High prices will outlast the war
economist.com
economist.com
The water level never fully recedes despite, or as a result of, society's short memory.
Edited to add: Are we likely to see an acceleration of the electrification of transport? Buy Tesla shares? Renewable energy projects double-digit percentage uptick?
> Edited to add: Are we likely to see an acceleration of the electrification of transport? Buy Tesla shares? Renewable energy projects double-digit percentage uptick?
Investing isn't really that simple. While TSLA has notionally gone down in price per share (from $1200 to $780), the bubble has gotten bigger. It's market cap is higher than every other automaker put together, plus a bunch of utility companies, plus a few battery companies. This is about the most crowded trade on the planet. Even after Elon dumped on everyone at the peak and is under SEC investigation for doing so. [1]
Generally, you won't do much better than just investing in the S&P 500. In fact 92% of actively-managed funds underperform the S&P 500 over a 15 year period. [2] You think you can do better?
[0] https://corporatefinanceinstitute.com/resources/knowledge/ec...
[1] https://www.wsj.com/articles/sec-probes-trading-by-elon-musk...
[2] https://www.cnbc.com/2019/03/15/active-fund-managers-trail-t...
[1] https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
Have conviction - put down roots - commit.
This is of course equally anecdotal, which is why I think folks would do well to review the NYT calculator to evaluate the specifics of their situation :)
Risk is good! I'm a big fan of risk. However, a house won't go up more than a few points a year. That's never going to be life changing money. The opportunity cost of the down payment making you unable to early exercise some startup equity could on the other hand leave you pretty full of regret.
However, you can borrow against it cheaper than virtually any other asset in existence at absurd leverage ratios - and swap your cash flow for the ownership of the asset. So long as interest rates are at or below growth / inflation / or your salary increases - it is a good investment.
Startup equity of the kind that produces fuck you-money returns shouldn't cost that much to early exercise since it's usually early stage, that's kind of the whole point of early exercise and filing the 83b before the imaginary value goes up in subsequent funding rounds.
When it's late stage enough for exercising to cost a pile of money, people usually don't bother with exercising and simply wait for a liquidity event to occur, assuming accelerated vesting will accompany it, and pay the exercise cost and taxes directly from the shares AIUI.
But I suppose it's nice to be able to exercise and leave if you wanted to before a liquidity event, since the options tend to expire in what... 90 days? Preserving that option with a pile of cash on hand is useful, handcuffs are annoying regardless of their color.
And mortgaging a house is leverage.
If you put your money in stocks and they go down 15%, you lose 15% of your money. If you plonk a 15% downpayment on a house and the house loses 15% of its value, you get zeroed out.
No guarantee that happens right now, but it sure could.
At this moment we're in a housing bubble inflated by low interest rates that may or may not be about to end. The risk is different than it usually is.
The ROI is attributable to the supply constraint in the face of population growth, not the subsidies.
If housing supply wasn't constrained the subsidies would lower the initial cost but then it wouldn't work as an investment because the real value would never go up since if it did that would cause an increase in supply through new construction.
But that's also what makes it a pyramid scheme. More people bidding on the same amount of housing makes the price go up, but only if the population grows. Fertility rate tells a bad story there. And on top of that it's per-city; ask people who had homes in Detroit.
Someday this is all going to fall apart. I don't know when it's going to be though.
Not a judgment of your character or anything, it makes rational financial sense as an individual to participate in it but if everyone followed your path we'd be thoroughly fucked with housing prices. More than what it already is.
I lucked out in 2007 and decided to rent rather than buy. Economy went into the shitter after and after a couple years my company had lay offs but I was lucky enough to jump to a better role in another city.
I spent $36,000 in rent over 2 years.
I had several friends who bought with $60,000 down and paid $50,000 in mortgage payments and property taxes.
When I moved I gave my landlord the keys and got my deposit back.
When they moved their house was way underwater, so they sent the bank the keys and walked away.
I spent $74,000+ less on housing than they did by renting.
It was just luck and sure an extreme example but man the lessons of 2008 have been very quickly forgotten.
