why do people and nations accept inflation if it's so negative?

[scorpioncapital]

clearly permanent loss of cash purchasing power can't be good for savers, rich or poor.

 

why do nations and people accept it ? why wouldn't they just not spend or lock their money away even if it earns little ? isn't there a human tendency toward deflation as a protection of one's savings? or is the issue that the vast majority of people have no money at all so any handout or income, inflated or otherwise, is better than nothing?

[BG2008]

clearly permanent loss of cash purchasing power can't be good for savers, rich or poor.

 

why do nations and people accept it ? why wouldn't they just not spend or lock their money away even if it earns little ? isn't there a human tendency toward deflation as a protection of one's savings? or is the issue that the vast majority of people have no money at all so any handout or income, inflated or otherwise, is better than nothing?

 

Do you want deflation?  Inflation is great for owners of hard assets.  As someone who has a 30 year fixed mortgage and 2 investment properties, I don't mind inflation at all in that portion of the portfolio. 

[rkbabang]

Do the vast majority of people even know what inflation is or what causes it?  Most people think if it as just some force of nature, prices go up, I get a raise every year, it is what it is.

[maplevalue]

clearly permanent loss of cash purchasing power can't be good for savers, rich or poor.

 

why do nations and people accept it ? why wouldn't they just not spend or lock their money away even if it earns little ? isn't there a human tendency toward deflation as a protection of one's savings? or is the issue that the vast majority of people have no money at all so any handout or income, inflated or otherwise, is better than nothing?

 

Why do people accept it? Because of the money illusion (https://en.wikipedia.org/wiki/Money_illusion) where most people think in nominal, rather than real terms. Inflation of 2% is small enough that most people barely notice it, and do not adjust their behavior much (i.e. still treat cash as a fine asset to hold).

 

Why do governments accept it? Because the government can use it as a hidden tax on individuals. It's no surprise that when government deficits are large the same governments manipulate interest rates so that the real interest rate is negative (right now in the US the short term real rate is deeply negative, 10yr real interest rate is -0.60%).

 

From a fairness standpoint it is very unfair to individuals who are not financially sophisticated, since these individuals would tend to have large amounts of cash or GICs. The rich largely avoid the negative effects of inflation as they tend to own things like equities which fare relatively better during inflations.

[thepupil]

my boat loads of long duration debt at 2 7/8% 30 year fixed very much accepts inflation.

 

my equities, well, I don't know, but I am pretty certain that I prefer inflation to deflation (as was the Bernank and all his successors).

 

why worry about it when one can position oneself to benefit?

 

I worry about deflation far more, having positioned myself for the base case and that which the central banks desire (inflation). Of course, most risk assets are probably short both tail risks to some degree (hyperinflation wouldn't be great).

[Gregmal]

Its kind of hilarious in a warped way how the answer in regards to pretty much every social/economic issue is that it benefits the rich....Darwinism is inevitable. Unfortunately.

 

Oh your phone bill went up 8%? Ah, I made some good money on my telcos last year!

 

Oh rent went up a lot? Yea my MF reits were raining cash on me all year!

 

$4 gas? Did I say I owned TPL?

 

 

 

[KJP]

The following is based on nothing but my armchair pontification and is likely worth what you paid for it.

 

Real wealth comes from the amount and quality of good and services in the economy, which in turn is driven over time by investments in and discoveries of new and more efficient technologies/ways of doing things.  Inflation -- meaning a general rise in nominal price levels throughout the economy -- provides an impetus for investment, because the alternative of putting it under your mattress will lose value over time.  Deflation -- meaning a general decline in nominal price levels throughout the economy -- retards investment, because you can gain relative wealth simply by putting your coin under a mattress and because earning a return on $100 invested today is more difficult when nominal price levels are declining (your customers will have fewer nominal dollars to pay you).  So mild inflation creates a gentle push in favor of investment that over time that leads to more real wealth.

[Ice77]

People don't have a personal experience with high inflation or they would worry more. Most haven't lived through the 1970s stagflation when rates were in teens or the terrible things that happened in 1920s Weimar Germany during hyperinflation. LatAm 90s inflation or Zimbabwe's inflation or that in Venezuela more recently are more stories and memes to most. Even the risk aversion of the Depression got lost along the way by the late 50s. That's why history rhymes because people forget the lessons of the past once generational handover happens.

[LearningMachine]

my boat loads of long duration debt at 2 7/8% 30 year fixed very much accepts inflation.

Way to go, pupil!

