Fractional Reserves ZERO?? (FREAKING OUT)

[MidwestnRich]

Today I just learned that Fractional Reserves are CURRENTLY SET TO ZERO. WHAT KIND OF SHIT IS THIS???

I hate freaking out, but how long can this game go on? Seriously! I'm currently saving 30% of my income in total market funds. But SHIT. Now I want to buy gold and bitcoin and go off the grid!!!

Talk to me! Is my $20k/yr savings going to evaporate in my lifetime??

[frugledoc]

Talk to me! Is my $20k/yr savings going to evaporate in my lifetime??

Turn off the news and step away from zero hedge/tv etc.

[bthewalls]

Ease off the coffee...go for a walk

[JAYSLOL]

Talk to me! Is my $20k/yr savings going to evaporate in my lifetime??

Turn off the news and step away from zero hedge/tv etc.

+1 

save your 20k/year and keep it invested through whatever ups and downs come.  If you want to add 5% gold or whatever then go for it, but keep 95% in stocks/bonds/real estate

[maizefolk]

The great thing about stocks is that in the long term they rise along with inflation. So even if inflation kicks up a LOT in coming years the money you're investing in total market index funds will be fine. And on paper your returns would look a whole lot better than fine.

Take it way out to the extreme: middle class households in Venezuela buy stocks rather than save money in the bank, because money in the bank gets eroded by hyperinflation while the value of stocks do not.

[solon]

Is there a specific event you're referring to, @CrazyStudentDad? A quick google search turns up nothing.

[Travis]

Is there a specific event you're referring to, @CrazyStudentDad? A quick google search turns up nothing.

It's been that way since March.

https://www.federalreserve.gov/monetarypolicy/reservereq.htm

The only places I found "freaking out" were crypto blogs. The Fed did this and a couple other things to fight against the anticipated COVID recession.

https://www.washingtonpost.com/business/2020/03/15/federal-reserve-slashes-interest-rates-zero-part-wide-ranging-emergency-intervention/

[vand]

The great thing about stocks is that in the long term they rise along with inflation. So even if inflation kicks up a LOT in coming years the money you're investing in total market index funds will be fine. And on paper your returns would look a whole lot better than fine.

Take it way out to the extreme: middle class households in Venezuela buy stocks rather than save money in the bank, because money in the bank gets eroded by hyperinflation while the value of stocks do not.

Sorry, this is the sort of nonsense that gets perpetuated about stocks from someone who only chooses to believe in fairy stories.

Stocks get crushed during hyperinflation in real terms.

Think about it, hyperinflation destroys a country's productive capacity. Why on earth would anyone pay MORE for a smaller base of production under these circumstances?



https://www.forbes.com/sites/kenrapoza/2019/02/05/believe-it-or-not-venezuela-has-a-stock-market-and-its-been-destroyed/#7e7f32bf3ff8

The Caracas Stock Market Index was 2018’s worst stock market performer in dollar terms, suffering a collapse of 94%.

Do you think those middle class Venezueleans are still cost averaging into their index trackers?


Yes, it's true that a country can eventually get past these destructive bouts, and stocks that survive can go on and flourish, but nobody got richer because they held stocks through a period of hyperinflation, they got richer despite periods of hyperinflation as the economy eventually recovered and then surpassed previous peak production.

[maizefolk]

Sorry, this is the sort of nonsense that gets perpetuated about stocks from someone who only chooses to believe in fairy stories.

Stocks get crushed during hyperinflation in real terms.

Think about it, hyperinflation destroys a country's productive capacity. Why on earth would anyone pay MORE for a smaller base of production under these circumstances?

Hyperinflation doesn't destroy a country's productive capacity, it destroys its currency, and if left unchecked long enough the capital allocation process.

As inflation kicks off it begins to spur more investment in building new productive assets as folks know having cash sitting around means watching it rapidly lose its value.

For a great description of how this happens I highly recommend reading about the effects of hyperinflation on investment in productive capacity in Germany during the Weimar Republic in "When The Money Dies" (definitely not a book that paints a rosy picture of hyper inflation).
 

https://www.forbes.com/sites/kenrapoza/2019/02/05/believe-it-or-not-venezuela-has-a-stock-market-and-its-been-destroyed/#7e7f32bf3ff8

The Caracas Stock Market Index was 2018’s worst stock market performer in dollar terms, suffering a collapse of 94%.

Do you think those middle class Venezueleans are still cost averaging into their index trackers?

Venezuela is starved for dollars right now, and has been for years. We (the USA) have imposed major economic sanctions on them. One of the ways this has manifested is a collapse in the dollar exchange rate above and beyond their domestic inflation. 

I didn't say they were cost averaging in, they were using it like a checking account, buy stock when their paycheck or any other source of money arrive, sell stocks when they need to purchase something. So far as I know they continue to do so.

If you'd prefer an example where it's easier to tie both inflation and stock market performance back to dollar terms, there is the data from the stock market in Argentina either before and after their big bout of inflation when they went off the dollar peg for their currency or the more recent one of the last several years.

[PDXTabs]

I would imagine that @vand and @maizefolk are both right. That:

• investment in productive capacity initially goes up
• many businesses can't survive in a rapidly raising interest rate environment and eventually fail
• stocks are the safest place to put your money, even if your real returns aren't great
• the actual productive capacity may or may not make it through (did you sell your equipment to buy bread?)

Keeping in mind that hyperinflation in the USA would be the first time post-WWII that we have seen hyperinflation in a developed nation, we don't really know what would happen.

