Category: Economics

How an asset bubble that inflates and deflates makes a lot of people worse off

by philg

One might think that an asset bubble that inflates and deflates doesn’t hurt that many people. After all, if you just stay in your house, what difference does it make if the value goes up to 3X and then comes back down to 1.2X?

Jeremy Grantham, the G in the asset management firm GMO, points out that people caught up in bubble fever adjust their consumption (i.e., spend like drug dealers). From his January 20 newsletter (a friend who has managed $billions sent it to me):

All 2-sigma equity bubbles in developed countries have broken back to trend. But before they did, a handful went on to become superbubbles of 3-sigma or greater: in the U.S. in 1929 and 2000 and in Japan in 1989. There were also superbubbles in housing in the U.S. in 2006 and Japan in 1989. All five of these superbubbles corrected all the way back to trend with much greater and longer pain than average.

Today in the U.S. we are in the fourth superbubble of the last hundred years.

One of the main reasons I deplore superbubbles – and resent the Fed and other financial authorities for allowing and facilitating them – is the underrecognized damage that bubbles cause as they deflate and mark down our wealth. As bubbles form, they give us a ludicrously overstated view of our real wealth, which encourages us to spend accordingly. Then, as bubbles break, they crush most of those dreams and accelerate the negative economic forces on the way down. To allow bubbles, let alone help them along, is simply bad economic policy.

What nobody seems to discuss is that higher-priced assets are simply worse than lower-priced ones. When farms or commercial forests, for example, double in price so that yields fall from 6% to 3% (as they actually have) you feel richer. But your wealth compounds much more slowly at bubble pricing, and your income also falls behind. Some deal! And if you’re young, waiting to buy your first house or your first portfolio, it is too expensive to get even started. You can only envy your parents and feel badly treated, which you have been.

If your house goes from being worth $800,000 to $1.6 million, as the houses in our Florida neighborhood have done within the past two years, Grantham predicts that you’ll sign up for that lavish vacation, buy the fancy new car, splurge on clothing and jewelry (see “Cartier’s Dazzling Festive Season Bodes Well for Luxury Stocks” (WSJ): “Overall, U.S. jewelry sales increased 32% year-over-year from Nov. 1 to Dec. 24”), pay $1.2 million for a piston-powered unpressurized airplane, etc. We see this with governments as well. States that are raking it in from temporarily turbocharged capital gains taxes build new spending programs that will need to be funded every year, even if capital gains tax revenues collapse due to asset values stagnating (but maybe inflation can help, since capital gains tax calculations don’t adjust for inflation and, therefore, even assets that actually lost value will result in taxes being owed on a nominal profit).

Where does Grantham, an elder statements of the equity markets, think we’ll end up?

The key here is that two things are true: 1) the higher you go, the lower the expected future return; you can gorge on your cake now or enjoy it piece by piece into the distant future, but you can’t do both; and 2) the higher you go, the longer and greater the pain you will have to endure to get back to trend – in the current case to a trend value of about 2500 on the S&P 500, adjusted for the passage of time, from whatever high point the market might reach (currently at nearly 4700).

In other words, the S&P crashes to 2,500 or, assuming sufficiently clever manipulation of all the control wheels by wizards in Washington, D.C., stays more or less where it currently is, adjusted for inflation, for a decade or so.

(Maybe “spend like drug dealers” above isn’t the best expression for today? How about “spend like crypto early-adopters”?)

Related:

  • Grantham warned us of a bubble in January 2021 (and if you’d followed his advice by going short or moving to inflation-savaged cash you’d be pretty miffed right now!): “We at GMO got entirely out of Japan in 1987, when it was over 40% of the EAFE benchmark and selling at over 40x earnings, against a previous all-time high of 25x. It seemed prudent to exit at the time, but for three years we underperformed painfully as the Japanese market went to 65x earnings on its way to becoming over 60% of the benchmark! But we also stayed completely out for three years after the top and ultimately made good money on the round trip. Similarly, in late 1997, as the S&P 500 passed its previous 1929 peak of 21x earnings, we rapidly sold down our discretionary U.S. equity positions then watched in horror as the market went to 35x on rising earnings. We lost half our Asset Allocation book of business but in the ensuing decline we much more than made up our losses.” The Jan 2021 piece includes the figure below.
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At-home test kits are back in stock; triumph of central planning?

by philg

As of last night, CVS in the Palm Beach area has at-home test kits back in stock.