[LearningMachine]

As someone who has a 30 year fixed mortgage and 2 investment properties, I don't mind inflation at all in that portion of the portfolio.

 

Way to go BG2008!

[ERICOPOLY]

People don't have a personal experience with high inflation or they would worry more. Most haven't lived through the 1970s stagflation when rates were in teens

 

There were winners and losers in the 1970s.

 

I've heard my father commenting many times about how that period of inflation rapidly paid off the house and brought the family a higher standard of living.  His pay rose with inflation.

 

[rkbabang]

People don't have a personal experience with high inflation or they would worry more. Most haven't lived through the 1970s stagflation when rates were in teens

 

There were winners and losers in the 1970s.

 

I've heard my father commenting many times about how that period of inflation rapidly paid off the house and brought the family a higher standard of living.  His pay rose with inflation.

 

 

Yes, it's great for people with debt, but horrible for people living on fixed incomes or cash savings.

 

[JRM]

People don't have a personal experience with high inflation or they would worry more. Most haven't lived through the 1970s stagflation when rates were in teens

 

There were winners and losers in the 1970s.

 

I've heard my father commenting many times about how that period of inflation rapidly paid off the house and brought the family a higher standard of living.  His pay rose with inflation.

 

 

Yes, it's great for people with debt, but horrible for people living on fixed incomes or cash savings.

 

Hence the boomer retirement plan of buy the biggest house you can mortgage then downsize when its time to retire.

[thepupil]

People don't have a personal experience with high inflation or they would worry more. Most haven't lived through the 1970s stagflation when rates were in teens

 

There were winners and losers in the 1970s.

 

I've heard my father commenting many times about how that period of inflation rapidly paid off the house and brought the family a higher standard of living.  His pay rose with inflation.

 

 

Yes, it's great for people with debt, but horrible for people living on fixed incomes or cash savings.

 

Hence the boomer retirement plan of buy the biggest house you can mortgage then downsize when its time to retire.

 

I mean this is the (shitty) retirement plan for the vast majority of Americans and people in many other countries. Home ownership is a cult and the federal government welcomes one into the cult with a massively subsidized fully prepayable 30 year fixed rate mortgage at an (almost) negative and fixed real rate of interest.

 

Sometimes it feels like “everyone” owns a bunch of stocks but when you look at the statistics, vast majority of people who have any wealth at all have huge portion tied up in levered, illiquid, home equity. Outside the extremes, these people want moderate inflation, no?

 

With mid 60’s percent of the US owning a home and the bulk of the country’s decision makers having a good bit of wealth in home equity, who wants deflation other than some Austrians and people who read too much Jim Grant?

 

[Spekulatius]

Human bias:

Imagine two different scenarios and determine which one make people feel better

1) 2% inflation and you get a 2% raise

2) 2% deflation and you get a 2% payout.

 

I bet that people will accept 1) and go in arms over 2).

 

The preference of inflation over deflation is just human bias/ how the brain works.

 

[TwoCitiesCapital]

People don't have a personal experience with high inflation or they would worry more. Most haven't lived through the 1970s stagflation when rates were in teens

 

There were winners and losers in the 1970s.

 

I've heard my father commenting many times about how that period of inflation rapidly paid off the house and brought the family a higher standard of living.  His pay rose with inflation.

 

 

Yes, it's great for people with debt, but horrible for people living on fixed incomes or cash savings.

 

Hence the boomer retirement plan of buy the biggest house you can mortgage then downsize when its time to retire.

 

I mean this is the (shitty) retirement plan for the vast majority of Americans and people in many other countries. Home ownership is a cult and the federal government welcomes one into the cult with a massively subsidized fully prepayable 30 year fixed rate mortgage at an (almost) negative and fixed real rate of interest.

 

Sometimes it feels like “everyone” owns a bunch of stocks but when you look at the statistics, vast majority of people who have any wealth at all have huge portion tied up in levered, illiquid, home equity. Outside the extremes, these people want moderate inflation, no?

 

With mid 60’s percent of the US owning a home and the bulk of the country’s decision makers having a good bit of wealth in home equity, who wants deflation other than some Austrians and people who read too much Jim Grant?

 

I don't think most people want deflation - rather, they want stability and it's unclear the government can provide that via central planning the 2010-2019 notwithstanding.

 

Inflation is just a super regressive tax - mildly bothersome to the rich (and potentially a benefit) and massively more problematic for the poor and lower middle class whose wages don't keep up and who don't own investments to appreciate in value.

