The Direct Cash Payments/Giveaways (+ Side Discussions About Inflation and Deflation)
- Thread starter Chop
- Start date
Monahorns
10,000+ Posts
I don't do both. Does that make me cognitively consistent?
Pragmatism is an ideology. Do you adhere to it rigidly? But then again if that is your ideology how do you decide what works?
I would say the only Fed Chairman that has done a good job in a long time is Volker. He took stagflation and did the hard thing. He raised interest rates, lowered the money supply, and reduced inflation which led to the early 80s economic rebound. His decision led to economic down turn for a few years as the economy readjusted and became healthy. Every Fed Chairman since him has done the opposite. The US economy has been a head case since the dot.com bust. Any economics gains has been built on inflation. It made the politically well connected rich and frustrated the working class. That dynamic for 16ish years led to a populist wave electing Trump. You can't complain about government mismanagement and working class hard times and believe money inflation is the way to prosperity. But Trump hasn't really changed anything. Bernanke is following the same path which has frustrated the working class. Sounds like the elites have been rigidly pushing an ideology for two decades to make themselves rich at everyone else's expense.
Are you one of those elites? Have they been making you rich? If not, no reason to go along with their charade.
Monahorns
10,000+ Posts
I don't see the logical connection. Not sure what you mean by periods of low demand. Not sure if you are clear on whose salaries are going up? Everyones'?
Inflation very clearly impoverishes the working class as it takes away their buying power year on year. Wage rates don't increase much more than a percent or two a year. Inflation outstrips that most years. Not sure why you want a factory worker's salary to buy less just because "demand" went down.
I really don't get the argument that inflation is economically good. It's good for people who already have debt and basically nobody else. I'm not going to call those debtors crooks, because the be inflation isn't their fault, but they do benefit from it. (If that debtor happens to be the government, then it is a crook, because the inflation is its fault.)
It's not even very good for new debtors, because creditors (if they're smart) will charge interest rates that account for the inflation.
It's not even very good for new debtors, because creditors (if they're smart) will charge interest rates that account for the inflation.
Musburger1
2,500+ Posts
Owners of multiple properties which receive income from rent are greatly enriched. As low interest rates and loose lending requirements drive demand, their properties appreciate and rent income soars.
But even for that to work, you have to be able to attract tenants. And if the money you receive from them is worth less than before, have you really enriched yourself?
Musburger1
2,500+ Posts
Certainly you would be enriched. If you own five $200,000 properties that become five $500,000 properties four years later, your equity increased $1.5 million dollars as a result of inflation working in tandem with leverage. The rent income is merely a bonus.
conversely, if you bought high and then the bubble burst, you are massively under water.We are in the process of completing this boom/bust cycle for the second time in two decades. The second real estate collapse is about to get underway. Only massive money printing by the fed and trillion dollar checks doled out to the populace stand in the way.
Last edited:
Let me get this straight; inflation increased the value of the properties so the owner becomes “greatly enriched”? Interesting.
This would mean that the inflation only affected the landlord’s properties and not every other product and service.
The reality is that inflation affects everything, although there are variances. Relatively speaking, the landlord is about the same before and after inflation.
To test the theory, what do you think the landlord could buy another property for if he sold his "inflated property" at an arms length transaction?
Musburger1
2,500+ Posts
To test the theory....
Typically investors purchase properties primarily with borrowed money.
Let's say I purchase property #1 for $200,000 via a loan. I don't sell it. Next year I buy (via another loan) three more nearly identical properties at $250,000 each. The next year I buy property #5 for $350,000. I've now used $1,300,000 in debt to purchase five properties. Three years later sell all five properties, now valued at $500,000 each for $2,500,000. I pay off the debt and walk away with $1.2 million. I can now pay cash for two properties and still have $200,000 left over.
Typically investors purchase properties primarily with borrowed money.
Let's say I purchase property #1 for $200,000 via a loan. I don't sell it. Next year I buy (via another loan) three more nearly identical properties at $250,000 each. The next year I buy property #5 for $350,000. I've now used $1,300,000 in debt to purchase five properties. Three years later sell all five properties, now valued at $500,000 each for $2,500,000. I pay off the debt and walk away with $1.2 million. I can now pay cash for two properties and still have $200,000 left over.
Austin_Bill
2,500+ Posts
Lol, I spent several years as a financial advisor. I'm pretty confident in my understanding of leverage and debt.
Right. And now you have 2 properties and $200,000 instead of five properties. You have taken risk and, hopefully, you are rewarded.
If you sold your five properties and bought five properties, you would be even.
Musburger1
2,500+ Posts
No. Now I have 2 properties and $200,000 instead of zero properties I started with. The gain was done exclusively through debt and leverage facilitated by inflation (loan orignation) having put up none of my own money.
Now magnify this on a global scale with stocks, real estate, etc. What you have is hundreds of billions, even trillions of digital wealth created via financialization rather than commensurate production. In essence, money from nothing. When it all bursts, all the digital money disappears. That's the big scare we are seeing now.
The bubble was greatly inflated by super-cheap debt, stock buy-backs, an irrational herd mentality psychology, the belief that “this time it’s different,” and other factors. Even before the virus hit, the stock markets were over inflated with price earnings ratios out of whack with historical norms on many widely traded stocks. There was a big run up in stock prices in late 2019. The virus came at a time when we were already nearing the peak of a bubble. It’s the old ‘perfect storm’ situation.