Do we call this a failure of central planning? The site to order “free” (i.e., paid for by us via taxes) kits went live only on January 19 delivery time was supposed to be “within seven to 12 days” (USA Today). In other words, the central planners’ fix for the shortage will not ramp up until after the shortage is over.

Or do we call this an example of the success of central planning? Secure in the knowledge that Joe Biden is sending them four kits per household, Americans have ceased their panic buying of test kits at retail.

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How’s transitory inflation in your area?

by philg

From the in-house economics Nobel-winner at the New York Times (December 2021):

Even once the inflation numbers shot up, many economists — myself included — argued that the surge was likely to prove transitory. But at the very least it’s now clear that “transitory” inflation will last longer than most of us on that team expected.

In other words, all inflation is transitory, but some transitory inflation is more transitory than others.

(Dr. Jill Biden’s colleague Professor Dr. Krugman, M.D., Ph.D. previously successfully predicted the stock market crash that lasted throughout the dark Donald Trump years.)

Readers: What are you seeing for the stuff that you buy? If you’re in business, what are customers saying when you raise prices to them? Is it better to multiply by 1.4X once or 1.1X every few months until your revenue recovers its former purchasing power?

We took our Odyssey in for an oil change. The Honda dealer’s showroom contained only used cars, as did the lot. A new Accord or Odyssey was available for $3000 over sticker and a 1-2-month wait. “Some dealers are charging more,” the salesman said. This would be about $7,000 more than we paid for our in-stock Odyssey a year ago (i.e., roughly comparable to the 20% annual inflation in housing, though it would have been much higher for similar delivery time (buy out someone else’s order for $5,000 extra?)).

Honda plainly isn’t charging a market-clearing price for wiper blades. The dealer had just one of the two front blades in stock. Regarding the passenger-side blade, the advisor said “They’ve been on backorder.”

Our Cirrus SR20 needs its “reefing line cutters” replaced every 6 years. These are required every time that the pilot, or a nervous passenger, elects to land via parachute. Owners have mentioned long delays in getting parachute components for the Cirrus so I emailed our mechanic recently, three months before we actually need the part. Here was his response:

I will order you a set of line cutters as this has been on back order … be advised aircraft parts are increasing in price almost every day!

In 2021, Robinson Helicopter Company, founded in 1973, imposed its first-ever mid-year price increase. Order your aviation stuff now (13 percent price increase from Lycoming) describes a first-in-many-decades mid-year price increase from Lycoming.

Aviation costs, even for parts, seem to go up more like U.S. labor costs than like the costs of stuff that you can buy in Walmart. Aircraft parts, due to certification requirements, can’t be made by multiple competing Chinese and Mexican factories. The volume is low so it isn’t worth automating. Even if you’re just buying a bolt, which for a jet can cost $thousands, you’re essentially buying labor and health insurance.

Here is a line cutter in action. I think you’re seeing a $1,000 part (there are two for redundancy and both must be replaced every six years; then there is the $15,000 currently-unobtainable re-packed parachute every 10 years):

The used aircraft market is still booming, with airplanes worth 2X what they went for in 2019, but I wonder if a few years of transitory inflation will change that. Not everyone’s income goes up with inflation. Someone who bought a plane budgeting $X/year for hangar, maintenance, and insurance will now be paying $2X per year. At some point, won’t that person begin to ask “Why do I need this airplane? I can do most meetings via Zoom. I can move to Florida and have popular vacation destinations within a short drive. President Harris can’t keep up the mask requirements on commercial airlines forever.”

Related:

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The Federal Reserve Bank president who said not to print money

by philg

Happy Lucky 13 day! Given the recent headlines, e.g., “Inflation rises 7% over the past year, highest since 1982” (CNBC), let’s look at “The Fed’s Doomsday Prophet Has a Dire Warning About Where We’re Headed” (Politico).

