Random thoughts and plans for the coming inflation.

[GuitarStv]

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!

Welcome to the thread!

I found several points in your post interesting, but wanted to comment on this one in particular.

Giving up voting rights is certainly part and parcel for passive indexing.  But as a large percentage of people are now investing in low cost, broad index funds and giving up voting rights, the index funds end up with a greater and greater say regarding CEO pay.  In practice, it appears that the index funds overwhelmingly just use their newfound power to vote along with whatever management of a company wants to do.

What this means in practice is that the compensation for people employed in many companies is becoming increasingly distorted from where things would naturally be.  There's an interesting article about the phenomenon here:  https://hbr.org/2016/10/research-index-funds-are-fueling-out-of-whack-ceo-pay-packages

I'm not sure what the best solution for the problem is, but index investing now controls over half the US stock market.  If the trend to ever more and more index investing continues one could expect the CEO pay distortion to increase.  But pointing out that CEOs are paid disproportionately for the work they do shouldn't be seen as an attack on executives - rather it should be seen as acknowledgement of an ongoing problem.

[BicycleB]

To be a free market, the human beings involved need to participate freely. Enslaved human beings are by definition not free, yet without them, there cannot be a market in slaves. Therefore any slave market is by definition not free.

I believe that you are making a common mistake here - equating personal 'freedom' with the economic term 'free market'.

Free market - an unregulated system of economic exchange, in which taxes, quality controls, quotas, tariffs, and other forms of centralized economic interventions by government either do not exist or are minimal

By imposing a moral layer to the definition (all human beings involved in trade must be free) you are imposing a regulation that limits the freedom of the market.  But it also causes some confusing additional questions.

What exactly is freedom, and where do you draw the line?  Every person has limits imposed upon their freedom.  If you live in the United States you're not (usually) free to walk into the congress buildings and smear poop on the walls.  You're not free to travel somewhere else (this requires government documentation, application for various permits/visas, etc.)  You're not free to drive on the left side of the road, and treat red lights as green.  You're not free to pay someone for sex, or to ingest certain drugs.
 You aren't free to build a house on unoccupied land in the woods.  You aren't free to pull your kid out of school and fail to educate them.  Obviously none of these are comparable to the limits on freedom experienced by slaves . . . but my point is that there is no easy line that can be pointed to saying 'this person is free' and 'this person is not free'.  There is a gradient of freedom.

So exactly how free does someone need to be in order to participate in a free market?  Tricky question.  It's likely part of why the economic definition of free market doesn't usually include it.

I agree that I am making a moral assertion, but disagree that it's a mistake. I do not accept the definition of free market you're espousing; I feel that definition makes a giant mistake on exactly the point I identified.

I appreciate the remaining part of the quoted post because you begin to engage in key questions about what a free market really is. I agree those are hard to draw precise lines about. Yet imprecise lines, or lines drawn with difficulty, can be better because they can express what we wisely want such a market to be. In my opinion, that's something like:

1. Participants are reasonably free to participate, and tolerably free to not participate
2. "Reasonably" here means, roughly, they have free will. Similar to how a contract is valid only if participants were not under duress.
3. Generally, participants can do with they choose, barring reasonable and hopefully minimal needed restrictions from government
4. Definite bonus points if said government is itself legitimately democratic, meaning a creature of the people rather than the other way around
5. Your US examples are very good - they are fine examples of restrictions from item 3 (I might quibble about one or two details, perhaps arguing that restricting payment for sex is unfree and not minimal or that drug laws should be looser, but clearly they're in the class that society can and does make these decisions about)
6. It's worth discussing the edge cases and whether we've achieved the right amount of "free" in our markets, but if we're in the right ballpark, there's some core of free market that we have, and it's good to have it

Balancing the burden of restrictions vs the value of needed restrictions is what democracy and, in general, good governance is about IMHO. Reasonable enforcement of restrictions against theft, extortion, and slavery are basic underpinnings of a free market IMHO.

I mean, sure, if you lived on a desert island with a small group of people, you might perhaps have cultural enforcement of norms that produced a small free market of sorts. But in large modern societies like most of us live in, there's a complexity level where in practice, we're deep into the stage of needing government and therefore trying to make it, like the of society, the best version of itself that we can.

Therefore I view free markets in a modern society not as a natural state interfered with by government, but a communal treasure created and maintained by government as a wise way to enable freedom and productivity. I do feel that economic freedom is an important subset of human freedom and therefore has a moral dimension.

I also doubt that meaningful freedom would last long without government. Bullies, guns, and wannabe slavers abound. Two of those three things are probably parts of the human condition. So we have to engage in the tough questions just to maintain a what we call a free market. Said free market will never completely fulfill a libertarian's dream, or an economist's abstraction; it will always have boundaries beyond the simplification, established through judgment and effort and maybe community struggle. I think.

[DiscoverJupiter]

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!

Welcome to the thread!

I found several points in your post interesting, but wanted to comment on this one in particular.

Giving up voting rights is certainly part and parcel for passive indexing.  But as a large percentage of people are now investing in low cost, broad index funds and giving up voting rights, the index funds end up with a greater and greater say regarding CEO pay.  In practice, it appears that the index funds overwhelmingly just use their newfound power to vote along with whatever management of a company wants to do.

What this means in practice is that the compensation for people employed in many companies is becoming increasingly distorted from where things would naturally be.  There's an interesting article about the phenomenon here:  https://hbr.org/2016/10/research-index-funds-are-fueling-out-of-whack-ceo-pay-packages

I'm not sure what the best solution for the problem is, but index investing now controls over half the US stock market.  If the trend to ever more and more index investing continues one could expect the CEO pay distortion to increase.  But pointing out that CEOs are paid disproportionately for the work they do shouldn't be seen as an attack on executives - rather it should be seen as acknowledgement of an ongoing problem.

I think there are a couple way of handling this.  One would be to have an index fund poll the beneficiaries of the funds and then vote in proportion to the polled responses.  I'm not sure if that violates any laws currently on the books, but I think that would be a reasonable way to accommodate the situation easily.