 

As the inflation rate creeps higher, so too the percentage of the population negatively impacted by it.

 

 

[Cigarbutt]

Probably, most people (consumers, entrepreneurs etc) don't care when there is mild inflation (or deflation) as long as their purchasing power is at least maintained. The 70s were interesting because real wages continued to grow significantly.

So mild inflation creates a gentle push in favor of investment that over time that leads to more real wealth.

i've never come across a convincing definition as to why the human world since barter has been, mostly, a story of mild inflation. Your answer is good as any i guess.

People don't realize how the 20th century was an outlier, by and large and apart from periodic and selective currency devaluations, concerning unusual inflationary pressures. In the last 40 years consumer inflation has given way to asset inflation and that's all i have to say about that.

width=600https://flow.db.com/contentAsset/image/993893a0-2ab9-424b-aed7-85a030b0a355/fileAsset/filter/Resize,Jpeg/resize_w/1280/3030e7bf-bb9e-4c91-a55d-7b942d367b2f.jpg[/img]

[scorpioncapital]

I imagine that CPI is the tool government uses to underestimate real inflation and by doctoring stats like this is able to justify any theft by even calling it a gain! For example say you receive transfer payments from the government. Say one day all the people under the poverty line receive a government payment. It may be tied to a false statistic hence the populists who voted them into power on the back of poorer folk who were promised endless checks may, themselves, through the backdoor of fake stats be getting not what they wanted anyway. After all, you can't make 1+1 = 4..

 

Regarding debt, I imagine inflation helps fixed debt but not variable. many corporations have not long-term fixed debt but mid-to short unless they are literally as solid as the government itself. Many individuals have either line of credit (variable) or margin loans. I would think in this situation, if you have variable debt that holding cash savings would be prudent for the day when those rates rise.

[thepupil]

There is

$800 billion margin debt outstanding

https://www.advisorperspectives.com/dshort/updates/2021/03/17/margin-debt-and-the-market-up-another-1-9-in-february-continues-record-trend

 

There is $11.5 trillion of single family mortgage debt

https://www.statista.com/statistics/274638/mortgage-debt-outstanding-on-us-family-residences/

 

So there’s 15x the ratio of mortgages (most of which are fixed) to margin. Home equity lines have been decreasing since the GFC (but are now Increasing). This says $250-$500 billion

https://www.mba.org/2020-press-releases/august/mba-study-finds-home-equity-lending-growth-hindered-by-alternative-products-and-covid-19

 

On the corporate side, the investment grade market is FAR larger than the high yield / leveraged

Loan market. IG debt IIRC has a weighted average maturity of about 13 years

https://www.oecd.org/corporate/ca/Corporate-Bond-Market-Trends-Emerging-Risks-Monetary-Policy.pdf

 

The index says 11.7 for US IG corps

https://www.spglobal.com/spdji/en/indices/fixed-income/sp-500-investment-grade-corporate-bond-index/#data

 

Not very recent data, but 3/4 of global corporate debt is investment grade

https://www.statista.com/statistics/274638/mortgage-debt-outstanding-on-us-family-residences/

 

Last time I looked less than 5% of S&P 500 market cap were speculative grade issuers.

 

Whether you are a household or corporate or government, you are likely to be short long duration fixed obligations, much moreso than short duration variable obligations.

 

 

 

 

 

[Cigarbutt]

...

Whether you are a household or corporate or government, you are likely to be short long duration fixed obligations, much moreso than short duration variable obligations.

Constructive criticism.

Thank you for the info*. The conclusion relays an impression of an incomplete picture. It's like if a company would describe the effect of currency movements on its balance sheet by focusing on the differential exposure between the components of the liabilities.

The valuation 'narrative' of the last few years is based on a low interest rate environment. Rising rates (i'm not saying this will happen; in fact i think (on a weighted basis) this is unlikely to happen, at least for the 'risk-free' part) would trigger a reappreciation of the asset side also. But individual net exposure may vary and the idea that debt can be inflated away is an attractive one.

*The info doesn't seem to include nonfinancial corporate loans (kept on banks' balance sheets) which are still quite a significant amount and which (the last time i checked) were about 85% variable. The increasing rate exposure that scorpioncapital describes also needs to take into account a dynamic aspect with rolling refinancing risk (cost of capital may be higher and more 'floating') and a very unusual bunch of potential fallen angels.

[KJP]

...

Whether you are a household or corporate or government, you are likely to be short long duration fixed obligations, much moreso than short duration variable obligations.

Constructive criticism.

