I get that, but wouldn't that profit be eaten up by inflation?
The Direct Cash Payments/Giveaways (+ Side Discussions About Inflation and Deflation)
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I get that, but wouldn't that profit be eaten up by inflation?
So the rate charged, or market rate, on a loan is theoretically the risk free rate + a risk premium, which is the expected return adjusted for variance, that is supposed to account for inflation. Simply put, it’s the return on a government security plus a risk premium.
AC
2,500+ Posts
Ive flipped houses in Houston before. I bought in 2000 & sold in 2004 for triple the price. We did all the work ourselves with no outside contractors. The kitchen tile and hardwoods we refinished were suspect but we had rugs. After you live in a house 2 years the gain is tax free. I paid cash for my next house and started my company. Being debt free since 2004 has been a God send to my family and I owe it all to the housing bubble which popped in 2008. Without that I would have never been able to start my company. I think it takes work to educate yourself and study trends like a housing bubble, but yes it probably tripled my net worth today. My brother was even better at it than me. He flipped 7 houses back then. Now I’m thinking currency is the next boom not real estate. Why? Because the dollar is going to get pummeled if we give every adult thousands as a stimulus for Corona Virus. We already have near zero interest rates. Ide love some discussion on the Dollar valuation after the Covid-19 recovery.
I’m not a commercial banker, but I believe it works something like this:
First time period —.bank borrows and receives deposits and pays out 2% interest. Bank lends that $ out at 4%.
second time period — slightly higher inflation kicks in. Interest rates up slightly. Bank borrrows and receives deposits and now pays out at 3.5% on this new money. Bank lends at 5.5% on this new money.
third time period — more inflation kicks in. Interest rates are noticeably up. Bank now borrows and receives deposits and pays out at 8% on this new money. Bank lends at 10% on this new money.
fourth time period — it’s the 1970s again. Now some serious inflation kicks in. Bank borrows and takes in deposits and pays out at 17% on this new money. Bank lends at 19% on this new money.
Whatever the inflation or interest rates are, a bank could usually loan that money out at a bit higher than it pays depositors / its lenders, and profits are made. At higher rates and inflationary values, the $ supply is expanded and the loan amounts and payments in and out are all larger. The collateral is also valued at a higher dollar amount.
So you may ponder: how do banks ever go belly up any more? Too many bad loans, especially if the collateral was overvalued on the books or declines in value and doesn’t fully secure the loans anymore. This is a big problem in real estate crashes.
you’re right. Here is what is a little strange about the process and you have to be aware of if you ever compare financial results of lenders (assume the loan amounts are the same in your scenarios): in scenario 1 the percentage return is 100%.
In scenario 3 the return is 25%.
In both scenarios the dollar amount of interest earned is exactly the same, which is 2% of the loan amount.
It’s been an eye opener this last month. I’m also watching the dollar and currencies in general. Normally gold is a safe harbor in uncertain times. Of course, the ultra-safe T Bills are also used to park money in times of much fear and uncertainty. This time, it appears that investors worldwide dumped equities and ran much more into US dollars and T Bills instead of gold—for now at least. Investors and funds appear to have actually sold gold to cover losses in equities! That indicates some desperate times indeed! Gold has gone down some, and the dollar is stronger. T-Bills have been paying at record low rates—the 10 year went under 1%. If and when inflation kicks in, I’d still look for a rush into gold.
Those annoying ads pitching gold investments are now starting to make a lot of sense.
An excellent point, and probably why commercial banks say they prefer lower rate environments.
It does make them look better to the uninitiated, but it hopefully means more business and fewer defaults too
Musburger1
2,500+ Posts
From frying pan to fire.Yeah, could happen. Never thought we’d hear of people moving their money to the ‘stable safe haven’ of cryptocurrency.
When Bitcoin is seen as more stable than the dollar (or even gold), something has gone terribly wrong. Bizarre times.
Or maybe governments and central banks have f-ed up money so bad that people are discovering what a sound money might look like - something that cannot be inflated/devalued away or easily censored or confiscated
One school of thought is that it is a risk to own bitcoin because of its price volatility, or it is not "backed" by anything, etc. Another view that many are coming to now is that it is a risk to not have some in your portfolio, ie a risk-off scenario
Gold historically filled that role. I still think it will, but it’s hard to predict anything in this environment.
