority of debt that people outside of the 1% are likely to hold is probably mortgage debt, and that only applies to homeowners, who are still likely the wealthier contingent and will benefit from inflation (as long as interest rates don't rise).

RC_ITR 5y ago
I cannot emphasize this enough. Mortgage debt is offset by equity and generally has a positive impact on peoples' net worth calculations (house prices are at an ATH). If you want to walk through the NY Fed's data on this happy to, but the bottom 50% are in student debt, credit card debt, and auto debt. Full stop.
- jbay808 5y ago
  I don't think that's inconsistent with what I said, so as much as you can emphasize it with a full stop, I think it's somewhat tangential to my point. I agree that homeowners will benefit (as long as rates stay low). But they're in the asset-owning class. The more hard assets you have, the more you'll benefit, and those who can draw low-rate lines of credit against their appreciating hard assets will benefit the most. But that does not describe the bottom 50%. Inflation is definitely not going to help anyone who is struggling with credit card debt, for reasons that should be obvious. It might help those who have student debt, but likely only for one contingent because tuition will probably continue to outpace wage growth as it has for years. It might help some people repay their old auto loans, but not today's buyers when automobile price growth is outpacing inflation.
  - 5y ago

naveen99 5y ago

The bottom 50% don’t count their future labor / income as wealth. However the top 10% do count as wealth future cash flows from business which is dependent on the bottom 90%’s labor. So once you setup an equation between future income and wealth, the situation is not so bleak for the bottom 50%. Their future labor is worth much more than their 4% wealth + some amount of debt in mortgages / student loans / credit cards.