Another way would be for people to start abandoning index funds, despite their status as having the highest expected return value.  To ease that, I think lifting taxes on buying/selling shares would be extremely beneficial as the main thing index funds benefit from is scale: they are constantly getting new money, returning existing money, etc.  With each of these transactions they can rebalance the fund or do in-fund swaps without realizing taxable events.  As an individual investor, I can't rebalance a portfolio to mimic an index without incurring a decent amount of transaction tax.  My weekly $800 just doesn't buy the proper ratio of shares to make that feasible.

I read a book once, maybe it was "A Walk Down Wall Street" or some other book about diversification, and it seemed to suggest that one could do reasonably well at mimicking the returns of an index with a substantially lower absolute count of companies in one's basket; maybe 30 or 50... certainly under 100.  If the above two solutions can't be implemented, investors could take back their power by doing things the old fashion way.  Of course, there are trade-offs with this method, as there are with the other solutions.

Ultimately I find this problem to be similar to "socially responsible" investing.  There are funds for these types of things, but they don't seem to perform as well.  It's a trade-off for each individual depending on the weighted preferences of their utility curve concerning expected returns and moral obligations.

[Cool Friend]

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!

Welcome to the thread!

I found several points in your post interesting, but wanted to comment on this one in particular.

Giving up voting rights is certainly part and parcel for passive indexing.  But as a large percentage of people are now investing in low cost, broad index funds and giving up voting rights, the index funds end up with a greater and greater say regarding CEO pay.  In practice, it appears that the index funds overwhelmingly just use their newfound power to vote along with whatever management of a company wants to do.

What this means in practice is that the compensation for people employed in many companies is becoming increasingly distorted from where things would naturally be.  There's an interesting article about the phenomenon here:  https://hbr.org/2016/10/research-index-funds-are-fueling-out-of-whack-ceo-pay-packages

I'm not sure what the best solution for the problem is, but index investing now controls over half the US stock market.  If the trend to ever more and more index investing continues one could expect the CEO pay distortion to increase.  But pointing out that CEOs are paid disproportionately for the work they do shouldn't be seen as an attack on executives - rather it should be seen as acknowledgement of an ongoing problem.

I'd love to see a separate thread with more discussion about this, FWIW

[Telecaster]

I read a book once, maybe it was "A Walk Down Wall Street" or some other book about diversification, and it seemed to suggest that one could do reasonably well at mimicking the returns of an index with a substantially lower absolute count of companies in one's basket; maybe 30 or 50... certainly under 100.  If the above two solutions can't be implemented, investors could take back their power by doing things the old fashion way.  Of course, there are trade-offs with this method, as there are with the other solutions.

Ultimately I find this problem to be similar to "socially responsible" investing.  There are funds for these types of things, but they don't seem to perform as well.  It's a trade-off for each individual depending on the weighted preferences of their utility curve concerning expected returns and moral obligations.

It is an interesting idea.  The hang-up is that CEO pay is usually set by the board of directors.  Who nominates candidates for the board?  The selection committee, which can have independent members, but is created by the company leadership. 

That said, there still may be some merit to what you are suggesting.  Studies have shown an inverse relationship between CEO pay and company performance:

https://cooleypubco.com/2016/07/25/new-study-shows-inverse-correlation-between-ceo-pay-and-performance-over-the-long-term/

This makes a certain amount of sense because excessive CEO pay can be a sign of poor corporate governance and poor financial decision making.  I suppose it could be possible to screen the market and select a basket of stocks that are on the lower end of CEO pay compared to their peers.  I not personally going to do it, but just throwing it out there.  FWIW, Billy Beane (of Moneyball fame) reportedly screens stocks by GEO height and gender.  The concept is that if you are a short male or a female you had to worker harder to get where you are.

[Radagast]

- The government finding/returning escaped slaves.  Did this happen enough and was this a significant impact upon the sale price of a slave on the free market?  It's certainly possible that it would increase confidence of slave owners that their property wouldn't be able to easily run away, which could have then translated into higher prices on the market.  Difficult to say precisely though.
- The government agents finding and arresting people helping slaves escape.  I don't believe that this would have any serious impact upon the price of a slave on the free market.
- The government putting down slave rebellions.  Again, I doubt that this would have significant impact upon the price of a slave on the free market . . . especially as despite this attempt, there were instances where slaves were able to escape to freedom (like the Creole case of 1841).
- The government making it illegal to teach slaves to read/write.  This is a form of government interference that would likely have little net impact upon the sale price of a slave.  Some people would see it as a benefit because their slaves would have more difficulty escaping, some would see it as a negative because their slaves would be less useful/capable.
- The government clearing people off from existing land in order to allow slave owners to use it.  This was common practice in the US, slave or no slave.  I'd argue that it was tertiary to the slave market and would have little impact.
- The government supporting one group of slave traders over another.  This seems to be a pretty clear case of market interference.

You should read about the history of Saint-Domingue to see whether or not you think government involvement was significant. https://en.wikipedia.org/wiki/Saint-Domingue. Just one example among thousands, of course. The reality is that government intervention in the slave market was overt, heavy handed, systematic, and ubiquitous. In fact it probably would have been pretty much impossible for slavery to exist as it did without extensive government support.

This shouldn't be surprising, given that the vast majority of it was under the mercantile system. You only seem to be considering an insignificant period of a few years toward the very end which you are calling a "free market." The reality is that governments realized in this short period that they would get more tariffs if they did not grant monopolies. So they stopped granting monopolies, and all the other aspects of the mercantilism system carried forward. "All the other aspects" include a very large number of activities which directly conflict with your definition. Later government realized it could get even more tariffs by freeing the slaves, and many people would say that aspects of mercantilism carried forward after even that.

Time to say "slavery was not a free market, by any definition."

Now that we know slavery was not a free market by your definition, lets examine whether it was a free market from the perspective of the slaves.

[Radagast]

To be a free market, the human beings involved need to participate freely. Enslaved human beings are by definition not free, yet without them, there cannot be a market in slaves. Therefore any slave market is by definition not free.

I believe that you are making a common mistake here - equating personal 'freedom' with the economic term 'free market'.

@GuitarStv ok, we've established that slaves did not have personal freedom. Did they have economic freedom?