In 2010, Hoenig was president of the Federal Reserve regional bank in Kansas City. As part of his job, Hoenig had a seat on the Fed’s most powerful policy committee, and that’s where he lodged one of the longest-running string of “no” votes in the bank’s history.

Between 2008 and 2014, the Federal Reserve printed more than $3.5 trillion in new bills. To put that in perspective, it’s roughly triple the amount of money that the Fed created in its first 95 years of existence. Three centuries’ worth of growth in the money supply was crammed into a few short years. The money poured through the veins of the financial system and stoked demand for assets like stocks, corporate debt and commercial real estate bonds, driving up prices across markets. Hoenig was the one Fed leader who voted consistently against this course of action, starting in 2010. In doing so, he pitted himself against the Fed’s powerful chair at the time, Ben Bernanke, who was widely regarded as a hero for the ambitious rescue plans he designed and oversaw.

Hoenig lost his fight. Throughout 2010, the FOMC votes were routinely 11 against one, with Hoenig being the one. He retired from the Fed in late 2011, and after that, a reputation hardened around Hoenig as the man who got it wrong. He is remembered as something like a cranky Old Testament prophet who warned incessantly, and incorrectly, about one thing: the threat of coming inflation.

So… he predicted inflation but was off by about 12 years as to when it would arrive? How is that different or better than predicting a big stock market crash at some point in the future?

But this version of history isn’t true. While Hoenig was concerned about inflation, that isn’t what solely what drove him to lodge his string of dissents. The historical record shows that Hoenig was worried primarily that the Fed was taking a risky path that would deepen income inequality, stoke dangerous asset bubbles and enrich the biggest banks over everyone else. He also warned that it would suck the Fed into a money-printing quagmire that the central bank would not be able to escape without destabilizing the entire financial system.

The Fed is now in a vise. Inflation is rising faster than the Fed believed it would even a few months ago, with higher prices for gas, goods and automobiles being fueled by the Fed’s unprecedented money printing programs. This comes after years of the Fed steadily pumping up the price of assets like stocks and bonds through its zero-percent interest rates and quantitative easing during and after Hoenig’s time on the FOMC. To respond to rising inflation, the Fed has signaled that it will start hiking interest rates next year. But if that happens, there is every reason to expect that it will cause stock and bond markets to fall, perhaps precipitously, or even cause a recession.

How does centrally-planned inflation work?

When the Fed kept interest rates low during the 1970s, it encouraged farmers around Kansas City to take on more cheap debt and buy more land. As cheap loans boosted demand for land, it pushed up land prices — something that might be expected to cool off demand.

But the logic of asset bubbles has the opposite effect. Rising land prices actually enticed more people to borrow money and buy yet more land because the borrowers expected the land value to only increase, producing a handsome payoff down the road. Higher prices led to more borrowing, which led to higher prices and more borrowing still. The wheel continued to spin as long as debt was cheap compared to the expected payoff of rising asset prices.

The bankers’ logic followed a similar path. The bankers saw farmland as collateral on the loans, and they believed the collateral would only rise in value. This gave bankers the confidence to keep extending loans because they believed the farmers would be able to repay them as land prices increased. This is how asset bubbles escalate in a loop that intensifies with each rotation, with the reality of today’s higher asset prices driving the value of tomorrow’s asset prices ever higher, increasing the momentum even further.

And the central planners, back in the 1980s messed up the flip side of this too, causing bank failures when farmland prices fell only 27 percent.

I recommend the article for its historical perspective. Don’t complain if you don’t find a solution to our current situation (high inflation; mediocre economic growth once adjusted for population growth). Part of this banker’s point was that there is no good way to stop printing money.

What did cars look like the last time inflation was this high? Here’s an example from a classic car gathering in our neighborhood:

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Exploring the land value tax

by philg

The U.S. Congress is getting back to “work” soon, trying to figure out how to squeeze enough tax revenue from Xbox-oriented Americans to fund all of the government programs that we dream of enjoying plus the $10 trillion in coronapanic spending that we indulged in.

