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Inflation is as corrosive to investing as it is to the real economy
- throwaway3b03 3y agohttps://archive.is/4vQ3T https://archive.is/4vQ3T
- gagged_s_poster 3y ago[flagged]
- mrfox321 3y agoDeflation can be self-reinforcing, too. If both directions can lead to runaway feedback, it likely needs to be controlled.
- netbioserror 3y agoNot while they’re in power and their friends and family control all the most easily heard microphones.
- jacknews 3y agoit's companies raising prices to increase profits, of course.
- rmbyrro 3y agoHow do all businesses in the world coordinate to raise prices simultaneously? And if all prices are rising, aren't businesses costs also rising? If that's so, how are they making more profit across the board, as you suggest?
- polygamous_bat 3y ago> How do all businesses in the world coordinate to raise prices simultaneously? Because anti-trust is a joke, and most brands are owned by a handful of companies, which are chaired over by even fewer handful of investment firms. We are light-years away from the times when business mostly meant mom-and-pop where large scale coordination was impossible. Hell, big tech companies coordinated no-poaching agreements back in 2005, and you think corporations can't possibly find a way to coordinate price hikes in 2023?
- jacknews 3y agoMaybe the same mechanism where they're all laying people off at the same time, despite still making handsome profits, in many cases even increasing YoY.
- jacknews 3y agohttps://www.imf.org/en/Blogs/Articles/2023/06/26/europes-inflation-outlook-depends-on-how-corporate-profits-absorb-wage-gains https://www.imf.org/en/Blogs/Articles/2023/06/26/europes-inf...
- croes 3y agoIf you really think that's the only reason for inflation you neither know economy nor the capabilities of politicians.
- maxilevi 3y agoBarter economies never had inflationary periods. Inflation as we see it is in it's major component caused by governments debasing the currency.
- diab0lic 3y agoBarter economies also make it next to impossible to save for the the future. Most goods produced by common are perishable and therefore one cannot be “saved” in any meaningful way. This keeps people at sustenance level and working until they die.
- throw0101a 3y ago> Barter economies never had inflationary periods. Barter economies have also never existed in human societies. They have either been gift economies (esp. with smaller tribes) or credit economies (records dating back to the earliest tables from Mesopotamia and Ancient Egypt). See: * https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years For a more recent example of a society becoming pure credit, see: * https://en.wikipedia.org/wiki/Irish_bank_strikes_(1966–1976) https://en.wikipedia.org/wiki/Irish_bank_strikes_(1966–1976) * https://www.youtube.com/watch?v=mFIQWWt4UaA https://www.youtube.com/watch?v=mFIQWWt4UaA
- throw0101a 3y ago> Patiently waiting for the day where we stop pretending inflation is anything other than people in government intentionally debasing the currency personal gain. You'll be waiting forever, because this is not what it is. Ideally inflation would be 0%, but that is impossible to do because it would mean that the "money" (however defined) available matches exactly that money that is needed for the economy to run and grow. But it is impossible to know/predict a priori how much would be needed. So if you have too much money available, and more importantly moving around 'too much' (velocity), you get positive inflation. Now if you have too little money available (especially if it's 'hard money' like coins, and not credit), you get the effect of stifling economic activity: * https://en.wikipedia.org/wiki/Great_Bullion_Famine https://en.wikipedia.org/wiki/Great_Bullion_Famine You also have the effect that the people who have the (literal) coin being able to charge more for it (rent seeking) because everyone else wants/needs it to do business (notwithstanding credit arrangements). So which is a bigger problem: too much money possibly allowing too much economic activity, or too little economic activity? In recent decades (post-Great Depression) the dogma is that we'd rather have positive inflation to have 'extra money' around so that activity is less hindered. Further, there is a misguided idea that government creates money: it does not. (No, not even the central bank.) Money is created by private banks through credit: * https://www.bankofengland.co.uk/explainers/how-is-money-created https://www.bankofengland.co.uk/explainers/how-is-money-crea... * https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m... * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 * https://rationalreminder.ca/podcast/132 https://rationalreminder.ca/podcast/132 And if you think that deposits are re-loaned out, this is utterly and completely wrong and out of date. Tobin called this "the old view" in 1963: * https://elischolar.library.yale.edu/cowles-discussion-paper-series/388/ https://elischolar.library.yale.edu/cowles-discussion-paper-...