[Wolfpack Mustachian]

I'll start by saying, I'm definitely in the camp of let's not get the government involved unless there's a serious problem. That being said, it's hard to see how excessive CEO compensation at this point isn't a problem - especially where ineptitude or at least failure is rewarded with huge compensation packages. It seems like something that somehow needs to be rectified, and when it gets to that point, in my mind, I tend to say, ok, fine, there's pretty much just the government left that can do anything about it, so they should.

The idea I've heard that seems the best would be a tiered tax structure on companies that severely incentivizes companies where the CEO pay is at most some percentage higher than the lowest-paid employee. I mean, we incentivize everything else with taxes, why not this?

I'm curious for those who want no government intervention on CEO pay, do you think it's not a problem at all (or not a serious one)? Do you think the free market is currently somehow working to correct the problem? Do you think the free market will eventually correct the problem? It would seem to need to be one of the three.

[GuitarStv]

I'll start by saying, I'm definitely in the camp of let's not get the government involved unless there's a serious problem. That being said, it's hard to see how excessive CEO compensation at this point isn't a problem - especially where ineptitude or at least failure is rewarded with huge compensation packages. It seems like something that somehow needs to be rectified, and when it gets to that point, in my mind, I tend to say, ok, fine, there's pretty much just the government left that can do anything about it, so they should.

The idea I've heard that seems the best would be a tiered tax structure on companies that severely incentivizes companies where the CEO pay is at most some percentage higher than the lowest-paid employee. I mean, we incentivize everything else with taxes, why not this?

This is an interesting approach, but (in defense of CEOs of large numbers of broke employees - which is a really weird side to be on) I'm not sure percentage of lowest paid employee is the best way to approach it.  Is the CEO of an engineering firm somehow making better decisions than the CEO of McDonalds and thus in need of pay?  I think using something like a percentage of the minimum wage would make more sense.

To be a free market, the human beings involved need to participate freely. Enslaved human beings are by definition not free, yet without them, there cannot be a market in slaves. Therefore any slave market is by definition not free.

I believe that you are making a common mistake here - equating personal 'freedom' with the economic term 'free market'.

@GuitarStv ok, we've established that slaves did not have personal freedom. Did they have economic freedom?

There's no easy yes or no answer to that question.  There are records of slaves growing their own crops, selling or bartering things they made (baskets/brooms), and in some regions even taking paying jobs on off days.  Indeed, slaves were sometimes recorded as able to participate in the slave market themselves - In 1839 for example almost half (42%) of the free blacks in Cincinnati, Ohio, had bought their own freedom.
 There are also records of places (often the tobacco and cotton plantations) where they were worked hard from morning to night and effectively prevented from any form of economic freedom.  So the economic freedom of slaves depends on where they were and who owned them.

While an interesting aside, the economic freedom of slaves has little to nothing to do with the economic term 'free market'.  The slave market was economically free in that the slave trade was minimally regulated by the government - freedom of the slaves (economic or otherwise) doesn't really change that as slaves were largely treated by the market as livestock.

[Radagast]

There are also records of places (often the tobacco and cotton plantations) where they were worked hard from morning to night and effectively prevented from any form of economic freedom.  So the economic freedom of slaves depends on where they were and who owned them.

The slave market was economically free in that the slave trade was minimally regulated by the government - freedom of the slaves (economic or otherwise) doesn't really change that as slaves were largely treated by the market as livestock.

It seems that freedom which entirely depends on the whims of someone else is not freedom, and I am sure you would not describe it as such in other cases.

Regardless, did slaves have economic freedom on the market which treated them as livestock?

Were slaves part of the slave market?

GuitarStv is in the market for a bicycle. He finds someone willing to trade a nice bike, and all parts of the bike are part of the trade, except the exotic seat, which is not part of the trade. Were slaves a part of the slave trade?

Did slaves have economic freedom in the trade of which they were a part?

[Wolfpack Mustachian]

I'll start by saying, I'm definitely in the camp of let's not get the government involved unless there's a serious problem. That being said, it's hard to see how excessive CEO compensation at this point isn't a problem - especially where ineptitude or at least failure is rewarded with huge compensation packages. It seems like something that somehow needs to be rectified, and when it gets to that point, in my mind, I tend to say, ok, fine, there's pretty much just the government left that can do anything about it, so they should.

The idea I've heard that seems the best would be a tiered tax structure on companies that severely incentivizes companies where the CEO pay is at most some percentage higher than the lowest-paid employee. I mean, we incentivize everything else with taxes, why not this?

This is an interesting approach, but (in defense of CEOs of large numbers of broke employees - which is a really weird side to be on) I'm not sure percentage of lowest paid employee is the best way to approach it.  Is the CEO of an engineering firm somehow making better decisions than the CEO of McDonalds and thus in need of pay?  I think using something like a percentage of the minimum wage would make more sense.

Good point - my initial thought was that they probably also employee custodial staff and so on that are paid lower than the engineers, which then made me think well, companies would then probably try to outsource their lowest-paid jobs to secondary companies in general - so yes, I'd revise it to maybe some percentage of the minimum wage of the lowest state that company operates in or federal level or whatnot would make sense.

[Radagast]

Laborers act as producer in a market, negotiating the price for their labor.

Machinery is owned, has no freedom or agency, and is used to produce. Machinery does not need to have agency for the seller of widgets to participate in a free market economy.

Again, slaves are, abhorrently, not allowed to act as laborers who negotiate the cost of their labor services, and in no other way are permitted to participate in the market.

A market requires 4 parts: two participants, and two commodities. The buyer, the seller, the commodity given, and the commodity received. Remove any of those parts, and it is no longer a market. Slaves, although actually laborers, were treated as commodities by the market.

Commodities cannot have economic freedom, and slaves did not have economic freedom in this exchange.

In a slave market, two out of every four parts have no economic freedom. Half of its parts are unfree. If a market is 50% economically unfree, it is not a free market, from an economic perspective. We already showed it is not free from a personal perspective.