Monahorns
10,000+ Posts
I disagreed with you on some stuff earlier, but this is spot on. There has been a bubble building for close to 10 years. No one knows how long bubbles can be extended. The Fed had actually done a good job keeping it going. But this virus outbreak event has been a catalyst. The stock market crashes at some point anyway. It could have been 5 years from now, but the loss of supply due to the shut downs flipped the switch.
Monahorns
10,000+ Posts
Austin Bill, I agree totally. The Fed is independent but not totally. You can find multiple cases of Presidents influences Fed policy. They basically do what Presidents want. The President nominates the Chairmen. They are absolutely listening to what he says, or he gets replaced.
Your last sentence is spot on. That is why I am confused on your previous comments which were completely in line with the government narrative.
Monahorns
10,000+ Posts
I agree with everything you say. Nothing you said contradicts what I said. Inflation helps debtors. But no one is just a debtor. All the other factors of inflation hurt wage earners.
Also, the money manipulation isn't performed to help the common man who has a loan. It is done in order to help the government pay its debt and to bail out political connected people who are poor businessmen. It is all set up to help elites.
Austin_Bill
2,500+ Posts
Just because I might agree with specific instances of their actions, that doesn't mean I trust them. I don't trust Democrats or Republicans except that they will act in their own best interest. I'm not a fan of Trump and I absolutely hate Pelosi.
I trust without question the Constitution of the United States because I think it is a perfect document, with that said, the Government it created is only as good as the morals of the men and women we elect to those offices.
Again, as far as I'm concerned there is no Amendment as important as the 2nd Amendment. That is our guarantee that we the people can take back our country against any enemy foreign or domestic.
Monahorns
10,000+ Posts
I guarantee you if Obama was President today. the media would not run headlines calling attention to death tolls. I saw on Twitter today a headline saying something like "Death toll rises 30% in 1 day!".
I know that wouldn't happen with Obama. You know how I know without a doubt? When Bush was President the news ran the number of deaths in Iraq daily, they scrolled the names of the dead at the end of the broadcast every day. Once Obama because President, we never heard about soldiers dieing in Iraq. No names were given. They stopped giving Cindy Sheehan any air time at all. Complete silence.
Austin_Bill
2,500+ Posts
All monetary systems are based on the concept that human beings will always act in their own best interest. Deflation is never sustainable because the moment people have more money in their pocket they will spend it creating demand which will adjust to the law of scarcity and prices will change to meet those demands.
However if inflation is somewhere south of 5% in the short term it hurts but wages always go up and in the long term it makes the cost of our long term debts go down. That 300K mortage that cost you 1,800 per month might be tough to pay when you are making 70K a year but if your wage is 100K that isn't nearly as hard to swallow.
That is what inflation can do for you.
Not sure anyone has noticed the cost of a gallon of water has gone up 40 cents since this began. Gallon of Ozarka water was 99 cents before this began, now it is 1.39 today. HEB is now jacking up prices.
However if inflation is somewhere south of 5% in the short term it hurts but wages always go up and in the long term it makes the cost of our long term debts go down. That 300K mortage that cost you 1,800 per month might be tough to pay when you are making 70K a year but if your wage is 100K that isn't nearly as hard to swallow.
That is what inflation can do for you.
Not sure anyone has noticed the cost of a gallon of water has gone up 40 cents since this began. Gallon of Ozarka water was 99 cents before this began, now it is 1.39 today. HEB is now jacking up prices.
Monahorns
10,000+ Posts
Spot on. The gain in $s is a mirage. It actually hurts home owners who are living in the house they bought. When you want a new house all the other houses are gaining in value too. So the benefit you get is how much of your mortgage you pay off and if your average yearly raise is higher than inflation (good luck on that). If you move to an area with less value you can get a bigger house and all, but that is true with or without inflation.
All of this is a mirage.
It is a beneficial mirage for corporations too. They get to give people "raises" that are below inflation, which means they actually pay you less year on year. You better be getting 3-4% raise every year or they are paying less.