EDIT: but it doesn't mater, we know how to stop hyperinflation. Unless the Fed goes to sleep it will never happen.

[maizefolk]

Thanks, PDXTabs. And yes I would agree with your four point summation.

Hyperinflation can (and almost always does) ultimately lead to a recession and stock prices do drop in recessions. But stocks also recover after recessions*, while cash and bonds get wiped out forever in the same scenarios.

*Short of societal collapse, communist revolution, and wars (civil or external) that destroy the country. In those cases we're all in trouble regardless of how much we've saved, how low our withdrawal rates are, or what form of asset we've put those savings into.

[vand]

I would imagine that @vand and @maizefolk are both right. That:

• investment in productive capacity initially goes up
• many businesses can't survive in a rapidly raising interest rate environment and eventually fail

• stocks are the safest place to put your money, even if your real returns aren't great

• the actual productive capacity may or may not make it through (did you sell your equipment to buy bread?)

Keeping in mind that hyperinflation in the USA would be the first time post-WWII that we have seen hyperinflation in a developed nation, we don't really know what would happen.

EDIT: but it doesn't mater, we know how to stop hyperinflation. Unless the Fed goes to sleep it will never happen.

A collapsing currency takes down anything denominated in the currency along with it.  The obvious play is just to get your wealth out of the currency - into foreign assets and hard assets... if you can.  Otherwise you'll end up another Zimbabwean trillionaire.

[JAYSLOL]

Sorry, are you saying that if you were in Zimbabwe and the price of bread went from $1 to $1,000,000,000, and you owned a bread factory that because your bread is sold in Zimbabwe Dollars, your company is now worthless?  That makes no sense. 

[PDXTabs]

A collapsing currency takes down anything denominated in the currency along with it.  The obvious play is just to get your wealth out of the currency - into foreign assets and hard assets... if you can.  Otherwise you'll end up another Zimbabwean trillionaire.

Does it? Google and Apple stock are denominated in US currency. I don't believe that a collapsing US dollar would spell the end of Google or Apple.

[facepalm]

A collapsing currency takes down anything denominated in the currency along with it.  The obvious play is just to get your wealth out of the currency - into foreign assets and hard assets... if you can.  Otherwise you'll end up another Zimbabwean trillionaire.

And when those currencies tank?

Hard assets . . . fine.

[talltexan]

So...what % of your assets are you moving into gold?

What % of your assets are you moving into crypto?

[DS]

So top is in?

[ChpBstrd]

The issue with hyperinflation is that it ironically forces people and businesses to increase their savings rate. E.g. if groceries cost $5,000 this week and I think they’ll cost $10,000 next week, but I’m not sure my raise will be in the bank by that time, then I better not buy anything unnecessary in the meantime if I like eating. Similarly, if I’m a business, I’m reluctant to expand and hire a bunch of people today if their salaries will have to double (or is it triple?) in 6 mos. Can I sell my products for that much in the future or will my costs outgrow my pricing power?

On the other hand, if wages and prices are stable I can budget and spend funds on frivolous shite. As a business, I can project future prices, costs, and demand, and expand according to plans that have fewer wildcards.

Both deflation and inflation lead to money hoarding by different routes, and so both depress aggregate demand.

[ChpBstrd]

If the theory is that zero reserve requirements will cause banks to over leverage and fail, then the logical bet might be to short the banks, or buy put options on them.

The hypothesis that banks are going to fail AND THEREFORE everyone will move their money into assets with only psychological value (gold, crypto) has a few extra moving parts that might fail.

[maizefolk]

The issue with hyperinflation is that it ironically forces people and businesses to increase their savings rate. E.g. if groceries cost $5,000 this week and I think they’ll cost $10,000 next week, but I’m not sure my raise will be in the bank by that time, then I better not buy anything unnecessary in the meantime if I like eating. Similarly, if I’m a business, I’m reluctant to expand and hire a bunch of people today if their salaries will have to double (or is it triple?) in 6 mos. Can I sell my products for that much in the future or will my costs outgrow my pricing power?

In the cases of hyperinflation I've read about, the opposite was actually the case. If you got paid this week, you can either buy this week's groceries and next week's groceries at $500/week, or by this week's now for $500 and next week's groceries a week from now for $1,000. In the hyperinflation of Germany/Austria/Hungary people would race out as soon as they were paid to buy anything, figuring that even if it wasn't what they needed at the moment they might need it in the future, or, at worst, could sell it at new and inflated prices in the future when they need the money to buy something they do need.

Similarly businesses could not save profits without seeing the value of those profits whither away, so the minute they get paid they'd turn around and try to spend the money again, buying new inputs for their business from their suppliers or investing in expanding their capacity because sooner or later they'll need that capacity and it might cost only 1/10th as much in nominal dollars to build the next assembly line today as it would cost two months from now.

This drive to spend money as soon as people receive it creates a temporary rush of growth, but it also creates a feedback loop because the faster people spend money the more the velocity of money (and hence prices) rise, even with the same amount of money circulating in the economy.

But that is based primary on stories from a century ago, plus some reading on Argentina/Venezuela. Which are cases you're seeing where rapid inflation produces increases in the savings rate and decreases in the velocity of money?

[Metalcat]

The issue with hyperinflation is that it ironically forces people and businesses to increase their savings rate. E.g. if groceries cost $5,000 this week and I think they’ll cost $10,000 next week, but I’m not sure my raise will be in the bank by that time, then I better not buy anything unnecessary in the meantime if I like eating. Similarly, if I’m a business, I’m reluctant to expand and hire a bunch of people today if their salaries will have to double (or is it triple?) in 6 mos. Can I sell my products for that much in the future or will my costs outgrow my pricing power?