Slavery: definitely not a free market. (it still seems like this should be obvious)

[Imanuels]

On the original title of the post, I'm wondering if this time is different and how should we be able to know it. Namely, I was recently reminded of the 'An Open Letter to Ben Bernanke' in 2010 where several well-known names warned that the FED planned asset purchases risk currency debasement and inflation. Which did't really materialize.

[roomtempmayo]

I have a working theory that inflation will be here in the 5-10% level for the coming decade.

All technical definitions of inflation aside, the stuff I care about acquiring has increased in price massively over the past decade.

That stuff includes equities, real estate, education, and health care. 

I think "asset appreciation" is just another term for taking tomorrow's gains today, which are then often accruing to someone else because I'm currently buying equities with urgency.

Real estate appreciation seems to be a euphemism for my property takes going up, which costs me more to own the same asset.

What if we've been living through massive inflation where the present is eating all of the future's cake?

The CPI focus we get pushed seems misplaced.  It makes almost no difference in my life (at least directly) if gas is $3/gallon or $6/gallon, or if a 2x4 costs $2 or $10.  Consumables are a minuscule portion of my expenditures.

The real stuff that matters to my long term financial security has been inflating for a long time.  Whether someone else is paying more for lumber to build a deck is neither here nor there to me.

[Michael in ABQ]

I have a working theory that inflation will be here in the 5-10% level for the coming decade.

All technical definitions of inflation aside, the stuff I care about acquiring has increased in price massively over the past decade.

That stuff includes equities, real estate, education, and health care. 

I think "asset appreciation" is just another term for taking tomorrow's gains today, which are then often accruing to someone else because I'm currently buying equities with urgency.

Real estate appreciation seems to be a euphemism for my property takes going up, which costs me more to own the same asset.

What if we've been living through massive inflation where the present is eating all of the future's cake?

The CPI focus we get pushed seems misplaced.  It makes almost no difference in my life (at least directly) if gas is $3/gallon or $6/gallon, or if a 2x4 costs $2 or $10.  Consumables are a minuscule portion of my expenditures.

The real stuff that matters to my long term financial security has been inflating for a long time.  Whether someone else is paying more for lumber to build a deck is neither here nor there to me.

If the price of a gallon of gas doubles and the price of lumber doubles the cost of building a new house won't double, but it will increase substantially. That's one of the direct causes of real estate inflation. If it's cheaper to build a new home than the price of existing homes will fall.

[roomtempmayo]

If the price of a gallon of gas doubles and the price of lumber doubles the cost of building a new house won't double, but it will increase substantially. That's one of the direct causes of real estate inflation. If it's cheaper to build a new home than the price of existing homes will fall.

Perhaps, or we start building smaller houses for less money, undercutting the price of my existing home.  Preferences are not fixed, and prices are set with a whole lot of different factors.

One of the benefits of living frugally is being minimally impacted by the consumerism that devours others. 

I may want a new deck, but I know I don't need such a luxury that allows me to sit outside without contacting the ground so that I can picnic like some sort of sultan aboard a litter.

If I really get desperate for lumber and pavers just won't do, I can learn a new skill milling my own boards from timber I fall.  I've long wanted to give milling a try anyways.

There's very little we need in the consumer economy for which there isn't a pretty ready substitute with a little know how and determination.

[roomtempmayo]

And in general, it is good that wages increase faster than inflation.  That means our standard of living is increasing.

Very little has been said about the possibility that a frugal wage earner ends up better off in the long run due to consumer inflation.

Consumer products go up, and consumers start trying to bargain for higher wages.  The consumers try to bargain until they're back to their old standard of consumption, so they're just treading water.

Meanwhile, for someone who is carried along by the wage increases but is only devoting 10% of their income to consumables, they pocket the difference between their wage increase in dollars and the increased cost of their consumption in dollars.  While others may see a COLA as a simple adjustment, a frugal person can pocket most of it.

If wages even mostly keep pace, conditions of consumer inflation can be an opportunity for frugal workers to increase their savings.

[pecunia]

What will drive the wages up?

Years ago I worked at plant that voted to unionize the engineering staff.

The management sent an old mechanical engineer to meet with the staff and pose arguments against it.  I remember his chief argument was that one gives up the right of individual negotiation.

The vote to unionize was promptly accomplished.

On the way out from the vote, I recall one of the fellows telling me, "We never had any individual negotiation.  They told us what we were getting paid and there was never any room for discussion."

I think many people are in that situation today.  Employers are in the position of saying, "My way or the highway."

This may cause the rate of inflation to be less than otherwise.

Retaining the cash from frugal living will only help you if you can put the money into something that will increase in pace with inflation.  Otherwise you lose.  Real Estate may be good.  Will index funds track inflation?  I hope so.

[GuitarStv]

I have a working theory that inflation will be here in the 5-10% level for the coming decade.

All technical definitions of inflation aside, the stuff I care about acquiring has increased in price massively over the past decade.

That stuff includes equities, real estate, education, and health care. 

I think "asset appreciation" is just another term for taking tomorrow's gains today, which are then often accruing to someone else because I'm currently buying equities with urgency.

Real estate appreciation seems to be a euphemism for my property takes going up, which costs me more to own the same asset.

What if we've been living through massive inflation where the present is eating all of the future's cake?

The CPI focus we get pushed seems misplaced.  It makes almost no difference in my life (at least directly) if gas is $3/gallon or $6/gallon, or if a 2x4 costs $2 or $10.  Consumables are a minuscule portion of my expenditures.

The real stuff that matters to my long term financial security has been inflating for a long time.  Whether someone else is paying more for lumber to build a deck is neither here nor there to me.

If the price of a gallon of gas doubles and the price of lumber doubles the cost of building a new house won't double, but it will increase substantially. That's one of the direct causes of real estate inflation. If it's cheaper to build a new home than the price of existing homes will fall.

Cost of housing is a really bad example to use for this if you live in any kind of city.  Except in rural areas, the price of a home typically depends far more on where it's located rather than what it's made of.  A house that cost 200,000$ to build in the middle of nowhere with few jobs around might sell for 250k . . . or in a bustling city the exact same home may sell for a couple million.

This is why I also disagree with concept of property value going up and then ending up costing the home owner significantly more money.  It's possible that you'll pay more taxes (although it's also possible that you won't*) but maintenance costs and utility costs should be pretty close to identical for both properties.