I will say though that inflation does help the housing industry, the real estate agents and loan companies. The new $s are going preferentially into your industry which means you get more $s before everyone else gets more $s. You are surfing the wave, staying ahead of the effects of inflation on the rest of the economy. What I mean is that house prices inflate before cell phone prices inflate and before food prices inflate. It is a good deal for bankers and real estate agents.
Monahorns
10,000+ Posts
The prices of specific goods don't go up when there are more and more products being introduced into the market. That is actually one of the causes of deflation. Money goes to the more valuable products. Prices of existing products go down because demand is less, etc.
Deflation is sustainable. The only reason it doesn't exist is because governments keep printing more money to pay off their deficit spending.
Austin_Bill
2,500+ Posts
Again, the law of supply and demand states that if demand is low and supply is high then prices will drop and conversely if demand is high and supply is low prices will rise. The only thing that changes this law is market manipulation. When people have more money they are going to spend it and create scarcity because there is only a finite amount of goods that can be sold then we run out. Don't mix up the laws of supply and demand and the laws of competition. When prices go up competitive entry into a market becomes more likely. Conversely when prices are falling competition might leave a market as there is less profit to be had.
Joe Fan
10,000+ Posts
OK, I guess you could say that.
Let's accept for the sake a simplicity in math that "Trump made 100 decisions about the coronavirus in the period Jan 29 - Feb 1, 2020." One of those decisions was to ban flights from China on Jan 31.
Then yes, technically, it was just 1% of his decisions and probably one of the handful of meaningful Exec Branch decisions that would be clearly different from what we would have seen with a Dem president.
But the effect of that 1% was to save the West Coast of the United States from being overrun in a quick fashion by this virus. So I think focussing on the number or the percentage misses the the big picture entirely.
Musburger1
2,500+ Posts
As of 7:50 this Monday morning, Congress is still debating how wide to open the spigot. But the Federal Reserve has opened its spigot and will be flooding the world with digital and, if needed, unlimited paper money. Quoting this morning report from Zerohedge:
Isn't this a form of fascism? When private or monopolistic industry basically control the level of government, the government in essence represents the corporate powers rather than the people.
The balancing act of course will go to Congress. While the Fed will bailout industry, Congress will send checks to individuals to insure that consumption continues and rents get paid. Asset values must remain elevated (of course the rich control most assets). Down the line we will see inflation not only in assets, but in prices. Will wages and UBI (universal basic income) drive upward enough to keep pace? In an economy that is primarily financialized? Hell no. America is over as we knew it.
The Fed unveiled an unprecedented expansion to its mandate, announcing open-ended QE which also gave it the mandate to buy corporates bonds (in the primary and secondary market) to unclog the frozen corporate bond market as we just one step away from a full Fed nationalization of the market (only Fed stock purchases remain now).
So if I'm a large, connected, or systemically important industry that can't raise enough cash via bond issuance (perhaps because the company is so risky nobody would buy its bonds no matter the interest rate), no worry. The Federal Reserve will make sure you survive.
Isn't this a form of fascism? When private or monopolistic industry basically control the level of government, the government in essence represents the corporate powers rather than the people.
The balancing act of course will go to Congress. While the Fed will bailout industry, Congress will send checks to individuals to insure that consumption continues and rents get paid. Asset values must remain elevated (of course the rich control most assets). Down the line we will see inflation not only in assets, but in prices. Will wages and UBI (universal basic income) drive upward enough to keep pace? In an economy that is primarily financialized? Hell no. America is over as we knew it.
AC
2,500+ Posts
America is NOT over! Sensationalism and fear mongering is for journalists. Buy some Bit Coin.
So if things fall apart more and more, we could see things like: (i) a mixed currency and barter economy (this already goes on to some extent -- the IRS hates this for obvious reasons), (ii) regular wage and purchase payments in crypto, (iii) company "script" like in the old-time mining towns, (iv) new private currencies backed, in whole or in part, by commodities (oil, ag goods, gold, silver, etc.)--Exxon dollars/Cargill dollars, etc., (v) replacement of the dollar by some foreign currency (China is licking its chops), (vi) movement away from the cities, (vii) more fights by heirs over the family heirloom silverware.
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