I came here to read about inflation hedging strategies, expecting to see the common talk of commodities, low-interest loans for mortgages or other assets, precious metals, crypto metals, etc., but instead I have about 8.5 pages of non-inflation related chatter.
So naturally I registered an account to chime in!
There are two points I'd like to address:
1. The government's intervention in the slave market and whether the impact led to more market freedom
Yes, naturally as someone pointed out, the government's intervention placed a constraint on the market which reduced overall market freedom. You can argue that the slaves were not free entities in the market and therefore were participating in an involuntary transaction (hence slavery), but the slave market was in fact defined as the contract between buyers and sellers of commodities just like any other commodity market (e.g., livestock).
2. What is the role of government in a society that promotes capitalism/free markets?
This answer is quite simple: the government exists to provide constraints on markets/society which prevent negative externalities of transactions.
From the slavery example, the government added a constraint to the market to prohibit the negative externality of involuntary transactions on the part of slaves. Similarly, the government places constraints on the market for murder because the negative externality there is the death of an unwilling participant. I think this system is appropriate.
What I do not think is appropriate is the government limiting voluntary transactions. As such, I believe that minimum wage laws are garbage. If people are willing to work for wages of $0.00 an hour, they should be able to! They are choosing to work! People say the "market sets prices" because in an open market if you have 1 employer and 100 qualified people, the person that will do the work for the lowest wage gets the job. Conversely, if you have many people offering jobs but nobody wanting to work them, those offering will have to bid against each other to discover the lowest price they can pay which will attract the lowest price someone in the labor pool is willing to accept. After they discover this price, they will have to continue to do price discovery to determine the price at which the second laborer is willing to accept. If at any time the laborer's demands out-weight the value that the employer would derive from them, the employer will choose to not hire anyone and close shop (or find an alternative as in the case of the self checkouts mentioned earlier).
In fact, any single government that enacts a constraint on a market such as minimum wage can have profound effects. Consider a country, A, which has no minimum wage, and country B which has a minimum wage of $1k/second. Employers in country B have a massive incentive to redirect their capital into R&D of automation to replace their laborers as it will save them $1k/second. Even if the initial cost is high, they can amortize the expense over a period of time to determine the long-run cost of the decision. The result is a system that replaces their workers. But that system was developed by someone, and that someone can now go to country A and sell it to them to replace their workers so long as the long run price of the purchase is lower than the expense of their human capital. Now if a company in country A is paying $0.00 or $0.01 per year to workers, they won't be interested, but if the price of the automation is less than the price of the human capital, they will be interested!
... that brings us back to the inflation point, and hopefully away from this discussion about slavery markets.
What we have seen in the last year is massive government printing, and that money is being handed out to people to stay home. In effect, the government is now (I consider unfairly, but that is my opinion) competing for "labor". I say this because the "labor" the government requires is nothing, but I'm considering it labor because it's essentially adjusting the labor supply curve as people have a preference for leisure over labor. To simplify things let's consider utility as a function of money and time, U(m, t).
So now that the government is competing for labor, businesses that pre-pandemic paid workers some amount of money that provides less utility to comparable workers than the utility they now derive from the government at the same wage levels must increase the amount of money they are offering people to entice them to come back to work. Essentially they have to pay people more because they have to convince people that the work is worth more than leisure. This leads to wage-push inflation: workers demand more pay for the same work, employers meet the demand or go out of business, workers now have more income for the same work and demand more goods, demand for goods rises while supply is constant (actually supply is constrained due to the pandemic so it's even worse), prices rise.
Conclusion: wage increases lead to inflation. The effect is identical when you raise the minimum wage which is why I personally think that minimum wage laws are horrific. They lead to fewer people being employed generally, and their inflationary effects are only mitigated by knocking people out of the workforce.
At the same time as wage-push inflation, we also have demand-pull inflation, especially for yield-returning assets such as houses, stocks, etc. due to the historically low interest rates and crazy amounts of money being printed. That is one of the reasons that housing prices have dramatically increased (also pandemic so nobody wanted to move [constrained supply] also pandemic so everyone wanted to move out of cities to houses for more space [increased demand]), and one of the reasons the stock market is up so high - people are dumping their excesses into stocks chasing yield.
Conditions which form my strategy regarding inflation:
- I missed the boat on housing prior to their run-up so I won't be taking out another mortgage to hedge against inflation.
- I think the US government is going to try to do everything possible to avoid increasing interest rates because that will naturally force more and more government budget into paying the interest on the insane national debt (MMT is dumb and I think its super dumb) and also a recession.
- I think that we'll never see someone with integrity again like Paul Volcker, and that makes me very sad.
My strategy:
- I dumped my entire bond holdings from the Total Bond Market which was largely if not entirely US based into an Emerging Market Bond. The expense ratio is higher (.88 or something vs the low .0-something), but this does three things for me:
1. Protects against weakening dollar as now my currency is non-US
2. Protects against inflation in the US crushing fixed-income US Treasuries and other US-based government notes
3. Protects against US-based corporate bonds as, in the case where the government does raise interest rates, I think we'll hit a necessary deep recession and the probability of corporate bonds failing in that scenario is higher
- I also purchased a few hundred shares of TBT which is an ETF that shorts US treasuries and should pump if interest rates go up (and I don't think interest rates will diminish significantly or into negative territory) so I believe I have some downside protection. At worst that money is stagnate, but it's a small portion of my overall portfolio.
One final thing I want to address that I saw come up previously, regarding CEO pay:
As was pointed out, by buying shares of a company you are implicitly supporting that company's policies. You have voting rights. If you don't like the board or the CEO, vote to change it. If you are passively investing in low cost, broad index funds, you are choosing to give up voting rights for a simplified, time-saving, diversified life with the best expected returns. That is a voluntary transaction!
Personally, I think income tax is garbage, and I think that capital gains taxes on stock investments is ultra-garbage (all cap gains really). If we didn't have capital gains taxes on stocks, you could much more freely "vote" with your money as you would be able to buy shares in companies and then move that money to other companies based on your personal preferences without having to worry about a tax penalty. If you want to complain about anything, complain that Washington has placed market constraints on the free market which are having consequences of making the market less efficient.
Crony capitalism is a joke, and I hate it. We need a consumption-based tax system only, as income taxes are completely unfair. People working under the table never pay income taxes. Income taxes reduce take-home pay which reduces investments and innovation. Consumption taxes force you to pay for things you use! And the government should ONLY be providing services that people use! So you should pay based on what you use, which is in effect subsidized by all the people that want to consume far more than you, as it should be since public goods are public. Clown world.