*Taxes in Toronto for example, are raised or lowered based upon how your house appreciates/depreciates compared to the rest of the market.  So if my house went up 9%, but the average for houses in Toronto went up 10% I end up paying less in taxes.  We bought our home for around 380, and it was last evaluated for 800k+ . . . but we're paying not very much more in property taxes.  Confused the hell out of me for the longest while.

[roomtempmayo]

What will drive the wages up?

Years ago I worked at plant that voted to unionize the engineering staff.

The management sent an old mechanical engineer to meet with the staff and pose arguments against it.  I remember his chief argument was that one gives up the right of individual negotiation.

The vote to unionize was promptly accomplished.

This sounds to me like a pretty ideal scenario.  Management isn't forthcoming with raises, and so employees unionize.  Not only are wages very likely to go up in the short term, but the structure of contracts has been changed over the long term to favor higher wages.

I'm not saying that wages always go up with inflation.  However, in the post-WWII developed west, there's been a strong tendency for sustained inflation to be accompanied by higher wages.  Some folks argue that there can't be sustained inflation without wages more or less matching it.

My simple point above was simply that we shouldn't assume inflation is negative for everyone.  As groups, I suspect those with few assets may very well benefit.

Take my folks, for example.  Late-ish Boomers who finished up grad school in the mid-70s with a moderate amount of student debt with a fixed rate of less than 3% and otherwise nothing but their paper qualifications to go on.  Inflation hit in the late 70s.  Their wages basically kept pace with inflation, and those gains were sticky.  They bought their house for cheap, but with around an 11% interest rate.  By 1986, inflation had destroyed their student loans, and they'd refinanced their house at a much lower rate while retaining the original purchase price.  And then they plowed their higher wages into equities that made huge gains over the next 35 years.  I would never be able to get them to say inflation was a good thing for them, but I think they were clear beneficiaries of it.

Could there be a whole generation of people who are coming along with very little and ultimately benefit greatly from another Nixon-Carter-Reagan cycle?  I'm going to rule it out.

[BicycleB]

Could there be a whole generation of people who are coming along with very little and ultimately benefit greatly from another Nixon-Carter-Reagan cycle?  I'm going to rule it out.

I think it's quite possible!

Will living frugally and investing the difference still supercharges the gains?It might make a difference which investments should be bought. Inflation could make mortgage leverage profitable, if home prices keep appreciating. Stocks - maybe not, for a while. Cash, bonds - probably bad for a while.

Yet there's also the question of what if all these inflationary fears/dreams don't happen? Would the inflation-conscious investor get stuck with big mortgage, falling stock, plunging gold? If the inflation burst is short, will an inflation-centric strategy get whipsawed?

[Bloop Bloop Reloaded]

The problem as i see it is that inflation is driven by blanket stimulus which is not well targeted. People and businesses got Covid relief whether or not they needed it. Thus the stimulus is not just aimed at saving employment (an arguably justified, albeit expensive, approach). It was aimed at stimulating the economy - therefore aimed at creating inflation. This is very bad for those of us who are prudent savers. I don't want to see businesses go bankrupt but I'm happy for wages to decrease and businesses struggle for a while if the alternative is higher taxes/inflation down the line.

As for the 'individual negotiation' thing, anyone who's in the top 10-20% of employees will always be able to individually negotiate. It's the average rank and file employees who lack that power. Unionising is good for the majority but bad for the minority, which is why I've always avoided heavily unionised workplaces. If you are a talented/hard working employee it makes sense to either go into partnership or go into sole trading/contracting. Being an employee requires you to pull the weight of others who are dragging down profitability.

[pecunia]

"As for the 'individual negotiation' thing, anyone who's in the top 10-20% of employees will always be able to individually negotiate. It's the average rank and file employees who lack that power. Unionising is good for the majority but bad for the minority, which is why I've always avoided heavily unionised workplaces. If you are a talented/hard working employee it makes sense to either go into partnership or go into sole trading/contracting. Being an employee requires you to pull the weight of others who are dragging down profitability."

We don't all have the same choices.  Life treats some better than others both through gifts and circumstances.  It was obvious that you avoided unionized workplaces due to the spelling.

Inflation will hurt those on fixed incomes.  I had a salesman talk to me the other day about annuities.  I told him they were a bad investment and wasn't even considering the inflationary aspect.  I will have a small pension.  It's not adjusted for inflation.

Inflation is good for debtors.  As time passes with inflation the debt effectively becomes less.  If the inflation is confined to the USA, it may lower the value of the dollar.  This may help the US to export its goods.  It will also cause the prices of imported goods to rise.  All these businesses that have invested elsewhere may have a real opportunity to invest here.

[ChpBstrd]

Take my folks, for example.  Late-ish Boomers who finished up grad school in the mid-70s with a moderate amount of student debt with a fixed rate of less than 3% and otherwise nothing but their paper qualifications to go on.  Inflation hit in the late 70s.  Their wages basically kept pace with inflation, and those gains were sticky.  They bought their house for cheap, but with around an 11% interest rate.  By 1986, inflation had destroyed their student loans, and they'd refinanced their house at a much lower rate while retaining the original purchase price.  And then they plowed their higher wages into equities that made huge gains over the next 35 years.  I would never be able to get them to say inflation was a good thing for them, but I think they were clear beneficiaries of it.

Could there be a whole generation of people who are coming along with very little and ultimately benefit greatly from another Nixon-Carter-Reagan cycle?  I'm going to rule it out.

The practice of going into debt to buy things now that will yield leveraged returns in a high-inflation future applies to education, housing, and not much else. The inflation of the 70's-80's functioned to wipe out the "old money" that was invested in bonds, and redistributed that wealth to younger people who were buying houses at close to the cost of construction, going to college, and who were not on the hook for debt from the Vietnam war, which was inflated away.

So yes, a young person today should hope for a decade of high inflation, which would raise their wages while eroding their student loans and eroding the trillions in national debt from the forever wars, two decades of tax cuts, and three decades of blank-check Medicare/Medicaid spending on unrestrained price hikes for medical services and pharmaceuticals.