In the cases of hyperinflation I've read about, the opposite was actually the case. If you got paid this week, you can either buy this week's groceries and next week's groceries at $500/week, or by this week's now for $500 and next week's groceries a week from now for $1,000. In the hyperinflation of Germany/Austria/Hungary people would race out as soon as they were paid to buy anything, figuring that even if it wasn't what they needed at the moment they might need it in the future, or, at worst, could sell it at new and inflated prices in the future when they need the money to buy something they do need.

Similarly businesses could not save profits without seeing the value of those profits whither away, so the minute they get paid their turn around and try to spend the money again, buying new inputs for their business from their suppliers or investing in expanding their capacity because sooner or later they'll need that capacity and it might cost only 1/10th as much in nominal dollars to build the next assembly line today as it would cost two months from now.

This drive to spend money as soon as people receive it creates a temporary rush of growth, but it also creates a feedback loop because the faster people spend money the more the velocity of money (and hence prices) rise, even with the same amount of money circulating in the economy.

But that is based primary on stories from a century ago, plus some reading on Argentina/Venezuela. Which are cases you're seeing where rapid inflation produces increases in the savings rate and decreases in the velocity of money?

Exactly this, I've never read of hyperinflation causing people to save more.

[talltexan]

The issue with hyperinflation is that it ironically forces people and businesses to increase their savings rate. E.g. if groceries cost $5,000 this week and I think they’ll cost $10,000 next week, but I’m not sure my raise will be in the bank by that time, then I better not buy anything unnecessary in the meantime if I like eating. Similarly, if I’m a business, I’m reluctant to expand and hire a bunch of people today if their salaries will have to double (or is it triple?) in 6 mos. Can I sell my products for that much in the future or will my costs outgrow my pricing power?

On the other hand, if wages and prices are stable I can budget and spend funds on frivolous shite. As a business, I can project future prices, costs, and demand, and expand according to plans that have fewer wildcards.

Both deflation and inflation lead to money hoarding by different routes, and so both depress aggregate demand.

thank you for this excellent post.

[talltexan]

The issue with hyperinflation is that it ironically forces people and businesses to increase their savings rate. E.g. if groceries cost $5,000 this week and I think they’ll cost $10,000 next week, but I’m not sure my raise will be in the bank by that time, then I better not buy anything unnecessary in the meantime if I like eating. Similarly, if I’m a business, I’m reluctant to expand and hire a bunch of people today if their salaries will have to double (or is it triple?) in 6 mos. Can I sell my products for that much in the future or will my costs outgrow my pricing power?

In the cases of hyperinflation I've read about, the opposite was actually the case. If you got paid this week, you can either buy this week's groceries and next week's groceries at $500/week, or by this week's now for $500 and next week's groceries a week from now for $1,000. In the hyperinflation of Germany/Austria/Hungary people would race out as soon as they were paid to buy anything, figuring that even if it wasn't what they needed at the moment they might need it in the future, or, at worst, could sell it at new and inflated prices in the future when they need the money to buy something they do need.

Similarly businesses could not save profits without seeing the value of those profits whither away, so the minute they get paid their turn around and try to spend the money again, buying new inputs for their business from their suppliers or investing in expanding their capacity because sooner or later they'll need that capacity and it might cost only 1/10th as much in nominal dollars to build the next assembly line today as it would cost two months from now.

This drive to spend money as soon as people receive it creates a temporary rush of growth, but it also creates a feedback loop because the faster people spend money the more the velocity of money (and hence prices) rise, even with the same amount of money circulating in the economy.

But that is based primary on stories from a century ago, plus some reading on Argentina/Venezuela. Which are cases you're seeing where rapid inflation produces increases in the savings rate and decreases in the velocity of money?

Exactly this, I've never read of hyperinflation causing people to save more.

The saving is still happening; you buy next week's groceries, and save your resources in that form rather than in monetary form.

[Metalcat]

The issue with hyperinflation is that it ironically forces people and businesses to increase their savings rate. E.g. if groceries cost $5,000 this week and I think they’ll cost $10,000 next week, but I’m not sure my raise will be in the bank by that time, then I better not buy anything unnecessary in the meantime if I like eating. Similarly, if I’m a business, I’m reluctant to expand and hire a bunch of people today if their salaries will have to double (or is it triple?) in 6 mos. Can I sell my products for that much in the future or will my costs outgrow my pricing power?

In the cases of hyperinflation I've read about, the opposite was actually the case. If you got paid this week, you can either buy this week's groceries and next week's groceries at $500/week, or by this week's now for $500 and next week's groceries a week from now for $1,000. In the hyperinflation of Germany/Austria/Hungary people would race out as soon as they were paid to buy anything, figuring that even if it wasn't what they needed at the moment they might need it in the future, or, at worst, could sell it at new and inflated prices in the future when they need the money to buy something they do need.

Similarly businesses could not save profits without seeing the value of those profits whither away, so the minute they get paid their turn around and try to spend the money again, buying new inputs for their business from their suppliers or investing in expanding their capacity because sooner or later they'll need that capacity and it might cost only 1/10th as much in nominal dollars to build the next assembly line today as it would cost two months from now.