You're right, but I'd like to share with you a lesson I learned in 2020/2021. Every single leader that has been around since 2008 is terrified of "mortgage" causing 2 recessions in a row.
Seeing people rally around house prices and evections over the past two years really solidified this for me.
Real estate can be a great investment, but it has very high transaction costs, is not diversified at all (real estate is entirely local), and has high maintenance costs.
>You think you can do better?
I'm not a trader, and in my very (like, VERY!) low value dabbles I've invariably lost (like, apparently, 90% of amateur traders). If I had more money to gamble, however, I'd definitely put some on Tesla in the current environment of foreseeable-future high oil prices. Investing is always a gamble though. My meagre investments are a very high percentage in indexed funds or ETFs or whatever they're called (see, I'm a freakin' pro :)).
Before you buy the stock, please consider not only the fact that it is likely gonna be great but *also* the current price of the stock. You also wouldn't buy a car without knowing the price. The market cap of Tesla is currently 792 billion. Let's look at the operating cash flow since that is the money a company can sort of spend on whatever they want. Their operating cash flow for the year 2021 is about 11.5 billion. So, assuming no growth, they will need 68 of those years to be able to pay all investors back.
But, okay, let's assume some growth. Let's say 30% growth in cash flow per year which is a optimistic estimate. Few companies manage to get a 30% yearly growth; let alone for a longer period. They will need about 16 of those years (11.5 * 1.3^16 = 765 billion).
As another number, you can look at the PE Ratio. The average PE Ratio for the S&P 500 is 23.80 currently (https://www.multpl.com/s-p-500-pe-ratio). In 2011 it got as low as 14 even. Tesla sits at 156!
To form your own opinion, I can highly recommend watching a bunch of videos on YouTube with Warren Buffet, Monish Pabrai, Howard Marks and Ray Dalio and if you get the chance a (audio)book or two of some of them. Especially Warren and Charlie Munger have a great ability to put things into perspective.
If that were the case stagflation of the 1970’s wouldn’t have been a big deal, but it was. And supply shocks were also a major trigger (Arab oil embargo).
If wage increases lag inflation, then consumers pull back on spending as prices rise. This can push you into a recession or piss-poor economic growth.
It took the US over a decade to get out of the high inflation/low growth environment of the mid-70s and the pain of even higher interest rates needed to break inflation - which further depressed the economy - was a painful cure.
You forget about sequence.
Prices went up 7-8% last year. I'm hoping that my company cost of living adjustment will match that... when it shows up. It hasn't yet. In the meantime, I'm paying 7% more for things on a salary that has not yet gone up.
My wages may catch up. But in the meantime, it hurts.
They haven't kept pace with productivity growth, but that's a different matter, and one worth paying attention to.
[1] https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us...
Could’ve had a line from Montreal through Maine but voters from the state killed it. Now our best hope is along the Hudson.
It’s not a technology problem, it’s a governance problem.
Right now inflation is relatively contained because everyone piles into USD as a safe haven asset, which allows the US to purchase a lot of imports since the dollar is strengthening when that happens.
How likely is that to happen this decade?
Russia just doesn’t have enough power to move global markets. Its economy is smaller than Texas’, and is rapidly shrinking.
First off, lots of other currencies are valuable without being reserve currencies. Swiss franc, Japanese yen, etc. Being a reserve currency probably boosts USD a bit but it's not the only pillar holding the thing up that people imply. If you disagree show your model: You have to believe that value for the euro, GBP, JPY, Swiss Franc is determined by thing X, USA does not have thing X and instead depends on being a reserve currency.
Second, what's the alternative reserve currency? Bitcoin? Don't make me laugh. RMB? Even more ridiculous. Euro? Probably the most realistic contender but seems to have major governance problems. As with democracy, the USD is the worst reserve currency, except for all the alternatives.
When people move their money out of monetary unions, there are only a few places and assets to purchase in large amounts. Everything has already been stretched to insane valuations, so USD is it.
I think your pragmatic look is refreshing, but too willing to reject a notion just because its popular, you’re right on the money just incorporate the demand drivers instead of excluding them.
