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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 r

• imtringued 5y ago
  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.
• klodolph 5y ago
  The assumptions of 4-5% market returns and 7% inflation seem a bit suspect to me.
  • the_lonely_road 5y ago
    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).
    • klodolph 5y ago
      > 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.
  • hammock 5y ago
    Isn't it the exact scenario we are in today?
    • sokoloff 5y ago
      The trailing 12 month return for the S&P500 is a little over 16%. Other broad-based equity indices are also substantially higher than 5%.
      • deathanatos 5y ago
        The S&P500 is currently at ~4250. 12 months ago, it was at ~3898. That's a 9% return, is it not?
• _hcuq 5y ago
  The 22 yr is just playing the wrong game. He needs to take out a fixed rate mortgage, as large as possible. Then rent the property.
  • thallium205 5y ago
    Ah yes, taking a big loan to speculate on investments. This kind of risky behavior is exactly what is wrong with high inflation environments.
    • imtringued 5y ago
      Yeah the worst part about either deflation or inflation is the positive feedback loop.
    • deleted 5y ago
      [deleted]
    • ephbit 5y ago
      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.
  • oneoff786 5y ago
    Renting is frequently a losing activity
    • ejb999 5y ago
      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.
• BenoitEssiambre 5y ago
  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.
  • jbay808 5y ago
    > 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.
• MiguelVieira 5y ago
  Expected investment returns are already inflation-adjusted https://www.csun.edu/~vcovrig/Asset_Aloc.pdf https://www.csun.edu/~vcovrig/Asset_Aloc.pdf 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.
  • yellowstuff 5y ago
    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. https://blogs.cfainstitute.org/investor/2021/07/19/myth-busting-equities-are-an-inflation-hedge/ https://blogs.cfainstitute.org/investor/2021/07/19/myth-bust...
    • jnwatson 5y ago
      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.
    • WalterBright 5y ago
      > it would be very surprising to most economists. If the Progressives get their way with the budget, it will be inevitable. You can't have trillions in deficits without massive inflation.
      • WalterBright 5y ago
        For people who don't like what I wrote: believing deficit spending won't create inflation doesn't change the reality :-/
• lupire 5y ago
  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.
  • eli_gottlieb 5y ago
    Notably, right now we have both the natural disaster and a war.
• helen___keller 5y ago
  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." I don’t understand
  • matheusmoreira 5y ago
    > I don’t understand 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.
  • jonathan-adly 5y ago
    From my limited readings of Austrian economic theory, monetary policy is the thing that causes inflation in the first place. With a fixed money supply, wide-spread inflation is not a thing.
    • imtringued 5y ago
      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.
• caeril 5y ago
  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.
• hinkley 5y ago
  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.
  • fdgsdfogijq 5y ago
    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.
    • WhompingWindows 5y ago
      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.
      • SketchySeaBeast 5y ago
        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.
• ska 5y ago
  > 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.
  • Siira 5y ago
    Bad for whom? By whose standards? 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.”
    • ska 5y ago
      > By whose standards? Monetary policy types. I'm not saying they are correct or incorrect, I'm saying this is how they look at it.
  • jonathan-adly 5y ago
    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.
• nostromo 5y ago
  Similarly it rewards debtors and punishes savers. 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. This kind of environment isn't sustainable.
  • nemothekid 5y ago
    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.
    • cortesoft 5y ago
      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.
      • jdmichal 5y ago
        I usually phrase this as: Your first house is covering a short position. Your second house is an investment.
      • pertymcpert 5y ago
        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.
    • nostromo 5y ago
• SilasX 5y ago
  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.
• mywittyname 5y ago
  > 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.
• YZF 5y ago
  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. Not an expert but lived through hyperinflation ;)
  • deleted 5y ago
    [deleted]
  • cableshaft 5y ago
    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.