This drive to spend money as soon as people receive it creates a temporary rush of growth, but it also creates a feedback loop because the faster people spend money the more the velocity of money (and hence prices) rise, even with the same amount of money circulating in the economy.

But that is based primary on stories from a century ago, plus some reading on Argentina/Venezuela. Which are cases you're seeing where rapid inflation produces increases in the savings rate and decreases in the velocity of money?

Exactly this, I've never read of hyperinflation causing people to save more.

The saving is still happening; you buy next week's groceries, and save your resources in that form rather than in monetary form.

Hoarding goods, sure, but I don't call that saving their money as the pp indicated.

[Wintergreen78]

The issue with hyperinflation is that it ironically forces people and businesses to increase their savings rate. E.g. if groceries cost $5,000 this week and I think they’ll cost $10,000 next week, but I’m not sure my raise will be in the bank by that time, then I better not buy anything unnecessary in the meantime if I like eating. Similarly, if I’m a business, I’m reluctant to expand and hire a bunch of people today if their salaries will have to double (or is it triple?) in 6 mos. Can I sell my products for that much in the future or will my costs outgrow my pricing power?

In the cases of hyperinflation I've read about, the opposite was actually the case. If you got paid this week, you can either buy this week's groceries and next week's groceries at $500/week, or by this week's now for $500 and next week's groceries a week from now for $1,000. In the hyperinflation of Germany/Austria/Hungary people would race out as soon as they were paid to buy anything, figuring that even if it wasn't what they needed at the moment they might need it in the future, or, at worst, could sell it at new and inflated prices in the future when they need the money to buy something they do need.

Similarly businesses could not save profits without seeing the value of those profits whither away, so the minute they get paid their turn around and try to spend the money again, buying new inputs for their business from their suppliers or investing in expanding their capacity because sooner or later they'll need that capacity and it might cost only 1/10th as much in nominal dollars to build the next assembly line today as it would cost two months from now.

This drive to spend money as soon as people receive it creates a temporary rush of growth, but it also creates a feedback loop because the faster people spend money the more the velocity of money (and hence prices) rise, even with the same amount of money circulating in the economy.

But that is based primary on stories from a century ago, plus some reading on Argentina/Venezuela. Which are cases you're seeing where rapid inflation produces increases in the savings rate and decreases in the velocity of money?

Exactly this, I've never read of hyperinflation causing people to save more.

The saving is still happening; you buy next week's groceries, and save your resources in that form rather than in monetary form.

Hoarding goods, sure, but I don't call that saving their money as the pp indicated.

This is why you shouldn’t learn macroeconomics from Internet forums.

[GuitarStv]

The Caracas Stock Market Index was 2018’s worst stock market performer in dollar terms, suffering a collapse of 94%.

Do you think those middle class Venezueleans are still cost averaging into their index trackers?

If they're not idiots, they invest in global markets . . . not just the country they live in, so yeah, they should be fine.

[Wintergreen78]

The Caracas Stock Market Index was 2018’s worst stock market performer in dollar terms, suffering a collapse of 94%.

Do you think those middle class Venezueleans are still cost averaging into their index trackers?

If they're not idiots, they invest in global markets . . . not just the country they live in, so yeah, they should be fine.

Venezuela had a 70 billion dollar economy in 2019. The US had a 22,200 billion Dollar economy.
https://worldpopulationreview.com/countries/countries-by-gdp

Vermont had the smallest star economy at 35 billion dollars.
https://en.m.wikipedia.org/wiki/List_of_states_and_territories_of_the_United_States_by_GDP

So, if you are using Venezuela as an example, it is like investing all your money in Vermont, assuming Vermont is also subject to international sanctions and was heavily dependent on oil extraction during a year when the global oil price fell off a cliff, oh and assuming Vermont printed it’s own currency but had to trade with other state’s in US dollars.

Why do you think anything about Venezuela’s economy can be used to draw parallels to US markets, the US economy, or US monetary supply?

[Wintergreen78]

The great thing about stocks is that in the long term they rise along with inflation. So even if inflation kicks up a LOT in coming years the money you're investing in total market index funds will be fine. And on paper your returns would look a whole lot better than fine.

Take it way out to the extreme: middle class households in Venezuela buy stocks rather than save money in the bank, because money in the bank gets eroded by hyperinflation while the value of stocks do not.

Sorry, this is the sort of nonsense that gets perpetuated about stocks from someone who only chooses to believe in fairy stories.

Stocks get crushed during hyperinflation in real terms.

Think about it, hyperinflation destroys a country's productive capacity. Why on earth would anyone pay MORE for a smaller base of production under these circumstances?



https://www.forbes.com/sites/kenrapoza/2019/02/05/believe-it-or-not-venezuela-has-a-stock-market-and-its-been-destroyed/#7e7f32bf3ff8

The Caracas Stock Market Index was 2018’s worst stock market performer in dollar terms, suffering a collapse of 94%.

Do you think those middle class Venezueleans are still cost averaging into their index trackers?


Yes, it's true that a country can eventually get past these destructive bouts, and stocks that survive can go on and flourish, but nobody got richer because they held stocks through a period of hyperinflation, they got richer despite periods of hyperinflation as the economy eventually recovered and then surpassed previous peak production.

Here’s a fed paper that didn’t find any strong correlation between hyperinflation and production in four different countries.

https://www.dallasfed.org/~/media/documents/research/er/1993/er9304c.pdf

Where is your evidence to support the idea that hyperinflation impacts production?

[Wintergreen78]

The Caracas Stock Market Index was 2018’s worst stock market performer in dollar terms, suffering a collapse of 94%.