That doesn't mean it's going to happen, but if it did happen, it wouldn't be nothing.
Americans with mortgages and other debts are happy to take US dollars they can use to clear their debts and foreign buyers are happy to get US exports for their declining dollar holdings, so the foreign dollars would end up in the domestic market and cause hyperinflation.
To the second point, yes for most countries there's no plausible alternative to USD. However, there's no law of nature that says the world has to have a single reserve currency. AIUI rather than the entire world switching away from the dollar the real risk is of fragmentation. Yes, most countries aren't going to suddenly stop using USD as their reserve currency. But Russia has had its USD central bank assets frozen. Their reserve currency is the currency of its biggest geopolitical opponent, who have demonstrated they are willing to use that fact as a weapon. Against that, RMB isn't necessarily so bad an option. That could be the beginning of establishing RMB as a global alternative reserve currency.
Edited to add: Firstly, AFAIK this picture of RMB becoming an alternative reserve currency isn't seen as all that likely, just a possibility, and secondly I'm the exact opposite of an expert on this stuff - just disagreeing with specific points based on what I've read.
Another edit: I also agree that the idea of bitcoin as a reserve currency is completely ridiculous and insane. Everything about bitcoin is ridiculous and insane, though.
Your claim also doesn't explain how inflation didn't balloon in countries that provided actual financial support to people - the US had two payments of next to nothing, most other countries provided continuous support, even those with far less per-capita income.
You have this backwards. Inflation (via CPI) is based on price changes, it doesn't cause them.
>would be much more believable if the businesses selling the "inflation impacted goods" we're making the highest profits ever, far in excess of the highest estimates of inflation.
This is exactly what you'd expect when there is low supply and high demand.
If, for argument's sake, a dollar halved in value, the price of a widget of constant value would double to maintain equality in the exchange. What makes things complicated is that the value of the widget isn't constant and can also change over time, so we can't just look at that widget to see how the value of the currency is changing. Instead, we try to look for price trends across a wide range of products (CPI) to try and infer what is related to currency devaluation rather than changing values of other goods and services.
Housing is the biggest component in CPI: something like 40% IIRC
[0] https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...
I've experienced the opposite several times because I don't consume a few things that are part of the basket.
Some back of the envelope estimates:
The last mile is usually going to be the largest expenditure of fuel per dollar of product transported. A semi truck gets 5 mpg on the low end and with diesel fuel currently at $5/gallon, that means it would cost just $2,700 in fuel to ship an entire truck load from New York to Los Angeles (much farther than most products would ever be trucked). Assume the truck is loaded with a low price, low margin product like toilet paper and you might ship around 4,000 small packs of toilet paper for a total fuel cost of $0.67 per roll. So if fuel prices doubled to $10 gallon, you would be looking at an increased cost of $0.67 per pack of toilet paper that is normally, maybe $10. So you are looking at a 7-10% increase in the cost of that toilet paper due to a doubling of fuel prices.
Of course, fuel is needed for the equipment that cuts the trees and the energy to manufacture that toilet paper, the plastic it is wrapped in, etc. But, we have to remember that we are talking about an inexpensive yet bulky product that we are shipping across the entire US and the weight is low so you could probably drag two trailers of it with only a marginal decrease in fuel efficiency.
The reality is that most products are trucked much shorter distances from ports that use enormous container ships where the fuel cost per dollar shipped is vanishingly small.
Congress and public policy is where the ball was dropped. Most of the Europe did a better job maintaining work stability by distributing subsidies through employers rather than cash to individuals. It meant that when lockdowns eased, workers were ready.
This is “broken clock” logic. The only argument behind giving the Fed credit for the 7% rise in prices is “they’ve been trying really hard to do so”.
And of course, those are just a few factors, there are countless more factors that make the whole situation far more complicated than anyone could possibly account for.
What's more likely: - Prices went up because there was a short supply of tangible things that actually (somewhat) respect the supply-demand curve
OR - Prices went up because there was an "excess supply" of money from "printing" that arguably does not respect the supply-demand curve
Probably not. Instead, we’d be in a depression amidst mass unemployment and bankruptcies.