It's not a free lunch, but it would be a reprieve from the mistakes of their parents.

Yet I cringe when I hear stories of millennials buying $500k+ houses. If inflation happens, and mortgage rates go up, nobody is going to be able to make the payment on such expensive housing, so prices could go down in a hurry. The marketable college degree bought with subsidized debt will continue to be a good investment, but the price of housing is no longer tied to inflation-sensitive construction costs in most areas, it's tied to interest rates.

Throw in getting hosed by the cryptocurrency fad early in one's investing career and you have a situation where millennials screw up the opportunity to benefit from inflation, if it occurs.

The truly worst-case scenario was experienced by the Japanese for the past 30 years. Imagine getting no pay raises for years, and imagine having paying off debts without the benefit of inflation, and imagine housing and investable assets all being inflated by a near-zero inflation rate. That's what we should truly fear.

[roomtempmayo]

The practice of going into debt to buy things now that will yield leveraged returns in a high-inflation future applies to education, housing, and not much else. The inflation of the 70's-80's functioned to wipe out the "old money" that was invested in bonds, and redistributed that wealth to younger people who were buying houses at close to the cost of construction, going to college, and who were not on the hook for debt from the Vietnam war, which was inflated away.

So yes, a young person today should hope for a decade of high inflation, which would raise their wages while eroding their student loans and eroding the trillions in national debt from the forever wars, two decades of tax cuts, and three decades of blank-check Medicare/Medicaid spending on unrestrained price hikes for medical services and pharmaceuticals.

It's not a free lunch, but it would be a reprieve from the mistakes of their parents.

I'm curious how it became almost an American axiom that anything more than minimal inflation is bad, presumably for everyone.

It's bad for some people, but it's good for others.  Keeping inflation extremely low is a distributional decision we don't seem to want to acknowledge as a society.

[pecunia]

As I stated earlier the inflation of the 70's and 80's hit people on fixed income hard.  The tales of cat food lunches for the elderly were not unusual.

The loans with high interest rates was not too good for most either.

Estimates of Construction Projects fell short as material costs rose in unseemly rates.  Budgeting can be difficult when one is battling a moving target.

I have asked this before, but receive mixed answers.  Are Index Funds a decent hedge against inflation?

[PDXTabs]

I have asked this before, but receive mixed answers.  Are Index Funds a decent hedge against inflation?

Define decent, hedge, and index funds?

With dividends reinvested and adjusted for inflation the SP500 was down -23.7% between January 1972 and January 1982. I believe that's the same as 10 years of -2.7% CAGR.
https://dqydj.com/sp-500-return-calculator/
https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp

EDITed to add - and gold was up 265.8%: https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart

[pecunia]

Good answer. 

[Cool Friend]

I have asked this before, but receive mixed answers.  Are Index Funds a decent hedge against inflation?

Define decent, hedge, and index funds?

With dividends reinvested and adjusted for inflation the SP500 was down -23.7% between January 1972 and January 1982. I believe that's the same as 10 years of -2.7% CAGR.
https://dqydj.com/sp-500-return-calculator/
https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp

EDITed to add - and gold was up 265.8%: https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart

Damn that blows

[Bloop Bloop Reloaded]

High inflation harms savers and those who are prudent with their money. It also encourages excess consumption, which is not a good thing.

"Support local businesses" doesn't really ring a bell for me. I support businesses that I want to support and only those businesses - local or otherwise.

If everyone did the same we'd have a lot less inflation and we'd have a more sustainable lifestyle too.

[pecunia]

The argument is sometimes made by those that want you to buy local food that there is a lot of energy used in the shipping of produce world wide. 

I buy what's cheap too.  I figure all food is basically organic so I skip that aisle.

I do believe in supporting the workers in North America and buying stuff made here, but when I see the difference in price, my hypocrisy arises.  It seems like most times these days you don't even have that choice.

[Bloop Bloop Reloaded]

I don't understand why anyone would want to support his or her countrymen more than someone overseas. We're all human beings after all. I have no room for patriotism or nationalism.

I have no issue with outsourcing or relying on migrant labour. If we lose a job here but create three in India we are doing the world a net good...and also increasing productivity and efficiency.

[GuitarStv]

I don't understand why anyone would want to support his or her countrymen more than someone overseas. We're all human beings after all. I have no room for patriotism or nationalism.

I have no issue with outsourcing or relying on migrant labour. If we lose a job here but create three in India we are doing the world a net good...and also increasing productivity and efficiency.

Buying simply for patriotism/nationalism - agreed.

But many goods manufactured overseas are cheaper because they're abusing workers or the environment.  While not perfect, often buying local (if you live in North America at least) you're guaranteeing at least a minimum baseline level of human rights and environmental protection.

[ChpBstrd]

The practice of going into debt to buy things now that will yield leveraged returns in a high-inflation future applies to education, housing, and not much else. The inflation of the 70's-80's functioned to wipe out the "old money" that was invested in bonds, and redistributed that wealth to younger people who were buying houses at close to the cost of construction, going to college, and who were not on the hook for debt from the Vietnam war, which was inflated away.

So yes, a young person today should hope for a decade of high inflation, which would raise their wages while eroding their student loans and eroding the trillions in national debt from the forever wars, two decades of tax cuts, and three decades of blank-check Medicare/Medicaid spending on unrestrained price hikes for medical services and pharmaceuticals.

It's not a free lunch, but it would be a reprieve from the mistakes of their parents.

I'm curious how it became almost an American axiom that anything more than minimal inflation is bad, presumably for everyone.

It's bad for some people, but it's good for others.  Keeping inflation extremely low is a distributional decision we don't seem to want to acknowledge as a society.

Just a hunch of mine, but it may have something to do with the following stats.

-> For citizens aged 18-34, 57% voted in 2020.
-> For citizens aged 65+, 74% voted in 2020.

Given that elderly people are more often on a fixed income and are more likely to own bonds, they have an interest in below-optimum inflation. Younger people, on the other hand, have an interest in high inflation because they have many years ahead of them to earn higher salaries and because they need to shrink the debt burden they are inheriting.