- deleted 3y ago[deleted]
- engineer_22 3y agoDoes anyone know if baby boomer retirement has been studied for its effect on the economy?
- JimtheCoder 3y agoNo, I'm sure it hasn't...
- HumblyTossed 3y agoShirley, you can’t be serious
- JimtheCoder 3y agoSo obvious that I didn't even think I needed to add the /s...
- DenisM 3y agoSnark is against the rules on HN
- jacknews 3y agoI think there's a bit of Goodhart's law when it comes to inflation (When a measure becomes a target, it ceases to be a good measure), and honestly it's one of the most BS of statistics. Clearly inflation is now because companies are raining prices. But is it because of costs, or profiteering?
- lotsofpulp 3y agoThis is easily determined by looking at changes in net profit margins, at least for publicly listed companies with public financials. One source of data that might be useful is this: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile... I find it especially funny when people complain about retailers “profiteering” when their net profit margins are as low as ever in the low single digits. Edit: here is an updated report of profit margin changes over time by industry: https://www.yardeni.com/pub/sp500margin.pdf https://www.yardeni.com/pub/sp500margin.pdf Edit 2: nvm, above link is not so useful since it is showing operating profit margin, not net profit margin
- refurb 3y agoClearly inflation is now because companies are raining prices. That isn't clear at all. If companies are raising prices, why didn't they raise them before?
- hsjqllzlfkf 3y agoI think that the argument is A) in a stationary scenario a company can't raise its prices arbitrarily because it will lose market share to its compatitors. Competition keeps prices low benefiting consumers while investors still get some profit. Capitalism works great! B) on sudden changes, textbook conclusions can't be trusted because they are arrived at for stationary scenarios 99.99% of the times, at least that's how I think. You have to go case by case and make your best judgement. The current narrative is that as consequence of the pandemic, when you have "supply chains are collapsing" fearmongering, even if partially true, sellers figured that customers would be more tolerant to price raises, or at the very least, that their competitors would reason in the same way and so everyone can raise their prices and customers don't have a choice anyway. Personally I find it believable that companies would make such a calculation.
- hourago 3y agoMy parents, and all their generation, purchased their apartments with inflation over 10%. The first couple of years was harsh, they had to keep things tight so their salary can cover all their needs. Four years later, their loan was just a small part of their expenses. Eight years later, their loan was less than their phone bill. Inflation has taken their debt away. How is that worse than people being indebted for decades dedicating half their earnings for housing? Maybe inflation is corrosive for investing but maybe it is not bad for the average Joe. Inflation so low as it has been kept the past decades has created a fantastic environment for investing. But it seems that has taken away any chances for average people to make a living. Hyper-inflation is bad, but low inflation is equally bad when it helps to concentrate wealth in a few hands. I see many people demonizing inflation because it will hurt "investments". Maybe, it is time that something else than salaries hurt for a change.
- ashleyn 3y agoInflation favours debt holders, it disfavours others (notably cash holders).
- soVeryTired 3y agoSubtle nitpick, but inflation favours fixed-rate debt holders. Floating rate debt holders can get burned pretty badly in an inflationary period.
- saurik 3y agoIs it really a "nitpick", though? People always trot out the argument that inflation helps people who hold debt, but I would think that the era of lenders irrationally handing out long-term loans at low fixed interest rates would have been over many decades ago, no?
- lotsofpulp 3y agoThose long term low fixed rate loans with no prepayment penalty are ultimately underwritten by people who use USD, and US voters implicitly like that policy because they like seeing the price of their assets go up. Without the taxpayer subsidy, I doubt any lender would offer those terms.