Supply chain would have crunched but the demand fueling inflation would have been destroyed. Instead, we maintained both demand and production while the supply chains falter. (For the most part. Egregious stand-outs in destroyed production capacity are the automotive and rental-car industries.)
The government doesn't create money.
Ordinary banks also create money when they make loans, which gets destroyed again when the loans are repaid. More money is created this way when interest rates are lower because people take out more loans then.
So not the government.
> When the Fed "sets interest rates" on bonds
It doesn't set the interest rates on treasury bonds. They set a target and engage in the market to get the price to that level. Still a private entity doing private things. Not the government
> Sometimes literally by physically printing it, but more often by crediting someone's account in their computers
Definitely not!
> More money is created this way when interest rates are lower because people take out more loans then.
This is the only way money is created. The previous paragraph is far from how anything works.
The Federal Reserve is the central bank of the United States. Its board is nominated by the President and confirmed by the Senate. It's the government.
Politicians sometimes like to pretend it's not so they don't get blamed for unpopular choices.
> It doesn't set the interest rates on treasury bonds. They set a target and engage in the market to get the price to that level
That's what setting interest rates means.
> Definitely not!
Where do you think coins and federal reserve notes come from?
If that's your logic, it's very hard to argue with it. It's literally a separate entity even from what you described.
> Where do you think coins and federal reserve notes come from?
the federal reserve which is not the government.
If you think government can print money out of thin air why do they even have to collect taxes. Can they not print their yearly expenditures?
You should think more on this question before you reply with some circular theory
From the fed's own website (notably a .gov domain):
"Some observers mistakenly consider the Federal Reserve to be a private entity because the Reserve Banks are organized similarly to private corporations. For instance, each of the 12 Reserve Banks operates within its own particular geographic area, or District, of the United States, and each is separately incorporated and has its own board of directors. Commercial banks that are members of the Federal Reserve System hold stock in their District's Reserve Bank. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. In fact, the Reserve Banks are required by law to transfer net earnings to the U.S. Treasury, after providing for all necessary expenses of the Reserve Banks, legally required dividend payments, and maintaining a limited balance in a surplus fund."
The Fed doesn't set interest rates on bonds, it sets target interest rates on interbank loans.
Bond rates will naturally tend to be impacted, but they aren't what Fed rate setting applies to.
Not only that: the government cannot and does not create money.
Of course gov printing had an effect, but supply chain is prob the biggest. Do you not agree?
Like Americans couldn’t afford their $25 plastic widgets before, and now because of gubmint stimulus they’re able to finally buy those widgets. Lol.
Cars is a perfect proof of my case. They thought covid would hurt demand for awhile, didn’t book enough chips. And then boom demand spike back and they don’t have a needed input in time. Thus people go to secondary market — used prices up a ton.
Printing money also causes prices to go up, as does war.
Anyone thinking that the problem was that we didn't give people enough money, hasn't taken a look at the explosion in homeless population throughout the country. People are still hurting and it is obscene ti complain that your savings account is worth slightly less when people don't have have a roof over their heads due to the worst pandemic in a century.
https://www.economist.com/graphic-detail/coronavirus-excess-...
This is the government - https://fred.stlouisfed.org/series/GFDEGDQ188S - and for anyone wondering, your party is as bad as the other party
It's not a coincidence, both have been caused by the same pandemic that you might have forgotten about.
To provide a natural experiment that should refute the point you imply: inflation went up massively in nearly every country on earth as they were all hit by the same supply side issues. Only a small minority of these countries "printed a lot of money" let alone as much as the US of A.
b) Deflation is bad but really easy to counteract. Print money and give it to people. Counteracting inflation is more expensive.
If the the extra money can be absorbed (economy can produce enough to meet demand), that’s fine and the economy just grows. But there were supply chain hiccups holding back the production capacity of the economy. So here we are.
Demand was induced with money printing. Supply was restricted with lockdowns. When demand outstrips supply, prices rise.
This cancels out if everybody does it, but not everybody can do it.