Let me recommend “Does Georgism Work? Part 1: Is Land Really A Big Deal?” (12/8/2021) and “Lars Doucet On Taxing The True Value Of Land” (12/15/2021), which is on one of my favorite topics, a Land value tax. The basic observations are (1) an income tax discourages people from working and earning money, which is what most of us want our fellow citizens to do (exception: those of us with jobs in the welfare-industrial complex, homeless-industrial complex, and migrant-industrial complex), (2) a property tax on the value of buildings discourages people from creating nice buildings, which is what most of us want our fellow citizens to do (exception: me, because I am sick with envy when someone else has a nicer house than our 2BR apartment). From these observations, it then becomes obvious that taxing the value of underlying land is a good idea because no matter how high the tax is, the land won’t go away (since it is neither produced nor destroyed by human effort).

Unlike most folks who are enthusiastic about this form of taxation, Doucet has put some thought into what a transition would look like. Some excerpts from the 12/15 piece:

To start things off: a friend of mine bought an apartment near a future station on the not-yet-built extension of the New York subway, thinking the value of the apartment would rise once the station opened. Obviously she didn’t build the subway, and didn’t pay for it any more than any other New York taxpayer. Can you talk about that example from a Georgist perspective? Under Georgism, what would happen to taxes in a neighbourhood when something like a new train station gets built?

Lars: So when you buy land in a major city, or next to planned areas of development, hoping that the value will go up, what you’re really hoping for is to profit off of the hard work and investment of your neighbors and government spending. Imagine two locations for a hot dog stand: the middle of the desert, and an empty lot next to the Empire State Building. Obviously I’ll sell more hot dogs in the second location, but clearly it’s the people and city of New York that have made that second location more valuable.

The example you bring up is particularly salient because we have this trap where we expect the government to provide us with services, but then those services cost money, so we tax people’s income (labor) and investments (capital) to fund them, or just put the government in debt to do it (which ultimately manifests as indirect taxes on labor and capital in the form of interest payments and inflation). And then, land values for properties closest to those services rise. Who captures that added value? Whoever was smart enough to buy up land real cheap before We The People started doing some public spending. So essentially our current scheme creates this bizarre cycle where we tax both the labor and the savings of Americans in order to provide public works, which have the side effect of subsidizing people who speculate on land, who not only aren’t doing anything for the economy, but are actively making the housing crisis worse by bidding up the price of land.

Land value tax is already better than neutral. The point isn’t just that it “doesn’t distort” the economy, it un-disorts the economy, because the “private tax” levied by the gatekeepers of land, location, natural resources, and other monopolies is already imposing a productivity drain on our economy.

Just to drive the point home, we’re not wanting to tax land just because it’s more “efficient,” or whatever. We’re doing it because land is scarce and rival. To own land means to exclude others from it. Given there’s only so much of it, and we can’t all use the same land, and we all absolutely fundamentally need land, it’s a simple matter of justice to say that if you want to exclude the rest of society from a piece of land, you should compensate society, since you did nothing to make that land exist in the first place.

There are three things that come together when humans produce things — land, labor, and capital. We call these inputs the “factors of production.” We can increase labor, and we can increase capital, but there’s not a dang thing we can do to increase land — “it’s the one thing they’re not making any more of.”

But what does it mean when the owner of the land “provides” land? It’s not like they created it, and it’s not like if we don’t pay them for access to it the factor will somehow go away, which is what happens when you stop paying labor and capital. Gatekeeping access to land isn’t productive, but in our society it entitles you to a share of the produce that labor and capital produced. And as I’m prepared to show, it entitles you to a really huge outsized share at that, essentially a private tax on the entire economy.

Lars: Right, so the problem is if you try to knock down the housing ladder all by itself, you’re going to make a bunch of people really mad because they only did what was rational under the old system, broken as it was. That feels like a rug pull and it’s certainly a political headwind you have to take seriously, and it’s also a matter of fairness.