Thank you for the info*. The conclusion relays an impression of an incomplete picture. It's like if a company would describe the effect of currency movements on its balance sheet by focusing on the differential exposure between the components of the liabilities.

The valuation 'narrative' of the last few years is based on a low interest rate environment. Rising rates (i'm not saying this will happen; in fact i think (on a weighted basis) this is unlikely to happen, at least for the 'risk-free' part) would trigger a reappreciation of the asset side also. But individual net exposure may vary and the idea that debt can be inflated away is an attractive one.

*The info doesn't seem to include nonfinancial corporate loans (kept on banks' balance sheets) which are still quite a significant amount and which (the last time i checked) were about 85% variable. The increasing rate exposure that scorpioncapital describes also needs to take into account a dynamic aspect with rolling refinancing risk (cost of capital may be higher and more 'floating') and a very unusual bunch of potential fallen angels.

 

I think wabuffo has been making a similar point, assuming I understand his references to aggregate assets.  But the dispersion of assets and liabilities is not uniform throughout the population; a few are very very rich and many others are running an "asset light" business model.  Is there a way to decompose the aggregate statistics to understand where, say, the middle quintile is with respect to assets and liabilities?  I think policy in a democracy/republic would tend to gravitate to what favors that median group, rather than what might make sense if you looked only at the aggregate numbers.

[thepupil]

...

Whether you are a household or corporate or government, you are likely to be short long duration fixed obligations, much moreso than short duration variable obligations.

Constructive criticism.

Thank you for the info*. The conclusion relays an impression of an incomplete picture. It's like if a company would describe the effect of currency movements on its balance sheet by focusing on the differential exposure between the components of the liabilities.

The valuation 'narrative' of the last few years is based on a low interest rate environment. Rising rates (i'm not saying this will happen; in fact i think (on a weighted basis) this is unlikely to happen, at least for the 'risk-free' part) would trigger a reappreciation of the asset side also. But individual net exposure may vary and the idea that debt can be inflated away is an attractive one.

*The info doesn't seem to include nonfinancial corporate loans (kept on banks' balance sheets) which are still quite a significant amount and which (the last time i checked) were about 85% variable. The increasing rate exposure that scorpioncapital describes also needs to take into account a dynamic aspect with rolling refinancing risk (cost of capital may be higher and more 'floating') and a very unusual bunch of potential fallen angels.

 

it wasn't meant to be comprehensive, but rather a simple rebuttal to scorpioncapital's anecdata. he was saying "i see a bunch of people w/ margin and home equity loans" and I was simply providing the data that puts that in perspective, likeweise on the corporate side. 

 

not really saying anything about valuations. i agree that valuations may come down if rates rise, particularly if they do substantially.

 

 

The increasing rate exposure that scorpioncapital describes also needs to take into account a dynamic aspect with rolling refinancing risk (cost of capital may be higher and more 'floating') and a very unusual bunch of potential fallen angels.

 

that's why i pointed out the maturity. there are a lot of companies that will be exposed to rising rates (and directly so). I own a few (for example BERY has wgt average term of 4ish years), but if the vast majority of corporate America (at least publicly traded corp america) looks more like an IG issuer, that's issuing 13 year debt on average w/ like 2.0x debt to EBITDA, and the IG index has wgt average maturity of 12 years I just don't see how rising rates is going to cause this big increase in cost of financing or fallen angels.

 

last time I looked at the bank loan market, the "nonfinancial corporate loans" are not really kept on bank balance sheets anymore and are, for the most part put into CLO's (which are captured in the leveraged loan data), things like revolvers may not be on there, but those are small part of a capital structure and first leien

 

to be clear, I'm not trying to dismiss the risk of inflation generally. Dramatic Inflation will wreak short term (and potentially long term) havoc on some corporates'/households' earnings power, but instead I'm trying to point out that i think the vast majority of people, corporations, etc have positioned their balance sheets for inflation to a much greater degree than deflation, including me. one thing that's beatiful about the american mortgage is that if we japanificate, one can refi at lower rates with no penalty, which offers some protection from long term fixed obligations becoming more burdensome (assuming one has a job/income statement is intact)

 

EDIT: I said leveraged loans were "included in the data" but now realize that was in another thing i was going to send, but did not, can't find it now, but IIRC from last time i looked at it, HY is about $2T outstanding and LL are $2T and the IG market is like $10T+

 

 

[Cigarbutt]

...

last time I looked at the bank loan market, the "nonfinancial corporate loans" are not really kept on bank balance sheets anymore and are, for the most part put into CLO's (which are captured in the leveraged loan data), things like revolvers may not be on there, but those are small part of a capital structure and first leien

...