The increase in demand from people having more money may also make it economical to increase supply faster and alleviate the shortfall sooner.
If you give $1000 to 1 M people then you start having inflation because those money go into shops.
This is the lesson from the last 15 years.
They have been praying for inflation - it is the intended outcome of the policy and it has taken 23 years for it to happen.
What they wanted was inflation in wages, assets, goods, services, productivity and growth. Inflate away the notional value of debt. What they got was gamestonk, crypto, stagnant wages, gig economy and antiwork.
But there was simultaneous easy money policy for years, in contradiction to the Taylor Rule. This deviation from that rule was going on for years before Powell, but he continued it for years, all throughout a prolonged economic boom.
Instead of counter-cyclical policy, this is pro-cyclical policy. And resulted in the misallocation you noted, for which Congress is even more to blame.
Greater instability has far greater risks to your pocket book than some short term concern of tiny rises in fossil fuel costs.
It might be used by some who don't consider it condescending, but many of those on the receiving end do consider it an insult. So, issuing a blanket "not condescending" can not be considered correct
Sorry, but this is not some internal war between 2 political factions where some other big power intervenes to help their preferred faction. It is an actual freedom war where many people are killed, many others are forced to leave their country and if Putin wins it will not stop there, he will continue.
If you are from US I understand why you might be frustrated with wars already though, but the alternative of doing nothing is worse, is like we pay tribute to Putin and hope is enough and he won't invade half of Europe.
It’s about degrading a volatile enemy. Shrinking Russia’s economy degrades its war machine. (The claim that impoverished Russians will revolt is crap. Starving, broken people don’t lead rebellions.)
If we had literally any better solution, we should take it. But we don’t. So we hope Russia weakens enough that it can’t invade Latvia while encouraging it to become a vassal of China’s.
That said, it seems unlikely that the sanctions will lead to starvation; the possibility of a Russian revolt or coup seems insane. (At least until it happens, and then it will be obvious.)
Rich people losing money lead them, starving people join them.
Middle-class people in the country with families to feed will not rebel and risk death; and when they become impoverished due to their government’s policies and global retaliation it will be too late.
The problem here is OPEC, not the war. There is plenty of gas and fuel to go around.
The solution is clearly to be building out a massive amount of renewable electricity whilst electrifying transport.
So in 10 years time politics in the US will not be driven by the whims of Saudi Arabia, Russia or some nut-job oil Barons in Southern states.
At least it would do something to help reduce climate change.
Did people not notice the price of everything going up?
Eyeballing the historical relationship between Brent crude and gas pump prices, that would mean $9.00/gallon: https://www.macrotrends.net/2501/crude-oil-vs-gasoline-price...
is 2.30 per liter here in Europe now. don't worry, I'm sure you can pay it. we can pay it, too.
The difference is that we also tend to drive more efficient vehicles.
If only there had been some sort of model or discipline that could have predicted this beforehand.
What is the scope of the evidence that proves that this claim (which, btw, is really not being trumpeted by anyone "in charge") is false?
And this grand conspiracy argument is the position, at least in part, being pushed by the Democratic Party in the US. It’s actually similar to what flailing governments in third world inflationary economies say too. It’s always the evil capitalists raising prices for no reason but to line their pockets. Ignorant drivel meant to appease ignorant people and deflect blame.
Nope. Prices are set by what the market is willing to bear. Supply and demand are loosely correlated with the final retail price of things.
Demand for a good is based on its current asking price and how the consumer values that good. If the asking price ends up pricing the good out of the market's ability to pay for it the demand will drop irrespective of the supply.
As for conspiracies to increase prices, that's just a ludicrous position. All players in the market with the same incentives can move in lockstep with zero coordination. There doesn't need to be a conspiracy when every company basically lives by "make the most money".
If you see a competitor raising prices it's the perfect time to raise your own prices irrespective of your costs. If your costs haven't increased then you get better margins for free. There's no need for direct collusion when competitors are looking at the same news and have the same overall playbook.
Only when supply is constrained, for example housing in leading cities. Otherwise prices tend to fall to the marginal cost of the item you are buying.
