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

[Cigarbutt]

^Look at the following:

https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/chart/#quarter:125;series:Net%20worth;demographic:networth;population:all;units:levels

You can select the asset-liability-net worth component and can select according to other criteria (wealth, income, age, generation etc). Also use the "comparison" option if you want.

-If you go by income category the next 9% group has a TA/TL ratio of about 9.

-there are people like sarganaga who made it without leverage but many in the group, especially earlier on (at a younger age) used leverage (the asset part eventually grew faster than the debt part).

Hope that helps.

Edit: i just noted that, since this AM, the Q4 2020 data has been updated.

[RichardGibbons]

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're in the top 10 by assets and we don't really use debt leverage.

 

We're set up that way because the goal isn't to maximize net worth, but rather to have the sort of life that we want. Sure, if we had twice as much money, our lives might be marginally better, but not that much better. And it goes back to Buffett's point (or was it Munger?): don't risk what you need in order to get things you want. There's no need to take on the risk when it will likely result in marginally higher returns, but a much bumpier path.

 

 

[thepupil]

Ya it just surprises me because I would think people would reach $1,2,3 million (mass affluent, top 10-5%, but not like super wealthy) and would still have at least a decent sized mortgage or even car loan. It would scare me to have no debt, because then I’d be super concentrated  and illiquid. Even if one lives in a part of the country where houses are cheaper, $1.5mm just seems like not enough to have a big % tied up in an unlevered house. I feel like having no debt is a suboptimal and risky choice to be made only when one has a ton of money, very surprised by the data.

 

Anyways, back to inflation <—which is another reason I feel safer with debt

[DooDiligence]

I’m not interested in moving the world, so don’t need a lever.

Right or wrong, I’m very comfortable being debt free.

 

Time will tell.

[Spekulatius]

Ya it just surprises me because I would think people would reach $1,2,3 million (mass affluent, top 10-5%, but not like super wealthy) and would still have at least a decent sized mortgage or even car loan. It would scare me to have no debt, because then I’d be super concentrated  and illiquid. Even if one lives in a part of the country where houses are cheaper, $1.5mm just seems like not enough to have a big % tied up in an unlevered house. I feel like having no debt is a suboptimal and risky choice to be made only when one has a ton of money, very surprised by the data.

 

Anyways, back to inflation <—which is another reason I feel safer with debt

 

Owning a house is “safer” with a 30 year fixed rate debt in a sense. If rates go up, the value of your house may go down, but the value of your fixed rate mortgage will go down even more, so it hedges in this situation. Cash flow wise, you are better of, if the higher rates are caused by higher inflation, compared to renting where you likely would have to pay higher rents.

If rates go down, you just refinance and lower the cost of your mortgage. Your house will likely go up in value unless the lower rates go hand in hand with a recession. There won’t be a problem as long as you can service your mortgage.

 

In both cases, you have somewhat of a hedge against changes in the value of your asset caused by interest rate changes, due to the optionality provided by the fixed rate mortgage.

 

If you are in a nonrecourse state, you also have the put option to hand the key to your house to the mortgage owner, which is particular appealing if you loaded your house under the roof with debt before the house values tank.

[scorpioncapital]

Anyone who has 1 million+ has the luxury of not using debt to get ahead. Not so much for others, unless they have an amazing job.

 

I sometimes wonder why government has chosen to subsidize housing with long-term fixed loans but not owning businesses like stocks. I have yet to hear of a fixed rate margin loan but I actually think it would be an interesting idea! Perhaps you could pay more for it but it would subsidize business ownership as a new wealth. Sure we have tax free investing accounts, but principle residence is already tax free too - and has 15-30 year fixed mortgages available.

 

If I understand the current intentions of the fed, it is that inflation should initially rise much faster than loan rates, thus forming a benefit even for variable margin loans, in fact quite dramatically if you think businesses have more growth potential than houses. But longer term, when the tables are turned, interest rates may have to match or exceed inflation, leading to both higher carrying cost and asset deflation. A fixed mortgage would only expose you to the latter maybe.

[ERICOPOLY]

But longer term, when the tables are turned, interest rates may have to match or exceed inflation, leading to both higher carrying cost and asset deflation. A fixed mortgage would only expose you to the latter maybe.

 

The theory sounds right but house prices in the 60s/70s/80s just kept on rising.