Policy is just following the wishes of the people who actually vote. Not to mention that your average 18-34 year old could not give a coherent answer to the question "would 1% inflation or 4% inflation be better for you" but you can bet a 65 year old has an answer. This also might explain how Japan's leadership settled on policies that would ensure ultra-low inflation for the past 30 years. Japan's demographics are tilted toward elderly pensioners. Inflation-phobia, which we've dealt with for a decade in the US, may continue for a couple more decades if demographic and voting trends tell us anything.   

All this political analysis is beside the point. When I studied econ, I was taught that 3% is about the optimum inflation number to stimulate economic growth. That's just enough to prevent the hoarding of cash and just enough to offer some downside cushion before a recession becomes deflationary, but not so high that interest expenses and menu change costs start to accelerate. There is even a strong case for a 4% inflation target:

https://voxeu.org/article/case-4-inflation

I'll add that this makes very good sense for a country like the US, which has locked in low long-term interest rates on tens of trillions in sovereign debt. Yet the fact that we're talking about a 2% target demonstrates the politics of inflation.

[PDXTabs]

I don't understand why anyone would want to support his or her countrymen more than someone overseas. We're all human beings after all. I have no room for patriotism or nationalism.

I have no issue with outsourcing or relying on migrant labour. If we lose a job here but create three in India we are doing the world a net good...and also increasing productivity and efficiency.

I mostly agree, but then there is the Local Multiplier Effect. But in that case we are talking about supporting people in your community, not your country.

[ChpBstrd]

I don't understand why anyone would want to support his or her countrymen more than someone overseas. We're all human beings after all. I have no room for patriotism or nationalism.

I have no issue with outsourcing or relying on migrant labour. If we lose a job here but create three in India we are doing the world a net good...and also increasing productivity and efficiency.

I mostly agree, but then there is the Local Multiplier Effect. But in that case we are talking about supporting people in your community, not your country.

There's also a question of which systems you are supporting. E.g. "capitalism with Chinese characteristics" or American subsidized libertarianism.

[PDXTabs]

I don't understand why anyone would want to support his or her countrymen more than someone overseas. We're all human beings after all. I have no room for patriotism or nationalism.

I have no issue with outsourcing or relying on migrant labour. If we lose a job here but create three in India we are doing the world a net good...and also increasing productivity and efficiency.

I mostly agree, but then there is the Local Multiplier Effect. But in that case we are talking about supporting people in your community, not your country.

There's also a question of which systems you are supporting. E.g. "capitalism with Chinese characteristics" or American subsidized libertarianism.

I completely agree, and it can be both. Eg, tax money spent on car infrastructure encourages oil purchases from questionable regimes in the middle east as well as questionable battery manufacture from Asia, where as walkable and bikeable infrastructure keeps far more dollars in the local economy and doesn't support those regimes, mostly.

[pecunia]

Let's see - I want high speed railroads.  If I spend the money on imported goods, the money goes to some foreign land.  At least some of the tax dollars which could be invested on all the good things the government can do including that high speed rail is gone.

Now I do realize that there are some among you who take the libertarian view and will disagree that tax dollars can do good things.

[roomtempmayo]

Policy is just following the wishes of the people who actually vote. Not to mention that your average 18-34 year old could not give a coherent answer to the question "would 1% inflation or 4% inflation be better for you" but you can bet a 65 year old has an answer.

Solid explanation.  The quoted portion above is especially on target.

Perhaps it's just inevitable as well that the old will tend to have stronger opinions about inflation than the young because its consequences for them are clearer.  The young have more of their lives ahead of them, and so more uncertainty.  Under those conditions, it's not unreasonable to defer to those who seem to feel that the situation is clear and settled.

Given the amount of student debt out there at fixed rates (not to mention big mortgages), it's still surprising to me that we aren't seeing a major push for more inflation.  Even those old Grainger farmers in the 1890s understood that inflation was good for debtors.

[ChpBstrd]

Policy is just following the wishes of the people who actually vote. Not to mention that your average 18-34 year old could not give a coherent answer to the question "would 1% inflation or 4% inflation be better for you" but you can bet a 65 year old has an answer.

Solid explanation.  The quoted portion above is especially on target.

Perhaps it's just inevitable as well that the old will tend to have stronger opinions about inflation than the young because its consequences for them are clearer.  The young have more of their lives ahead of them, and so more uncertainty.  Under those conditions, it's not unreasonable to defer to those who seem to feel that the situation is clear and settled.

Given the amount of student debt out there at fixed rates (not to mention big mortgages), it's still surprising to me that we aren't seeing a major push for more inflation.  Even those old Grainger farmers in the 1890s understood that inflation was good for debtors.

Excellent points. Yes, young people with student loan debt, a fresh mortgage, and who are on the hook for boomers' national debt decisions should be rioting in the streets in support of higher inflation. They either don't understand or they think inflation only applies to their daily costs and not to wages, debts, or inequality. Perhaps the Grainger farmers of the 1890s were better informed than the TikTok generation?

If sub-optimal inflation is our destiny, I wonder if we can count on economic growth to fund our early retirements. Safe Withdraw Rates are higher in eras when inflation is low. On the other hand, the economy will under-perform due to the rate of inflation being below optimal, so stock returns might be lower than in the past. Recall that from 2010 to 2016, slow jobs growth coincided with the low inflation "conundrum".

This sounds like a great setup for someone to FIRE, but I don't know of many people brave enough to exploit it by pulling the trigger with a 5%-6% WR. If inflation is low in the 2020's, perhaps we'll all overshoot with our 3.5%-4% portfolios, and will have wasted years of our lives at work.

However, we also don't have the luxury of being able to buy treasuries with real yields of 1-2% like retirees could do in the 1990s; instead our real yields are negative. So we'll retire with stock-heavy portfolios into a period of slow earnings growth and possible Japanification. It seems likely the FIRE crew will miss out on most of the benefits of disinflation.   

[pecunia]

We are at the edge of a time of increasing technological innovation.  This global warming thing is pushing the auto industry to electric cars.  Almost daily, I hear of some idea for better batteries.  Mass production of electric cars is a new industry.  It's kind of obvious that it will spawn entire new sub industries.  This will not be the only change for global warming.