Do you think those middle class Venezueleans are still cost averaging into their index trackers?

If they're not idiots, they invest in global markets . . . not just the country they live in, so yeah, they should be fine.

Venezuela had a 70 billion dollar economy in 2019. The US had a 22,200 billion Dollar economy.
https://worldpopulationreview.com/countries/countries-by-gdp

Vermont had the smallest star economy at 35 billion dollars.
https://en.m.wikipedia.org/wiki/List_of_states_and_territories_of_the_United_States_by_GDP

So, if you are using Venezuela as an example, it is like investing all your money in Vermont, assuming Vermont is also subject to international sanctions and was heavily dependent on oil extraction during a year when the global oil price fell off a cliff, oh and assuming Vermont printed it’s own currency but had to trade with other state’s in US dollars.

Why do you think anything about Venezuela’s economy can be used to draw parallels to US markets, the US economy, or US monetary supply?

Sorry, I got all riled up. You should compare Venezuela’s economy to Maine. That changes everything.

[Buffaloski Boris]

If the world was going to be turned on its ear due to changing reserve requirements, I think it would have already happened six months ago. 

[marty998]

Why is it you guys always make a comparison to Venezuela? What is is about that one specific country that keeps turning up over and over again in US economic debates?

I appreciate some of it is the "Democratics are evil socialists" nonsense, but there are a lot of bad things that need to happen before you guys get to understand what it is like for real to live in an economy like that...

[Metalcat]

Why is it you guys always make a comparison to Venezuela? What is is about that one specific country that keeps turning up over and over again in US economic debates?

I appreciate some of it is the "Democratics are evil socialists" nonsense, but there are a lot of bad things that need to happen before you guys get to understand what it is like for real to live in an economy like that...

It's the same way Japan always comes up when discussing the 4% rule.

[marty998]

Why is it you guys always make a comparison to Venezuela? What is is about that one specific country that keeps turning up over and over again in US economic debates?

I appreciate some of it is the "Democratics are evil socialists" nonsense, but there are a lot of bad things that need to happen before you guys get to understand what it is like for real to live in an economy like that...

It's the same way Japan always comes up when discussing the 4% rule.

I laugh at that one too. I doubt there is anyone on earth who invested all their capital at the exact peak in the late 80s and never invested a single Yen since during all the troughs and the subsequent rebounds.

[vand]

Why is it you guys always make a comparison to Venezuela? What is is about that one specific country that keeps turning up over and over again in US economic debates?

I appreciate some of it is the "Democratics are evil socialists" nonsense, but there are a lot of bad things that need to happen before you guys get to understand what it is like for real to live in an economy like that...

It's the same way Japan always comes up when discussing the 4% rule.

I laugh at that one too. I doubt there is anyone on earth who invested all their capital at the exact peak in the late 80s and never invested a single Yen since during all the troughs and the subsequent rebounds.

For a less extreme example look at Argentina, where the local currency has lost about 90% of its value over the last decade. Not anywhere near "hyperinflation" but I can tell you from first hand experience that life is immesurably worse for the vast majority of Argentinians than it was a decade ago as the savings have been destroyed and their earnings do not keep up with inflation, which is logical considering the continual capital destruction and shrinking productive base. 

The middle classes have slowly been wiped out. There are no tales of people making a fortune on the stock market or in real estate (50% interest rates will do that). But look how "well" Argentine stocks have done in local currency: https://tradingeconomics.com/argentina/stock-market

If you kept your money in anything peso-denominated then it gets destroyed, and the only way to preserve wealth is to get your money out of the local currency, but even that is almost impossible as hugely restrictive capital controls are en force.

[Imanuels]

Another, less extreme example is Turkish lira. It is by no means productive for a country. A colleague of mine got a faculty position in Turkey and wrote a research grant for her lab. Later when it was approved, she could afford to buy any of the planned equipment anymore since they were all to be imported and paid in EUR. She left the country work abroad. The parents of a friend of mine who live there anticipated the trouble and bought some real estate as well as an olive farm which has helped.

[vand]

The great thing about stocks is that in the long term they rise along with inflation. So even if inflation kicks up a LOT in coming years the money you're investing in total market index funds will be fine. And on paper your returns would look a whole lot better than fine.

Take it way out to the extreme: middle class households in Venezuela buy stocks rather than save money in the bank, because money in the bank gets eroded by hyperinflation while the value of stocks do not.

Sorry, this is the sort of nonsense that gets perpetuated about stocks from someone who only chooses to believe in fairy stories.

Stocks get crushed during hyperinflation in real terms.

Think about it, hyperinflation destroys a country's productive capacity. Why on earth would anyone pay MORE for a smaller base of production under these circumstances?



https://www.forbes.com/sites/kenrapoza/2019/02/05/believe-it-or-not-venezuela-has-a-stock-market-and-its-been-destroyed/#7e7f32bf3ff8

The Caracas Stock Market Index was 2018’s worst stock market performer in dollar terms, suffering a collapse of 94%.

Do you think those middle class Venezueleans are still cost averaging into their index trackers?


Yes, it's true that a country can eventually get past these destructive bouts, and stocks that survive can go on and flourish, but nobody got richer because they held stocks through a period of hyperinflation, they got richer despite periods of hyperinflation as the economy eventually recovered and then surpassed previous peak production.