Gordon Tullock calls this the “transitional gains trap,” using the example of taxi medallions. The first generation that buys into the system gets in cheap and enjoys outsized gains, but the next generation has to pay “full price” for it. Sure houses appreciate over time because of the land values, but the person who just bought one had to really shell out for that privilege and hasn’t had much time to reap the rewards. So even if transitioning to a non broken system makes everybody better in the long run, the pain to change over is too much for some people.

There are four different ways to do it. The first is just to phase in land value tax gradually over time, like say, over 20-40 years. The challenge with this is that’s going to be quite a political feat to get it to stick over many generations of politicians.

The second is to levy land value tax as a sort of lien, something that you don’t have to pay until you sell the property, or pass it on to your heirs. So grandma and Farmer Brown aren’t going to be kicked out of their homes because of the land value tax. And just for the record, Farmer Brown’s land value isn’t going to be super high anyways — farmland is pretty cheap, it’s urban land that’s expensive. Farmer Brown will likely just get a tax break compared to what he’s currently paying in property taxes.

I hope that I’ve inspired you to read “Does Georgism Work? Part 1: Is Land Really A Big Deal?” and “Lars Doucet On Taxing The True Value Of Land” and then, for the next step, that you become a U.S. Senator and can actually act on your knowledge. Perhaps you can replace Senator Karen and Elon Musk won’t be distracted from creating the minivan-with-dog-mode that I crave.

Mangrove trees in Fort Lauderdale. Nobody told them “they aren’t making any more land.”

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Inflation chronicles: when a $120 steak dinner is underpriced

by philg

One of my favorite restaurants is Bern’s Steak House in Tampa. If you don’t order any wine, you could probably get out of there for $120 per person including tax and tip (menu with some $50 entrees, but you’re going to need an appetizer and you can’t go to the separate dessert room without ordering dessert (and you can’t go to Bern’s without going to the dessert room!).

How is $120 plus wine underpriced? You need to book 90 days in advance to get a table (we recently tried for a Tuesday and a Wednesday evening, a week in advance and then a month in advance, and failed on both attempts). Bern’s would have to raise prices substantially to reduce demand to the point that the restaurant was full and bookable by those who can’t plan their meals three months in advance.

Maybe it was always like this? Not in 2014. A group of us made a last-minute reservation while at Sun ‘n Fun in nearby Lakeland.

Maybe they’re afraid to raise prices to what would ordinarily be considered a market-clearing level, even if they can discount during slow summer months. They wouldn’t want people to walk away saying “The food wasn’t any better than at a restaurant with lower menu prices.”

What if they auctioned the seats, though, the way that a European discount airline does? Charge people a reservation or booking fee, that could be $1 (90 days in advance of a Monday night in the summer), $75 per person (3 days in advance of a Friday night in December), or $150 per person (last-minute Saturday night table). By the time the bill for the actual meal comes, the customer might have forgotten the pain of having paid for the reservation. Right now it seems as though the restaurant is leaving at least $30 per customer in pure profit on the sidewalk as well as disappointing those who are willing to pay the market-clearing price.

Related:

  • From 2014 (“BB” (Before Bidenflation)) … “Want To Dine Out? You May Need To Buy Tickets — Or Bid On A Table” (NPR): Other restaurants are even pondering auctions for tables, selling them off to the highest bidder. And even though Alinea doesn’t do that, bidding already occurs for Alinea tickets on other websites. … A new ethics-challenging startup called ReservationHop is another. In its initial form, ReservationHop booked tables at popular restaurants under assumed names, and then sold those reservations on its website.
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Avionics News: What’s worse than paying $18,245 for $200 of electronics?

by philg

Chatting with some pilots and aircraft owners this evening, one mentioned that he’d ordered an $18,245 Garmin 750Xi. This has some computing power, some flash memory storage, a touchscreen display (926×834 pixels), a GPS receiver, and two radios that can operate on a range of VHF frequencies. In other words, all of the same things that you get when you buy a $200 Android phone (except that the phone has higher resolution and the radios operate on higher frequencies).

What’s more painful than paying $18,245 (plus installation!) for this basket of capabilities? The retailer quoted him 9 months for delivery.

