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> That is true regardless of where interest rates are, or whether inflation is happening If there was no inflation, there would be no inherent profit from taki

> That is true regardless of where interest rates are, or whether inflation is happening If there was no inflation, there would be no inherent profit from taking out a large loan. From my comment above the math is 7% inflation minus 3% interest rate equals 4% profit just from taking the loan. That's the problem. It's not just that the poor can't start a business or buy an asset, it's that debt itself is incentivized, and those that are wealthy get the best access to that debt. Our current monetary system then exacerbates that as the lower the interest rate, the higher the inflation. Thus the looser the monetary policy, the greater the incentive to take out debt, the less the poor and middle class have access to debt. Further, this all compounds into inflated asset prices for basic needs like housing.

vkou 5y ago
> If there was no inflation, there would be no inherent profit from taking out a large loan. Only if you are a spherical cow that intends to live forever. Most people value money now more than money later. Money now lets you buy things you need, today. If you expect your earning power to increase (which happens for most people without inflation to one respect or another), but you need the asset today (a car to get to work, a house to live in), you'd still want to borrow money. > It's not just that the poor can't start a business or buy an asset, it's that debt itself is incentivized, and those that are wealthy get the best access to that debt. Yes, that's one major driving factor for inequality. > Our current monetary system then exacerbates that as the lower the interest rate, the higher the inflation. Okay, that's a far more persuasive argument than 'Bob's $500 savings account lost 2% of its value this year.' And it does hold true for asset inflation, as asset prices take a few years to normalize to, say, a P/E ~inversely proportional to the prime interest rate. But once they do normalize, why do you expect asset price inflation to continue?
- reedjosh 5y ago
  > you'd still want to borrow money. For sure, but you'd be met with market rates that tame your desire for money now. Buying a car on credit is a lot less tempting at 20% interest than 4%. Right now used car prices are going up and it's easy to get low interest financing. Used cars are not supposed to go up in value. It's madness. > But once they do normalize, why do you expect asset price inflation to continue? I expect asset prices to continue to inflate as long as we continue with our current monetary policies. I expect us to continue with our current monetary polices because the US would be unable to service its debts in about decade otherwise.
  - vkou 5y ago
    > Used cars are not supposed to go up in value. That's due to a demand spike and supply shortage. Blame bitcoin and video games and people not wanting to take public transit in the middle of a global pandemic. It's not because of monetary policy, or because Scrooge McDuck borrowed a trillion dollars for free to buy up a bunch of used cars, or because GOOGL doubled in value in two years. > I expect asset prices to continue to inflate as long as we continue with our current monetary policies. Why? If it didn't make sense to invest money at a P/E ratio of X at a Y%-for-you interest rate, why would you invest money at a P/E ratio worse than ~2X, at a Y/2%-for-you interest rate? I get that the process of going from X to ~2X is painful, but why wouldn't it stop there?

vkou 5y ago

> If there was no inflation, there would be no inherent profit from taking out a large loan. Only if you are a spherical cow that intends to live forever. Most people value money now more than money later. Money now lets you buy things you need, today. If you expect your earning power to increase (which happens for most people without inflation to one respect or another), but you need the asset today (a car to get to work, a house to live in), you'd still want to borrow money. > It's not just that the poor can't start a business or buy an asset, it's that debt itself is incentivized, and those that are wealthy get the best access to that debt. Yes, that's one major driving factor for inequality. > Our current monetary system then exacerbates that as the lower the interest rate, the higher the inflation. Okay, that's a far more persuasive argument than 'Bob's $500 savings account lost 2% of its value this year.' And it does hold true for asset inflation, as asset prices take a few years to normalize to, say, a P/E ~inversely proportional to the prime interest rate. But once they do normalize, why do you expect asset price inflation to continue?

reedjosh 5y ago
> you'd still want to borrow money. For sure, but you'd be met with market rates that tame your desire for money now. Buying a car on credit is a lot less tempting at 20% interest than 4%. Right now used car prices are going up and it's easy to get low interest financing. Used cars are not supposed to go up in value. It's madness. > But once they do normalize, why do you expect asset price inflation to continue? I expect asset prices to continue to inflate as long as we continue with our current monetary policies. I expect us to continue with our current monetary polices because the US would be unable to service its debts in about decade otherwise.
- vkou 5y ago
  > Used cars are not supposed to go up in value. That's due to a demand spike and supply shortage. Blame bitcoin and video games and people not wanting to take public transit in the middle of a global pandemic. It's not because of monetary policy, or because Scrooge McDuck borrowed a trillion dollars for free to buy up a bunch of used cars, or because GOOGL doubled in value in two years. > I expect asset prices to continue to inflate as long as we continue with our current monetary policies. Why? If it didn't make sense to invest money at a P/E ratio of X at a Y%-for-you interest rate, why would you invest money at a P/E ratio worse than ~2X, at a Y/2%-for-you interest rate? I get that the process of going from X to ~2X is painful, but why wouldn't it stop there?