[SharperDingaan]

Amusing thread.

 

Throughout history EVERY fiat currency issuer has debased their currency, most often via inflation. When everybody has been doing it, and for a very long time - historic fact it clearly screaming that it must be an advantageous thing to do so.

 

Buy a house for 1M, mortgage it for 1M with a floating rate HELOC; assume inflation is 5% this year, the interest rate on your HELOC rises by 500bp to compensate, and you are ONLY paying interest (tax deductible in the US). All else equal the value of your house rose 5% to 1,050,000, the mortgage remained at 1,000,000. You are UP 50,000 in equity, but paying an additional 5% (50,000)/yr in interest.

 

You cant afford the interest, sell this house, and buy a cheaper house someplace else. Either buying a cheaper house in a poorer neighborhood, again with 100% debt; or a better house in a better neighborhood with debt + equity (from the house exchange). The buyer of your house makes improvements, further raising its value. Everybody along the value chain benefits

 

But apparently ... this a terrible thing?

It's only terrible if you're that person who had to downsize.

 

SD

 

 

[scorpioncapital]

do you know why house prices rose during the 70s and 80s when carry costs were so high ?

[SharperDingaan]

Define carry cost. In the 1980's, across Canada, mortgage rates of 5-8% were considered cheap. Rates subsequently spiked to 17%+ (Canada's debt wall) and have progressively come down ever since. The lower the rate, the more mortgage a buyer can afford; but if the supply of desired housing is lagging - it's higher prices for housing.

 

Supply is inventory turnover + new build. Keep favoring some market segments over others (Condo vs SFH), and distortions magnify. SFH in the 'burbs are currently selling well, downtown condo's .... not so much. But in many major urban downtowns - carry cost + condo fee + ppty tax is still LESS than rent.

 

SD

 

 

   

[Cigarbutt]

^Starting in the 60s, real price appreciation started becoming significantly and sustainably positive, a trend that hasn't subsided.

In the 60s and the 70s, the key underlying factor was a demand-supply mismatch and high or rising 'carry costs' can be compensated by faster rising underlying asset value, in proportion to the leverage used, if you can keep it.

Other factors that helped then were relatively balanced real wage growth (about CAGR 2.6% real between end WW2 and the mid70s; that changed after...) and then women massively entering the labor force.

 

The upward trend in real estate real prices since then is fascinating (even corrected for larger homes). Apart from demand-supply mismatch, other factors that have become significant are very significant direct and indirect subsidies for home ownership and ultra-low interest rates. It's interesting to note that even if mortgage rates are ultra low, real wage growth has remained quite anemic and this explains the diverging house value to income trends that characterize most developed nations to varying degrees. i think the central authorities call this the wealth effect and, so far, people and nations are buying it.

Intrinsic value question: what should the home ownership rate be these days?

[no_free_lunch]

I am ok with inflation , in theory but I also don't think the central bankers really know what they are doing. It's not really a criticism, it's just reality.  It's not them, it's anyone, too many variables in the equation to be able to predict the outcome.  They sure didn't expect a nationwide housing plunge in 2006.  Im not sure it was clear that various stimulus measures would lead to a mammoth tech bubble in the middle of a virus epidemic either.  So I would be ok with inflation in that 2 to 3 pct range so long as we know that's actually what will happen.

 

There was a good post by VC Sam Altman on inflation, sorry no link, where he suggests what is in store is faster deflation of anything depending on labor and inflation on anything otherwise supply constrained , basically equities, land, certain commodities.  It seems that's what has been happening for last 30 years or more. It explains why housing has gone through the roof and the cost of t-shirts has gone nowhere.  In reality t-shirts and everything else manufactured has plunged while housing has gone up a bit but money printing obscures it.  You can see how the concept of singular inflation rate starts to become difficult in this paradigm.  You layer the fed mucking with interest rates on and it gets even messier.

 

We can debate who causes it but it's good to surface this dual inflation concept so that the argument evolves beyond  "the rich are stealing from us".

[maplevalue]

There was a good post by VC Sam Altman on inflation, sorry no link, where he suggests what is in store is faster deflation of anything depending on labor and inflation on anything otherwise supply constrained , basically equities, land, certain commodities.

 

I agree with this wholeheartedly.