Here’s a fed paper that didn’t find any strong correlation between hyperinflation and production in four different countries.

https://www.dallasfed.org/~/media/documents/research/er/1993/er9304c.pdf

Where is your evidence to support the idea that hyperinflation impacts production?

LOL. Institution whose job is to debase the purchasing power of money releases reserach saying there are no ill effects from the debasement of money.

[Buffaloski Boris]

Why is it you guys always make a comparison to Venezuela? What is is about that one specific country that keeps turning up over and over again in US economic debates?

I appreciate some of it is the "Democratics are evil socialists" nonsense, but there are a lot of bad things that need to happen before you guys get to understand what it is like for real to live in an economy like that...

We should consider Mexico in the 1980's, but that's outside of most young people's memories.  I used to go there a lot at the time.  It was great for me and other Americans who went to visit; things were super cheap. It really sucked for the Mexicans and I suspect a lot of the problems that they're experiencing today stem from that time period.  There was a long term human cost here as a lot of their productive population went to the US to live and have a future. One interesting tidbit was the slang for money.  Pesos were "plata" or silver, while dollars were "oro" or gold.

[Wintergreen78]

The great thing about stocks is that in the long term they rise along with inflation. So even if inflation kicks up a LOT in coming years the money you're investing in total market index funds will be fine. And on paper your returns would look a whole lot better than fine.

Take it way out to the extreme: middle class households in Venezuela buy stocks rather than save money in the bank, because money in the bank gets eroded by hyperinflation while the value of stocks do not.

Sorry, this is the sort of nonsense that gets perpetuated about stocks from someone who only chooses to believe in fairy stories.

Stocks get crushed during hyperinflation in real terms.

Think about it, hyperinflation destroys a country's productive capacity. Why on earth would anyone pay MORE for a smaller base of production under these circumstances?



https://www.forbes.com/sites/kenrapoza/2019/02/05/believe-it-or-not-venezuela-has-a-stock-market-and-its-been-destroyed/#7e7f32bf3ff8

The Caracas Stock Market Index was 2018’s worst stock market performer in dollar terms, suffering a collapse of 94%.

Do you think those middle class Venezueleans are still cost averaging into their index trackers?


Yes, it's true that a country can eventually get past these destructive bouts, and stocks that survive can go on and flourish, but nobody got richer because they held stocks through a period of hyperinflation, they got richer despite periods of hyperinflation as the economy eventually recovered and then surpassed previous peak production.

Here’s a fed paper that didn’t find any strong correlation between hyperinflation and production in four different countries.

https://www.dallasfed.org/~/media/documents/research/er/1993/er9304c.pdf

Where is your evidence to support the idea that hyperinflation impacts production?

LOL. Institution whose job is to debase the purchasing power of money releases reserach saying there are no ill effects from the debasement of money.

So where is your evidence that high inflation destroys productive capacity? I’m open to evidence if you’ve got any.

Also, as I understand that paper, they were comparing inflation and real GDP over time. Are you taking issue with their measures of inflation in each country, their measures of real GDP in each country, or their ability to chart data points over time?

Basically, if you have an actual objection to the specific data in that paper, I’d love to hear it.

[theoverlook]

The middle classes have slowly been wiped out. There are no tales of people making a fortune on the stock market or in real estate (50% interest rates will do that). But look how "well" Argentine stocks have done in local currency: https://tradingeconomics.com/argentina/stock-market

The chart you link to shows the Merval going from 3007 to 45856 in 10 years. I don't know if that's a total return chart, but looks like a heck of a ride - 15x gain in 10 years.

[vand]

The middle classes have slowly been wiped out. There are no tales of people making a fortune on the stock market or in real estate (50% interest rates will do that). But look how "well" Argentine stocks have done in local currency: https://tradingeconomics.com/argentina/stock-market

The chart you link to shows the Merval going from 3007 to 45856 in 10 years. I don't know if that's a total return chart, but looks like a heck of a ride - 15x gain in 10 years.

that's the point, there are absolutely no real gains. It's not a hel of a ride up  its a hell of a ride down for the purchasing power of the currency.

Actually I got some more reporting from the coal-face just this morning.. inflation is now starting to run wildly out of control in Argentina, and they're entering hyperinflation once again. This makes sense as the classic conditions for an inflationary depression are now in operation since Covid - a fast increase in money supply coupled with a sharp contraction in output; more currency chasing fewer goods.

As an example, one friend of my wife was looking to move home on a like-for-like basis.  She reported that just the fees (selling agent, solicitor, taxes) would now amount to as much as she paid for the whole home just a few years ago. It's a 2,000% increase, while her wages have only gone up 14%. Try making those numbers work. My MIL reports that her pension now only buys about 1/10th of what it did a few months ago.

the point is that life doesn't operate on the same terms when you have no idea how much purchasing power your money will earn tomorrow, let alone next month or next year. It's impossible to engage in any long term projects, and time horizons for everyone become flattened.

[maizefolk]

Actually I got some more reporting from the coal-face just this morning.. inflation is now starting to run wildly out of control in Argentina, and they're entering hyperinflation once again. This makes sense as the classic conditions for an inflationary depression are now in operation since Covid - a fast increase in money supply coupled with a sharp contraction in output; more currency chasing fewer goods.