Housing however is constrained by the price of land, outside of a few small regions like the Netherlands there is no amount of innovation that will create more of it. Hence the price of housing is set by what the market will bear.
However, some of the inflation is being caused by companies just being comfortable raising their prices. They are comfortable because so many companies are monopolies, and as soon as there's any slight pressure in the direction of inflation, they immediately pass it onto their customers without any punishment. The anger against companies for gouging consumers is placed correctly, but of course it's with the wrong explanations.
You seem to be claiming that the price increases seen over the last (pick a number) 10 months are all driven by "actual inflation", and that the instances of companies raising prices to increase their profit margins are rare.
I haven't seen good evidence for this claim. I have seen reasonable evidence that it's the other way around: a few limited sectors have experienced "actual inflation", but most of the price increases are arbitrary and imposed by sellers.
Note: we do not have "across the board inflation" either. Quite a few things have continued to drop in price across the pandemic.
Just as one example: housing prices often rise in response to a process frequently referred to as "gentrification" (often with a somewhat disparaging tone, to put it mildly). But that process tends to start when people with very little income to spend on housing move into low cost of living neighborhoods and subtly shift their demographics and nature. So is gentrification a process driven by the "poor" (the initial influx of new tenants) or by the "rich" (developers who can carry out significant remodelling and/or new construction) ? The answer is clearly both, yet even that doesn't really cover the whole mechanism. For a start, for gentrification to become significant in driving up housing costs, existing owners need to sell. These are often neither the newcomers nor the developers. Gentrification also requires a modest but distinct influx of businesses into an area, which in turn requires businesses to either start or expand.
I'm citing this as just one single example of where bullshit simplifications drawn from "basic" economics fail to describe the real world. There are so, so many more.
Why does it gentrify in the first place? Because the initial group of "gentrifiers" took the time and money to develop the area to make it more appealing, thus increasing demand.
Economics says you can't fix it no matter how much regulation you impose because at some point all the surrounding businesses, etc. will be gentrified too and force out poor people. Even if you freeze rent, ban new businesses from coming in, etc. the existing business owners will start to cater to their new clientele simply because the demand from those customers is much higher. The only thing you _can_ do is ban people from moving to the neighborhood, at which point you've turned into the worst parts of the Soviet Union.
Wildly simplistic. The first stage of gentrification involves almost no money and almost no development. It doesn't even really involve much time. It's the result of a demographic shift (and often not a very big one at at that) between the existing residents and newcomers who are willing to trade currently less-than-ideal living conditions for lower costs.
The value of money depends on the underlying asset used to create this money.
Money is not created out of thin air.
And you clearly have no clue what the gold standard was.
>The value of money depends on the underlying asset
Printing more dollars does not create more 'underlying assets.' Therefore it doesn't make sense to claim there will be no effect on value of money if more money is chasing the underlying assets. It's quite possible the value of the dollar decreases.
Using your own definition, which itself is debatable, it is guaranteed the value of money will decrease if you only change the supply of money and nothing else.
I want to see the kind of mental gymnastics that people have to do fit in the false idea that government creates money out of thin air
A quick look at the numbers makes this obvious. Consider that 80% of all dollars that exist were created in the past three years.
Now ask why Janet Yellen, Jerome Powell, and the Biden administration conveniently forget to mention even the possibility that money printing may have been a contributing factor driving inflation.
It is one of those "unpopular opinions" that are actually enormously popular.
Jerome Powell is not posting "money printer go brrr" memes.
And expected to do so 4 more times this year.
Wheat? I’m to believe we can’t grow our own wheat?
because biofuel production increases, due to governmental incentives in part, food grain production goes down.
on edit: I believe this article will probably also make some connections https://news.ycombinator.com/item?id=30681639 although have not gone into yet, David Frum arguing to decrease ethanol subsidies as they help Putin.
2. Protein content is quite sensitive to the climate the wheat is grown in, so assuming you want breads and pastas rather than pastries there are even more challenges in front of you.
3. An acre planted in wheat is an acre not planted in something else, so even if you overcome all of other issues you're just pushing the problem onto another crop.