You’d think that if there are people willing to pay $18,245 for what is mostly a 10-year-old box of electronics that Garmin would cheerfully deliver a container load of them tomorrow. There are huge development and FAA certification costs for most things in aviation, so every additional sale should be great from a marginal profits perspective. The crypto miners aren’t buying the same chips that go into an airplane GPS. I am doubtful that any TSMC 5nm parts are in there. Why can’t Garmin harvest the fruits of its certification labor?

The lack of supply was confirmed by checking Aircraft Spruce, which sells a slightly different package for experimental aircraft: “no stock” and with an expectation of shipping June 2.

It can’t be that there was a huge surge of demand for these items. There weren’t suddenly a lot more airplanes built in which to put them.

Related:

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Merry Christmas from the Central Planners

by philg

Merry Christmas to everyone!

Loyal readers will know that I love central planning (seen “Citizens for a Planned Economy,” the political group that I formed after watching the 2012 Presidential debate in which candidates from both parties promised federal intervention) and bureaucratically-managed coronapanic. Today, we celebrate the Christmas gifts of the Maskachusetts Pharaohs to the people, in particular the distribution of COVID-19 tests to “more than 100 municipalities with a larger proportion of families facing financial hardship”. These are characterized as “free” so, presumably, the people themselves will not have to pay for them via taxation.

My favorite part of the mass.gov page is the list of the impoverished towns that will receive “free” tests. Weston, Massachusetts is on the list. Back in 2019, the town had a median household income of $207,702 per year (Census; using pre-Biden dollars). What will the good burghers of Weston do with the test kits? After the Massachusetts Emergency Management Agency and Massachusetts National Guard drive away,

Each city or town will determine how best to distribute tests within their community, with an emphasis on increasing access for individuals and families who are facing financial hardship.

“Hospitals Scramble as Antibody Treatments Fail Against Omicron” (NYT, 12/21):

In New York, hospital administrators at NewYork-Presbyterian, N.Y.U. Langone and Mount Sinai all said in recent days that they would stop giving patients the two most commonly used antibody treatments, made by Eli Lilly and Regeneron, according to memos obtained by The Times and officials at the health systems.

Federal health officials plan to assess at the end of this week whether to pause shipments of the Eli Lilly and Regeneron products to individual states, based on how dominant Omicron becomes in different regions of the country, according to a senior administration official who spoke on condition of anonymity.

Already in high demand even before Omicron arose, the supply of sotrovimab is very limited for now. But the situation is likely to improve somewhat in the coming weeks. The Biden administration is in talks with GlaxoSmithKline about securing more doses to be delivered by early next year, the administration official said.

The central planners are getting you antibodies for Christmas, but it might be Christmas 2022…

Related:

  • Trouble in public health paradise… “Mass. Medical Society calls for statewide mask mandate for all indoor public settings” (Boston.com, 12/14): The president of the Massachusetts Medical Society is recommending that state officials require the use of masks in all indoor public settings, regardless of vaccination status, in the face of worrying COVID-19 trends in the commonwealth. The call to bring back an indoor mask mandate came a day after Gov. Charlie Baker said he has “no plans to bring back the statewide mask mandate,” despite the urging of health experts to do so. In recent weeks, Massachusetts has seen a sharp increase in COVID-19 infections and hospitalizations to levels that have not been seen since the surge last winter, prompting state officials to order hospitals facing capacity constraints to cut elective procedures by 50 percent. Some municipalities, including Boston, have since brought back indoor mask mandates in response to the COVID-19 trends seen in their local communities. Starting Monday, Salem is also requiring all individuals entering a public or municipal building to wear a face covering, regardless of their vaccination status.
  • Merry Christmas to Israelis who celebrate this holiday… “For a growing number of Jews in Israel, it’s beginning to look a lot like Christmas” (Times of Israel): You ask Yaeli Amir, a seven-year-old Jewish girl growing up in a rural town in Israel, what her favorite holiday is, and she won’t name any of the almost countless Jewish ones. Instead, she’ll say, without hesitation, “Christmas!” (Tisha B’Av is a tougher sell to 7-year-olds?)
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Tyler Cowen says inflation harms the poor more

by philg

In Inflation harms the elite, the working class, or the poor? I posit that the coverage of inflation by elite-controlled media suggests that inflation harms the elite more than it harms the poor (who might never see a bill for rent, health care, food, or smartphone!).