As an example, one friend of my wife was looking to move home on a like-for-like basis.  She reported that just the fees (selling agent, solicitor, taxes) would now amount to as much as she paid for the whole home just a few years ago. It's a 2,000% increase, while her wages have only gone up 14%. Try making those numbers work. My MIL reports that her pension now only buys about 1/10th of what it did a few months ago.

the point is that life doesn't operate on the same terms when you have no idea how much purchasing power your money will earn tomorrow, let alone next month or next year. It's impossible to engage in any long term projects, and time horizons for everyone become flattened.

vand, I get the feeling from this post that you're trying to convince the rest of us that hyperinflation is bad. I agree hyperinflation is bad. I don't think anyone in this discussion is arguing hyperinflation is good.

All I'm arguing is that owning shares of companies (and real estate for that matter) cushions people a lot more from the effects of hyperinflation than if they left that same money sitting in a bank or invested in theoretically lower risk assets like bonds. I don't have to believe hyperinflation is a good thing to believe that some investment stategies are going to be more resilient to inflation than others.

[phildonnia]

The "freaking out" is, I assume something along these lines:

We were all taught in high school history class that the Great Depression was caused by fractional reserve banking, and that's why, boys and girls, today we have the FDIC which requires a 10% cash reserve.

So, it kind of makes sense: in the middle of a financial crisis, the feds quietly remove the requirement for a 10% reserve, which should, on its own, undermine confidence in the banking system; and no one notices or cares.  It's like they didn't remember high-school history or something. 

I freaked out a little too, I must say.

However, I will point out that the FDIC is still there, still insuring deposits for $250k, still holding an enormous reserve of its own, and still allegedly backed by the Fed's ability to send over a truck full of money as fast as the ink can dry.  There is no danger of 30's-era bank runs.  The real danger is from that truck full of money sucking the value out of your deposits. 

Solution: don't keep too much of your wealth in cash.

---

As for the much-debated link between inflation and stock prices:

Stock prices generally respond positively to inflation -- just like everything else.  If the price of a loaf of bread doubles every day, then the price of Apple will increase, and for the same reason.  It doesn't matter what it's officially "denominated in", if you are personally valuing it using an inflating currency, then it will seem (to you) to rise in value. 

I think that the fallacy is to think that Apple is some kind of pile of money, that loses value as more dollars are printed.  Apple is not a pile of money.  Apple is a machine that takes plastic and silicon and turns it into something useful.  Even if the government declares pine needles to be legal tender, Apple will still be a machine that makes wealth, and you can still be wealthy if you own it.

Obviously, inflation is going to change consumer spending habits, credit, and efficiency, in ways that might damage the economy, and Apple in particular.  This is a separate effect.

[theoverlook]

The middle classes have slowly been wiped out. There are no tales of people making a fortune on the stock market or in real estate (50% interest rates will do that). But look how "well" Argentine stocks have done in local currency: https://tradingeconomics.com/argentina/stock-market

The chart you link to shows the Merval going from 3007 to 45856 in 10 years. I don't know if that's a total return chart, but looks like a heck of a ride - 15x gain in 10 years.

that's the point, there are absolutely no real gains. It's not a hel of a ride up  its a hell of a ride down for the purchasing power of the currency.

Maizefolk's claim was that people were buying stocks instead of depositing cash in the bank. You said they weren't and that stocks were "crushed" by hyperinflation, then linked to a chart showing stocks with massive gains. I fail to see how that demonstrates your point? Seems to me you're arguing while supporting maizefolk's point.

[vand]

The middle classes have slowly been wiped out. There are no tales of people making a fortune on the stock market or in real estate (50% interest rates will do that). But look how "well" Argentine stocks have done in local currency: https://tradingeconomics.com/argentina/stock-market

The chart you link to shows the Merval going from 3007 to 45856 in 10 years. I don't know if that's a total return chart, but looks like a heck of a ride - 15x gain in 10 years.

that's the point, there are absolutely no real gains. It's not a hel of a ride up  its a hell of a ride down for the purchasing power of the currency.

Maizefolk's claim was that people were buying stocks instead of depositing cash in the bank. You said they weren't and that stocks were "crushed" by hyperinflation, then linked to a chart showing stocks with massive gains. I fail to see how that demonstrates your point? Seems to me you're arguing while supporting maizefolk's point.

They’re not massive gains at all. Get into your head that everything is going up in nominal terms only because your money loses all its purchasing power. A tenfold increase in a stock index is a real loss if a tin of beans or a sack of rice cost you 50 times more. You can buy far less with your stocks than you used to, no matter how many extra zeroes are on the end of your account statement.

[Wintergreen78]

The middle classes have slowly been wiped out. There are no tales of people making a fortune on the stock market or in real estate (50% interest rates will do that). But look how "well" Argentine stocks have done in local currency: https://tradingeconomics.com/argentina/stock-market

The chart you link to shows the Merval going from 3007 to 45856 in 10 years. I don't know if that's a total return chart, but looks like a heck of a ride - 15x gain in 10 years.

that's the point, there are absolutely no real gains. It's not a hel of a ride up  its a hell of a ride down for the purchasing power of the currency.

Maizefolk's claim was that people were buying stocks instead of depositing cash in the bank. You said they weren't and that stocks were "crushed" by hyperinflation, then linked to a chart showing stocks with massive gains. I fail to see how that demonstrates your point? Seems to me you're arguing while supporting maizefolk's point.

They’re not massive gains at all. Get into your head that everything is going up in nominal terms only because your money loses all its purchasing power. A tenfold increase in a stock index is a real loss if a tin of beans or a sack of rice cost you 50 times more. You can buy far less with your stocks than you used to, no matter how many extra zeroes are on the end of your account statement.