 

It is amazing how frequently one reads about new labour saving technology (take a look at this video on autonomous fruit picking which looks like it is out of The Jetsons

). I think we have almost become numb to how fast technology is advancing.

[wachtwoord]

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.

 

But if you grew up in a world without inflation (or deflation even) you would have likely made different capital allocation decisions. Interest rates (real rates, not the insane central bank manipulated ones) would also be low in a deflationary world.

 

What is up for discussion is whether infaltion or deflation is better for the world in general. Of course that only applies if one of the two is better in general. My gut feeling prefers deflation as that rewards saving which positively influences peoples behavior.

 

Regardless I think the question is moot. I think no-one can know for sure which is better and even if one could having the power to choose between the two is a power that corrupts absolutely. The free market should decide and central banks should not exist.

[Cigarbutt]

...

There was a good post by VC Sam Altman on inflation, sorry no link, where he suggests what is in store is faster deflation of anything depending on labor and inflation on anything otherwise supply constrained , basically equities, land, certain commodities.  It seems that's what has been happening for last 30 years or more. It explains why housing has gone through the roof and the cost of t-shirts has gone nowhere.  In reality t-shirts and everything else manufactured has plunged while housing has gone up a bit but money printing obscures it.  You can see how the concept of singular inflation rate starts to become difficult in this paradigm.  You layer the fed mucking with interest rates on and it gets even messier.

We can debate who causes it but it's good to surface this dual inflation concept so that...

It is amazing how frequently one reads about new labour saving technology... robot efficiently picking up ripe products... I think we have almost become numb to how fast technology is advancing.

Sam Altman is an interesting fellow and belongs to the school of thought that says that productivity enhancements are not adequately measured (the productivity paradox question). According to him, the traditional GDP measures should be adjusted upwards to reflect the higher value that main street consumers are getting. So, according to him, inflation numbers of the last few years should be adjusted downwards. ???

Next time you meet a main street consumer who is concerned about healthcare, education, child care bills, tell him/her that.

The dual consumer inflation is not a new concept, it's been developing for years. It's the balance and sustainability of those diverging factors which is interesting. Mixing consumer and asset inflation confuses the picture. For consumer inflation, the dual concept applies directly to the origin of labor. When the labor is cheap and outsourced, expect deflation. When the labor is domestic and expensive (the 'growth' sectors of developed countries), expect inflation.

Productivity gains in agriculture (from basics to robots and AI) are nothing new. Starting in the 1920s in the US, productivity gains have been impressive and quite constant, resulting in an about CAGR 1% price decline for food. The share of consumer budgets devoted to food has constantly decreased since then. The reason why a relative plateau is occurring is because people have been allocating a gradually larger share of their food budget to food prepared outside of home (now about 50% of the food budget). The latest productivity enhancement in that sector is that instead of people taking their car to go to a restaurant, a car is used to bring the food home (and an application is used instead of a dumb phone).

 

The real story though for the main street consumer is the asset inflation story and begs the question: "why do people and nations accept inflation if it's so negative?".

Below are numbers for which the methodology can be questioned and 'adjustments' could be considered but there is a clear trend.

 

To derive an idea of what it 'costs' for a median household to buy a median house in the US, ratio of median household home price over median household income:

1950:2.5  1960:2.4  1970:2.0  1980:2.7  1990:2.6  2000:2.2  2010:4.5  2020:4.4

The story is complicated by many issues and housing (land) supply is important but, clearly, something else is going on. 2020 was a very interesting year because house prices increased significantly in correlation to rising median income (largely because of debt-financed government transfers).

 

To derive an idea of what it 'costs' for a median household to buy a unit of the stock market currency, number of hours necessary to buy a unit of the S&P 500 index:

This is basically the stock market cap to GDP that Mr. Buffett has described as a potential tool but with a more human touch. There are several 'problems' with this measure and it has not been a good short term predictor but, clearly, something is going on.

Going back full circle, according to Sam Altman, the main street consumer should be happy to recognize that divergence between the value of assets and the value of earning power is not that significant because the main street consumer should recognize that his or her earning power should be adjusted upwards for the pleasure derived from access to Netflix and Facebook.

Ultimately, Mr. Altman will be right and Malthus will be wrong again but it's mesmerizing how the asset inflation has occurred and how the frog, so far, has decided to remain in the warming pot.