Economist Tyler Cowen tackles the same question for Bloomberg in “Who Does Inflation Harm More, the Poor or the Rich?” (shouldn’t it be “Whom”?):

With inflation now rising faster than at any time in the last four decades, economists are debating which group suffers more from inflation, the poor or the rich. This kind of economy-wide question is not easy to answer, especially when rates of inflation have been so low in recent times and hard data are scarce. Nor is it obvious how exactly to compare the losses to the poor to the losses to wealthier groups. Nonetheless, the arguments suggest that the poor are likely to take a beating.

One major factor: The poor is the socioeconomic group that finds it hardest to purchase a home, and real estate seems to be one of the best inflation hedges. U.S. real estate prices have been on a tear for some time, including through the recent inflationary period.

Rents are rising at a rapid clip, due to the mix of rising demand and bottlenecked supply. The biggest losers there will be the poor. And if poorer people are trying to live somewhere relatively prosperous, perhaps to enjoy future economic mobility for themselves and their children, rising rent will eat up an especially large share of their incomes.

As noted above, I’m not sure it makes sense to talk about the “poor” paying rent. If they live in government-owned “public” housing, what do they care about the nominal dollars that their apartments might fetch in a market economy? It is Americans who aren’t quite poor enough to be officially “poor” who get killed by higher rents. (i.e., the chumps who work 60 hours per week to end up with a spending power just 15 percent higher than someone who doesn’t work at all and/or someone who had sex with a dentist).

Professor Cowen makes a great point about the richest of the nouveau-est riche:

Another asset class that has risen in value recently is crypto. There is no good data on who is buying crypto, but it seems likely that the poor are underrepresented here as well, if only because they have less disposable income.

The rise in crypto prices is mainly due to factors incidental to current retail price inflation, but a more general point applies: The poor hold a disproportionate share of their assets in pure cash, which has no potential for price appreciation and is hit hard in inflationary times.

He makes another good point about cars. Anyone who is at least upper middle class has a car that can last for 10 more years if necessary:

The poor do buy fewer cars than do the wealthy — but they also buy lower-quality cars, and find it harder to postpone a car purchase for a few years if they do not wish to pay a higher price. This is yet another illustration of the point that the poor can have a harder time making adjustments in an inflationary environment.

He counters my big argument, i.e., that real Americans bury themselves in debt and therefore will be delighted to pay back creditors with near-worthless dollars:

Probably the strongest argument in favor of the notion that the poor are less affected by inflation is that inflation can, under some circumstances, lower the real value of debt. If prices go up 7%, and your income goes up 7%, all of a sudden your debts — which typically are fixed in nominal value — are worth 7% less.

This mechanism is potent, but it assumes that real wages keep pace with inflation. Right now real wages are falling, and with higher inflation may continue to do so. Furthermore, many poor people roll over their debts for longer periods of time. Repaying those debts will eventually be cheaper in inflation-adjusted terms, but not anytime soon.

His conclusion is powerful. Countries that have high levels of inflation aren’t packed with cheerful poor people:

I’ve been focusing on the U.S., but elsewhere in the world the general correlation is that high inflation and high income inequality go together. Correlation is not causation, but those are not numbers helpful to anyone who wishes to argue that inflation is a path to greater income equality. Have very high levels of inflation done much for the poor in Venezuela and Zimbabwe? And if you ask which group would benefit from an improvement in living standards prompted by higher rates of investment, as might follow from a period of stability — it is the poor, not the wealthy.

Whether my original post was correct or, as seems more likely, Professor Cowen’s article, Joe the Plumber will still be living comfortably! (from Legoland Florida, just outside the restrooms)

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Inflation harms the elite, the working class, or the poor?

by philg

From page of the New York Times today:

Whom does inflation harm? It has to be bad for someone, right? Otherwise it wouldn’t be front page news. In fact, you would have to scroll down five times to reach “Migrant Truck Crash in Mexico: ‘They Were All Cadavers’”, a story about “a horrific crash that killed at least 54 migrants.” The NYT story that was much more important than 54 deaths:

The Consumer Price Index is rising sharply, a concern for Washington policymakers and a sign of the rising costs facing American households.