I expect we’ll eventually get through it, and it will all come back at some point, but significant short term pain is to be expected. Hopefully some good lessons will be learned.
I expect we’ll eventually get through it, and it will all come back at some point, but significant short term pain is to be expected. Hopefully some good lessons will be learned.
Last edited:
Austin_Bill
2,500+ Posts
This might come as a shock to you, but HELL NO!!!!
I don't trust anyone with my money, if you do then you are foolish beyond reproach. I use a financial advisor but I also have an accountant to watch him. The check writer and the book keeper should always be separated, this is just good common sense.
If the Fed was free from political pressure, I might be able to trust them, but they are not, politics plays too big a part in their decisions. Don't get me started with government. No one should trust the government except to act in their own best interest.
No inflation over time when you compare it to long term investments and long term leverage is a great thing.
My parents are millionaires. Between them they have 1 high school diploma. My dad put in 20 years in the Army and retired, he then put in 20 years in the post office and retired. His two retirements together give him about 4500 per month. My mom worked for 30 years in various department stores her retirement is about 2,000. However they saved, didn't spend a lot of money on cars or houses, they bought the house they currently live in back in 1980 and paid it off by 1995. For 25 years they have saved and chose wise investments. Now they are 75 and millionaires.
Their house cost them 60,000 when they bought it, it is now worth about 200,000. This is because of inflation. As you can see, this is because to value of the dollar has gone down and over the last 40 years. When they bought their home minimum wage was about 1.25 per hour. Now it's about 7.25, the increase coincides with inflation. All long term investments are good with inflation because the value of the loan is consistent while the value of the dollar decreases. When the value of the dollar decreases then wages go up and you end up with more money to pay on a loan.
If you can't see that then you really need a financial advisor.
And where do you borrow money for the purchase of a commercial property without having a downpayment? I need to find that lender.
Musburger1
2,500+ Posts
Musburger1
2,500+ Posts
If you are an individual, you would have to put up some cash, but only a small percentage. In the scheme of things, whether that’s 5 or 10 per cent doesn’t change the point. If you are an institutional investor like Blackstone, you borrow maybe at 0.5% from the fed and then purchase the properties you want. Thus Blackstone has an unfair advantage over Joe Schmoe who has to borrow at the market rate.
So your scenario is incorrect from the beginning. It has more problems, but all is explained by basic finance.
If we had a Democratic President, probably 98 percent of what the government is doing, it would still be doing, and probably 98 percent of what the government hasn't done, it still wouldn't have been doing. The media would just be a lot cheerier about it. We'd hear a lot of questions like: "With how hard you and the rest of the Administration are working for the American people, how do you find time for family?"
I'm not a financial expert or economist, but I'm having a hard time following the argument that inflation is a good thing. If the value of your property goes up but the value of that money is proportionately less, how are you better off? Since you guys bring up real estate, suppose I bought a house in 1990 for $100,000. Suppose it's now worth $200,000. Yes, the value of my property increased by 100K. However, what if $1 in 2020 is only worth what 50 cents was worth in 1990? Have I really made money on the deal? It's better than if I just stuffed that $100K under my mattress in 1990, but I don't see how I'm money ahead.
If I mortgaged that house and borrowed at an interest rate that was lower than the rate of inflation, I could see how I might be a little ahead, because I'm paying it off in devalued currency. However, inflation is still taking a hell of a lot any gain I made. And by the way, i'm not sure how a bank can make money loaning money and charging interest lower than the rate of inflation.
If I mortgaged that house and borrowed at an interest rate that was lower than the rate of inflation, I could see how I might be a little ahead, because I'm paying it off in devalued currency. However, inflation is still taking a hell of a lot any gain I made. And by the way, i'm not sure how a bank can make money loaning money and charging interest lower than the rate of inflation.
The bank borrows its money (or pays depositors) at an even lower rate than it charges its borrowers, and makes $ on the delta.
Last edited:
You are on the right track. The idea is to match the terms of assets and liabilities. Bank liabilities are deposits. They want to keep their assets (i.e.loans) short term as well so they don’t get hit with the inflation problem. That’s why bank loans are typically short term as opposed to mortgage lenders.
Hardly.
Musburger1
2,500+ Posts
Without leverage, inflation is generally not a good thing; especially when it occurs at a higher rate (tuition, healthcare) than the rate your income increases.
With leverage, it’s a different ballgame. If I can borrow 10 million dollars at 1/2 a per cent and get a return of 1% return that’s a $100,000 gain. Even if the general rate of inflation is say, 3% I’m better off.
Leverage or not, as long as ROI is higher than the cost of capital, you are good. In fact, that’s the idea.
He’s talking about fractional reserve banking and the multiplier.
Musburger1
2,500+ Posts
No, that’s true. If bank depositors demanded just 15% of their deposits, banks wouldn’t be able to comply. They are only required to keep something like 10% of deposits on hand.
If a bank has, for example, has $100 million in deposits, the bank can make $1 billions in loans. It is in essence legal counterfeiting.
Weekly Prediction Contest
* Predict HORNS-AGGIES *
Sat, Nov 30 • 6:30 PM on ABC
Recent Threads
-
The Media Industry
- Started by texas_ex2000
- Replies: 8K
- West Mall
-
President Biden Accountability Thread
- Started by 2003TexasGrad
- Replies: 4K
- West Mall
Prediction Results Threads
