Just a short one today as it's only a very small thought.
I've been tracking a couple of econo-bloggers and financial websites and I'm seeing more and more chatter about inflation. As I'm nearing the end of my career run, I'm trying to learn how inflation affects investments and retirement. Something occurred to me today that I thought I'd share.
Inflation is a transfer of wealth from people who hold cash and cash-equivalents, such as long-term bonds with fixed interest rates, to people who hold real goods such as property and ownership of performing assets.
If you think about it, nothing real has changed when inflation jumps or even when a currency crashes. There are still houses and parcels of land, large businesses typically don't fold and the stuff around you doesn't vaporize. The money you have may dissolve, but most other things do not.
If the amount of real wealth in the country stays relatively fixed, it must be the distribution of the wealth that changes, like a pie chart keeping the number of slices constant, but changing the relative sizes.
That's not Earth-shattering, I know, but it seemed like an odd and somehow useful way to think of things.
As a partial tangent, I perused the histories of stock indices as their native currencies went through fiscal spasms and what dawned on me was that the big companies almost never folded. If you held stock in Mirgor, an Argentinian company that makes auto parts, in 1985, you could still own that stock today.
As long as you've got sufficient cash flow to survive and your city doesn't go full BLM / ANTIFA like Portland, you could weather a pretty substantial fiscal storm.
3 comments:
Indeed! Those with assets benefit, especially levered assets. Think Wall Street and real estate developers.
Homeowners with a mortgage benefit too.
But this comes at the cost of creating massive wealth inequality... which may eventually cause more serious problems for domestic tranquility.
Not every stock market survives social upheaval. I think German investors got pretty wiped out permanently in WWII, for example, and I doubt there's much of value left on the once prosperous Venezuela exchange.
Food for thought for those pushing inequality to potentially revolutionary extremes!
One thing I wonder about: Is inflation a "positive feedback" situation, where people making investments to protect themselves from inflation tend to amplify the inflation, or is it "negative feedback", where people protecting themselves from inflation tend to reduce the magnitude of inflation?
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