Inflation jumped to the highest level in nearly 40 years, fresh data released on Friday showed, as supply chain disruptions, rapid consumer demand and rising housing costs combined to fuel the strongest inflationary burst in a generation.

As housing and other day-to-day costs rise, workers may begin to ask for raises to help offset the financial blow. Employers are competing for laborers at a time when job openings far exceed the number of people actively looking for jobs, and wages are rising at a brisk pace. The Employment Cost Index, a measure the Fed watches closely, picked up notably in the three-month period that ended in September.

Increased pay has not been enough to fully offset inflation for most people: Wage gains are up sharply, especially for low earners, but are not rising quickly enough to keep up with the acceleration in prices.

The language gives the reader the impression that inflation is most detrimental to the American rabble. Let’s look at some of the language:

  • American households
  • laborers
  • people actively looking for jobs
  • low earners

On the other hand, if it is front page news in a newspaper controlled by elite Americans, shouldn’t we suspect that elites are being harmed? Throughout coronapanic, for example, the NYT advocated for public schools to be closed (#AbudanceOfCaution), thus depriving non-elite children of an education even as elite kids continued in their private schools or with home tutors.

Let’s consider someone on the bottom rung of the American income distribution. He/she/ze/they is entitled to free public housing, free health care via Medicaid, free food via SNAP/EBT, and a free smartphone (Obamaphone). If the market value of his/her/zir/their apartment in Cambridge, Maskachusetts, Manhattan, or San Francisco is $3,000 per month and rises to $30,000 per month, what difference does that make to someone who isn’t paying rent? Similarly, if someone on Medicaid had been getting hepatitis meds for $84,000 in pre-Biden money, what does he/she/ze/they care if the price goes up to $840,000?

What about a working-class wage slave who has borrowed up to his/her/zir/their eyeballs, like any true American? The house was bought with a mortgage and then a home equity loan siphoned out the gains due to inflation. The driveway contains three vehicles, all of them purchased with borrowed money. The wage slave was gulled into three years of college and never finished. He/she/ze/they is left with $45,000 in debt from that debacle. Maybe his/her/zir/their wages won’t quite keep pace with galloping inflation, but all of the debt is effectively wiped out.

What if we get to the above-median end of the American income and wealth spectrum? By definition, someone with “wealth” is a saver, at least on net. Savings, especially if kept in bonds, are attacked by inflation. Stocks generally fell during America’s previous experiment with rampant inflation (printing money to finance Lyndon Johnson’s new comprehensive welfare state and also the Vietnam War that JFK and Johnson embroiled us in). Here’s a chart of the S&P in constant dollars (source; the gray regions are recessions). It doesn’t recover its 1972 value until 1987:

How about the government itself? Inflation makes it easy for the government to pay bondholders ($29 trillion in federal debt isn’t so bad if a Diet Coke costs $29 billion). Inflation enhances capital gains tax receipts, since the U.S. taxes capital gains without adjusting the basis price for inflation. An asset bought 50 years earlier, even if it went down slightly in real value, will be taxed at 33 percent (federal plus state in California) on essentially the entire value when sold. As evidenced by their low quit rate, government workers are paid much higher salaries than they would earn for comparable work in the private sector. Inflation, especially when combined with a fraudulent CPI formula, allows the government to quietly cut employees’ wages.

The effects are certainly going to be uneven, but it is fair to say that generally the powerful inflation that our leaders are brewing is a force for redressing the inequality that the same leaders decry?

(Separately, let me remind readers that all of my ideas are stupid. Back in January 2021, I cautioned a friend who had borrowed money to buy a factory new $3 million Cirrus Jet. I lived for so long in New England that I developed a Yankee idea that you shouldn’t borrow for a personal airplane. In nominal dollars, the jet is now worth far more than he paid, of course, so essentially he is being paid by the lender (and bondholders behind the lender?) to fly around in his jet.)

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