Necessity is the Mother of Invention.  It's getting obvious that doing stuff against global warming is a necessity.

At the end of the 1990s, the telecommunication / computer innovations really gave the market a push.  I predict climate change innovations will also push the market forward.  So, even with the anticipated inflation don't expect stagnation.

In the past 2 generations we've seen a nation of 2 billion people go from burning books and farming behind oxen to become a leading scientific nation.  These changes are not restricted to China.  India is moving forward too.  These people are looking for business opportunities.  Expect some great innovations to come from Asia.  It just makes sense from a statistical viewpoint when you consider the vast populations.

Yeh - The stock market will surge forward.

I wish I was just a bit smarter or I would know what those changes will be.

[ChpBstrd]

Yeh - The stock market will surge forward.

I wish I was just a bit smarter or I would know what those changes will be.

The optimistic view for the FIRE crowd is that we'll either have high inflation and growth or low inflation and stagnation. In either case, our retirements are secure. In the first scenario, stock gains make up for higher spending. In the second, low inflation negates the need for high returns. Let's hope.

[Imanuels]

Campbell Harvey et al. recently published an article on the inflation topic: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3813202

They studied 34 inflation episodes in the US, UK and Japan to understand the impact of inflation on asset prices. The image below is from the summary in the Financial Times article (https://www.ft.com/content/88ebab48-edc7-49f1-b535-8c546988d4fd).

They conclude that treasury bonds do poorly when inflation surges. Commodities do well - energy, industrial commodities and precious metals. Unexpected inflation is very bad news for equity investors.

[vand]

Inflation is right here right now.

We'll see if its really is transitory, but personally I would not put all or even most of my eggs into that thesis bcause the downside if you are wrong and the inflation is secular will be huge.

https://www.wsj.com/articles/us-inflation-consumer-price-index-may-2021-11623288303

[ChpBstrd]

Inflation is right here right now.

We'll see if its really is transitory, but personally I would not put all or even most of my eggs into that thesis bcause the downside if you are wrong and the inflation is secular will be huge.

https://www.wsj.com/articles/us-inflation-consumer-price-index-may-2021-11623288303

There's also a downside if the Fed freaks too soon and snuffs out inflation. Think about the price paid by Japan once disinflationary expectations set in during the early 1990s and couldn't be dislodged. They're wrapping up "lost decade" number 3 now, their national debt to GDP is a spectacle, and nobody can imagine a bright future. Remember, the US's demographics today are grayer than Japan's were in the early 1990's.

From May 2019 to May 2021, CPI has increased 5.2%, so the trend - spanning over the deflation of 2Q 2020 - is still historically low at only 2.6% inflation per year. I think we need a year >3% to have a chance at escaping Japanification and a debt trap. That is no sure thing, especially as wages are being traded for work-from-home privileges by the white-collar crowd.

[Simpleton]

Inflation is right here right now.

We'll see if its really is transitory, but personally I would not put all or even most of my eggs into that thesis bcause the downside if you are wrong and the inflation is secular will be huge.

https://www.wsj.com/articles/us-inflation-consumer-price-index-may-2021-11623288303

There's also a downside if the Fed freaks too soon and snuffs out inflation. Think about the price paid by Japan once disinflationary expectations set in during the early 1990s and couldn't be dislodged. They're wrapping up "lost decade" number 3 now, their national debt to GDP is a spectacle, and nobody can imagine a bright future. Remember, the US's demographics today are grayer than Japan's were in the early 1990's.

From May 2019 to May 2021, CPI has increased 5.2%, so the trend - spanning over the deflation of 2Q 2020 - is still historically low at only 2.6% inflation per year. I think we need a year >3% to have a chance at escaping Japanification and a debt trap. That is no sure thing, especially as wages are being traded for work-from-home privileges by the white-collar crowd.

I don't think the Fed has the political clout to even think about snuffing out inflation. I think the direction is pretty clear that big-fed-funded-deficits are here to stay. There is little political will to cut spending. I think it will continue until its politically more beneficial to snuff out inflation than to continue spending.

I think anybody investing in taxable accounts are in for a world of hurt if this 5%+ inflation rate continues (personally I think its just getting started and will trend in the 5-10% for a few years). The matter gets even worse if capital gains taxes are increased - which also seems like a foregone conclusion.

-With no inflation, if your stock returns 10%, you lose half the gain to taxes and end up with a 5% real gain.
-With 5% inflation, To return your to a real 5% gain your stock p/e multiple has to be cut in half so that you end up with a 20% return, 10% after tax and 5% after inflation.

[pecunia]

Will the upcoming inflation void the validity of the 4 percent rule?

[Simpleton]

Will the upcoming inflation void the validity of the 4 percent rule?

Even fire calc puts the 4% rule at an 77% success rate over long time horizons (50 years) which I feel most people looking at early retirement should use.

Obviously there is no clear answer but I would say that all else being equal, growing inflation and sky high valuations make it more likely you end up in the 23%.

Even small adjustments though like going to 3.5% raises the success rate to 95%

Just depends how much risk you want to take.

[ChpBstrd]

Will the upcoming inflation void the validity of the 4 percent rule?

It would depend on one's ability to maintain real returns. E.g. if inflation is 6%, you better be earning 8-10% nominal. I find it terrifying that many retirees are loaded up on bonds, per the standard advice from the 20th century. Locking in 1-3% nominal returns for a decade or more would be a horrible idea if that is our future.

One of the 4% rule failure cases of the 20th century hit people who retired in the late 1960s and were then walloped by the low returns and rising inflation of the 1970s. Both stocks and bonds went down. There's a case to be made that if inflation rose to, say, 5%, the stock market would tank because its multiples are based on the assumption of low interest rates. This is another reason to look at options-hedged portfolios.

[ChpBstrd]

Here's a good chart and analysis of why prices are rising.

https://www.marketwatch.com/story/inflation-scare-look-at-this-chart-before-freaking-out-11623440152?mod=home-page

With the exception of cars, most items are reverting to a spot on the PCE chart (representing consumer demand) not that far from where they were in February 2020. And that looks like crazy high inflation if your starting point was April/May 2020!