EDIT: I said leveraged loans were "included in the data" but now realize that was in another thing i was going to send, but did not, can't find it now, but IIRC from last time i looked at it, HY is about $2T outstanding and LL are $2T and the IG market is like $10T+

FWIW, i agree with most of what you say.

Bank loans (kept on balance sheet) to corporate entities have increased (in absolute terms) over the last 10 to 15 years but it is true that the % of bank loans vs total corporate debt has gone down significantly. The banks' exposure to leveraged loans is likely manageable under almost any scenario but the actual exposure on the books needs to take into account the much larger (and growing) undrawn revolving credit lines to 1-companies being directly funded by leveraged loans and to nonbank financial institutions dealing with and holding leveraged loans. As 'we' saw in 2020, undrawn credit lines can become drawn quite rapidly but the Fed came to the rescue so let the good times roll.

BTW, whenever there are exchanges with you, there seems to be some tension(?). To defuse this tension, let me share this picture:

In the future, whenever our paths cross, just remember that i've been moving leftward over the last few years towards the fair value type and may spend way too much time on the overall picture (in part because of an apprehension to look like the guy on the left; maybe i'm the patsy?) and just remember that, when reading your posts, i picture you like the person on the right.

...

I think wabuffo has been making a similar point, assuming I understand his references to aggregate assets.  But the dispersion of assets and liabilities is not uniform throughout the population; a few are very very rich and many others are running an "asset light" business model.  Is there a way to decompose the aggregate statistics to understand where, say, the middle quintile is with respect to assets and liabilities?  I think policy in a democracy/republic would tend to gravitate to what favors that median group, rather than what might make sense if you looked only at the aggregate numbers.

This may be worth discussing. i've been looking at consumer loan providers, including fintechs, for the bottom 50% and may even come up with stuff to share here, in due course, so this information is fresh on my desk.

In summary, it's helpful to segregate (if you allow this word) the group into: the top 1%, the next 9%, the next 40% and the bottom 50% (all numbers as of Q3 2020). Removing the bottom 50% from the graph above results in (for total amounts):

net worth: -2%

total assets: -6%

total liabilities: -32% (of that 32%, 47% is mortgage debt and 46% is consumer debt)

The ratio of total assets over total liabilities for the groups:

top 1%: 49.2

next 9%: 15.3

next 40%: 5.9

bottom 50%: 1.5

 

To address your point about inflation exposure, the assets/liabilities/net worth has a similar pattern (ie positive net worth but the assets to liabilities ratio goes up exponentially with rising wealth). The 'median' voter (the next 40%?) have an interesting dynamic of assets vs liabilities. They would likely suffer less than the bottom 50% for the consumer inflation aspect but would suffer more for the asset inflation aspect. In a democracy, people want more services and pay less taxes and a way around this is to use cheap debt in a manner that is not perceived as future taxation. It's a difficult exercise and easy paths are tricky.

 

 

[thepupil]

ha, there's no tension, just relaying how i see things. I'm not a macro guy, but I'll happily be branded as the permabull in the hood on the right.

 

I really like the breaking down the net worth distribution. Can you point me to the source?

 

I am really struggling with the top 2%-10% having 16x as much in assets as liabilities. This seems crazy to me based on anecdote (but the data is the data). someone needs about $1.3 million to make it to the top 10%. Who has $1.3mm net worth and virtually no liabilities? seems like a terribly unlevered way to go through life!

https://dqydj.com/net-worth-percentile-calculator-united-states/

 

 

[sarganaga]

ha, there's no tension, just relaying how i see things. I'm not a macro guy, but I'll happily be branded as the permabull in the hood on the right.

 

I really like the breaking down the net worth distribution. Can you point me to the source?

 

I am really struggling with the top 2%-10% having 16x as much in assets as liabilities. This seems crazy to me based on anecdote (but the data is the data). someone needs about $1.3 million to make it to the top 10%. Who has $1.3mm net worth and virtually no liabilities? seems like a terribly unlevered way to go through life!

https://dqydj.com/net-worth-percentile-calculator-united-states/

 

We have significantly more than $1.3 million and no debt. No mortgage or loans, credit cards paid off entirely each month. It's been like that for over 30 years.

It's been much easier/less stressful  to take business and investment risks on a cash basis. I can see how far down is. I realize this is not the best path for everyone, but it's worked well for me.