- hkt 3y agoInflation means sitting on cash piles makes no sense: it spurs investment.
- igsomething 3y agoExcept every investment becomes high-risk. Businesses cannot make financial plans/projections because of the uncertainty created by the same inflation. Depending on the inflation percentage, the furthest you could plan ahead could be up to a couple of months. Would you make long-term investment in an economy where companies cannot predict what is going to happen in the next 3 months?
- hkt 3y agoIf I was losing 10%+ a year I absolutely would. I'm sure not everyone would,but the present rate of investment is absolutely dire and needs to change. If inflation does that, then great. If instead it puts more onus on the state to invest as the only major player who would.. then that's also great.
- LudwigNagasena 3y agoIt shouldn’t matter much whether inflation is low or high as long as it is stable. Every supposed effect of inflation seems to be mostly an effect of either wealth redistribution or uncertainty.
- contravariant 3y agoWell it needs to be somewhat reasonable for that to work. It might not matter much whether money has a half-life of 20 or 30 years, but if it becomes 10 days or 1000 years then that is a quite significant change in the way that money works.
- analog31 3y agoIt can also be seen as a form of wealth redistribution. People who have the flexibility to change their prices or wages in sync with inflation won't see its effects as much as those who are either locked into long term obligations or have less economic mobility.
- s1artibartfast 3y agoThis doesn't hold up because there are a number of ways to invest your wealth to protect it from inflation.
- analog31 3y agoMany workers have little or no wealth to invest, and possibly limited job mobility.
- ComputerGuru 3y agoBut that’s what the article is really about. It shows how there is an intrinsic link between the rate of inflation and the volatility of that rate YoY.
- LudwigNagasena 3y agoIs that because the inflation is high, or is it because it deviates from the Fed target too far?
- paulpauper 3y ago5-7 percent inflation is not so bad when your assets are returning 20-100 percent or more a year (such as Meta stock, Nvidia, real estate, tech stocks, Tesla, etc.). The Economist is always finding some reason to complain . there is always something wrong with the world somewhere or sometime. High inflation in the 80s and 90s didn't stop tech investors and real estate investors from making fortunes.
- ChuckNorris89 3y agoAverage Joes are paid wages not in stocks and real estate. And wages haven't been tracking inflation.
- paulpauper 3y agothe article is talking about investing
- mxkopy 3y agoBro has achieved the real American dream: complete dissociation from the lives of regular people
- apienx 3y agoMost of the current inflation is probably a delayed effect of the recent money printing craze. If that's the case, then the corrosion to investing is overstated.
- micheng 3y agoAs a late GenXer, I saw the problems hitting millennials coming just a few years later and decided to take the leap early. I was way off on the inflation bump, about 20 years early, but I was correct about the asset inflation. Hence, while others in their early 20s were out having fun, I focused on saving and investing into rental properties. Back then, home prices were already steep, but not as insurmountable. I pinched my way to 4 rentals and managed to hold on to all but one. Since my call on general inflation was so far off, I rode quite modest investment returns from 2001. Then when COVID stimuli finally brought the long awaited bump in inflation, my rental returns took off, tripling my average rate over the prior 17-19 years. I don’t see how the continued bout of modest inflation would be bad for asset investments. Indeed, I’m seeing what remains of my fixed rate mortgages fade away rapidly while rents keep getting bid up by tenants. My debt load fell so fast in the past three years that I’ve had to relever up to ride the inflation wave. Quite a ride since. Meanwhile, I’m pleasantly surprised that I’m totally on the mark about the reversion of the suburban exodus during COVID as tenants are throwing out far more in rent than I could have imagined. Yes, this inflation bump sucks for anyone living on fixed investment incomes or salaries, but for any half competent investor, it’s fulsome times and I can’t imagine having the balls to whine about it to the masses on the economist. The smarter play has been to promote the fiction of rich-cession, even if that’s too fanciful for millennials and gen Zs to swallow.