I’m really curious where you get your numbers from. You seem to have very strong feelings about this. When I googled Argentine inflation rates I got this site, which seems to show 355% inflation over the last 10 years:

https://www.worlddata.info/america/argentina/inflation-rates.php

Wikipedia says the Merval went from 2320 at the end of 2010 to 41,610 at the end of 2019. Now, check my math here, but that looks like 1,693% return over 10 years. Take out 355% inflation, that gives you 1,338% real return. So, unless I’ve missed something it seems like the real returns for the last 10 years have averaged 130% per year.

130% per year seems ok to me. Do you expect more than that? What am I missing here?

[vand]

The middle classes have slowly been wiped out. There are no tales of people making a fortune on the stock market or in real estate (50% interest rates will do that). But look how "well" Argentine stocks have done in local currency: https://tradingeconomics.com/argentina/stock-market

The chart you link to shows the Merval going from 3007 to 45856 in 10 years. I don't know if that's a total return chart, but looks like a heck of a ride - 15x gain in 10 years.

that's the point, there are absolutely no real gains. It's not a hel of a ride up  its a hell of a ride down for the purchasing power of the currency.

Maizefolk's claim was that people were buying stocks instead of depositing cash in the bank. You said they weren't and that stocks were "crushed" by hyperinflation, then linked to a chart showing stocks with massive gains. I fail to see how that demonstrates your point? Seems to me you're arguing while supporting maizefolk's point.

They’re not massive gains at all. Get into your head that everything is going up in nominal terms only because your money loses all its purchasing power. A tenfold increase in a stock index is a real loss if a tin of beans or a sack of rice cost you 50 times more. You can buy far less with your stocks than you used to, no matter how many extra zeroes are on the end of your account statement.

I’m really curious where you get your numbers from. You seem to have very strong feelings about this. When I googled Argentine inflation rates I got this site, which seems to show 355% inflation over the last 10 years:

https://www.worlddata.info/america/argentina/inflation-rates.php

Wikipedia says the Merval went from 2320 at the end of 2010 to 41,610 at the end of 2019. Now, check my math here, but that looks like 1,693% return over 10 years. Take out 355% inflation, that gives you 1,338% real return. So, unless I’ve missed something it seems like the real returns for the last 10 years have averaged 130% per year.

130% per year seems ok to me. Do you expect more than that? What am I missing here?

Yes, you have - you've missed the fact that the "official" rates of inflation vastly understate the true rate of inflation. By orders of magnitude.

If you want a better real indication of how inflation has progressed, just look at the exchange rate, from 3.95 pesos per USD in 2010 to 77 pesos today.  So your stocks needed to rise x19 fold just to retain their purchasing power. A 1693% nominal rise is still a real loss.

[maizefolk]

If you want a better real indication of how inflation has progressed, just look at the exchange rate, from 3.95 pesos per USD in 2010 to 77 pesos today.  So your stocks needed to rise x19 fold just to retain their purchasing power. A 1693% nominal rise is still a real loss.

So even if we use the numbers you propose look at the dollar value of domestic Argentine stocks, in the middle of a major inflation event, economic recession, social unrest, and spiking crime, investments in stocks "only" are losing about 2% per year in value over the past decade?

That's obviously not ideal, but if things ever get as bad in the USA as they are in Argentina, I would consider myself quite fortunate relative to my peers if my stash retained 80% of its real value.

[Wintergreen78]

The middle classes have slowly been wiped out. There are no tales of people making a fortune on the stock market or in real estate (50% interest rates will do that). But look how "well" Argentine stocks have done in local currency: https://tradingeconomics.com/argentina/stock-market

The chart you link to shows the Merval going from 3007 to 45856 in 10 years. I don't know if that's a total return chart, but looks like a heck of a ride - 15x gain in 10 years.

that's the point, there are absolutely no real gains. It's not a hel of a ride up  its a hell of a ride down for the purchasing power of the currency.

Maizefolk's claim was that people were buying stocks instead of depositing cash in the bank. You said they weren't and that stocks were "crushed" by hyperinflation, then linked to a chart showing stocks with massive gains. I fail to see how that demonstrates your point? Seems to me you're arguing while supporting maizefolk's point.

They’re not massive gains at all. Get into your head that everything is going up in nominal terms only because your money loses all its purchasing power. A tenfold increase in a stock index is a real loss if a tin of beans or a sack of rice cost you 50 times more. You can buy far less with your stocks than you used to, no matter how many extra zeroes are on the end of your account statement.

I’m really curious where you get your numbers from. You seem to have very strong feelings about this. When I googled Argentine inflation rates I got this site, which seems to show 355% inflation over the last 10 years:

https://www.worlddata.info/america/argentina/inflation-rates.php

Wikipedia says the Merval went from 2320 at the end of 2010 to 41,610 at the end of 2019. Now, check my math here, but that looks like 1,693% return over 10 years. Take out 355% inflation, that gives you 1,338% real return. So, unless I’ve missed something it seems like the real returns for the last 10 years have averaged 130% per year.

130% per year seems ok to me. Do you expect more than that? What am I missing here?

Yes, you have - you've missed the fact that the "official" rates of inflation vastly understate the true rate of inflation. By orders of magnitude.

If you want a better real indication of how inflation has progressed, just look at the exchange rate, from 3.95 pesos per USD in 2010 to 77 pesos today.  So your stocks needed to rise x19 fold just to retain their purchasing power. A 1693% nominal rise is still a real loss.

Ok, that is fair enough. It sounds like a good reason to be internationally diversified. What else do you take away from that?