arcticbull said '... you would have been a lot more furious at the Fed in the event they had sat back during COVID and presided over a deflationary spiral ...'
Deflation makes cash have more purchasing power, so arcticbull your speculation is wrong. Completely backwards.
I suspect anything in between would have led to a huge spike in interest rates making borrowing yet less affordable no?
> Deflation makes cash have more purchasing power, so arcticbull your speculation is wrong. Completely backwards.
>> Can't get a mortgage if you're out of work, ya know?
So no, not really... unless you stopped reading before you got to that sentence ;)
"stagflation" is simply what happens when inflation keeps up with deflationary trends. It doesn't mean monetary policy is doing nothing. It likely means it's working as intended.
> Japan has had serious struggles fighting off deflation
But the CPI in Japan hasn't gone down, if anything it's gone up more years than it's gone down. Moreover, in what way is Japan terrible? Due to less inflation, there's less income inequality. Maybe deflation isn't bad.
In an inflationary economy, people spend their money quickly, since it's worth less sitting around. In a deflationary economy people hoard cash because the value of cash just increases in the bank. Why invest in anything (companies, labor, capital investment) if your money just earns 10% in the bank?
If enough people do that jobs disappear, as they realize they don't need to market any new product or service to make their money.
FWIW, they call that period in Japan "The Lost Decade(s)" https://en.m.wikipedia.org/wiki/Lost_Decades_(Japan)
Austrians and the HN community talk past each other because it's not easy to get the latter (which I am a part of) to see that their large salaries in FAANG companies are partly due to the Fed largesse.
If currency loses 100% of value, it will be worth zero. A complete, 100%, total loss.
A 500% loss would be spectacular! And not possible using commonly accepted laws of the universe such as math.
A dozen peaches experience 100% deflation. They completely 100% go to zero. There are zero peaches. They are gone.
What would 500% deflation do? Using regular math and experiences with donuts and peaches, what happens at theoretical 101% deflation? And 500% deflation? How can something be reduced more than 100%, the point at which it already disappeared?
Inflation is about the loss of value, not deflation. 1£ today will be worth x£ tomorrow, where x < 1.
So for example, a 500% deflation just means that one dollar today buys $6 worth of whatever it could have bought in the past (my math might be off)?
No, what I'm saying is the government failed to act sufficiently and forced the fed to act when they shouldn't have(or at least to the level they have).
> Generally speaking, you shouldn't hold cash.
Now come on that's not really true in the short term. Generally speaking, you shouldn't put your money in the market if you need it in the next 5 years. Sure I could have bought CDs but have you looked at rates lately? That wouldn't have helped. My only option would have been to pile into an asset, and by the time I needed to park my money assets had already appreciated above historical norms. I'd be gambling against a reversion to the mean.
> Housing affordability hasn't really changed on a monthly basis
The market I am familiar with and was planning on going back into is up about 35% from late 2019. You're also then gambling that these historically high valuations will hold going forward. Homebuyer sentiment has plummeted because folks like me no longer think paying these high prices(https://fred.stlouisfed.org/series/CSUSHPINSA) makes sense.
Did you really mean 5 years, or 5 months, or something else? I'm not sure if I can take this statement seriously, or if it's meant to be a joke. 5 years is a long time.
If you're young and you've only seen the market go up you need to familiarize yourself with normal volatility patterns. The market can easily take a dump at any time and fail to provide a positive return for years.
...or decades: "Nikkei index hits 30,000 for first time in three decades"
https://asia.nikkei.com/Business/Markets/Nikkei-index-hits-3...
What should the government have done?
According to whom? Right now, nothing pays out any yield, it’s stocks or lose to inflation.
I’ve followed ARCC, MAIN and GSBD for years, and there’s the more diversified Van Eck Vectors BDC ETF (BIZD), with an 8.5% yield. But I digress.
Nah, holding cash is fine under some circumstances.
Yes, the 2% inflation that the Fed chose to aim for makes holding cash costly.
But everybody holds cash. It's just that higher inflation expectations makes people hold less cash in real terms.
But then, you can be angry at the Fed for choosing that particular inflation target. The Fed could just as well go for 0% inflation. Or even go for a stable nominal GDP 65,000 USD per year per capita in perpetuity. (The latter would basically automatically ensure its dual mandate. Though most of the proponents of nominal GDP level targeting suggest to target a slight increase over time.)
In such a stable nominal-GDP system, holding cash would be rational in many more circumstances than today, because in general cash would slowly increase in real value as productivity and thus real GDP improved.
I don’t think they intended to be holding cash, they were setting up for a large purchase and the timing was bad. But yeah, arguably when there’s no immediate prospect of the opportunity resurfacing, probably reinvesting that paper would be more congruent with the system we have before us.
This is a factor worth considering for anyone who is currently looking to buy a home. As long as you can afford the downpayment, you could lock in a fixed-rate mortgage while your earnings or other savings could grow at a higher rate. This is analogous to what some companies have done in recent years, loading up on low interest debt.
If the Fed and the government are going to reward those who leverage up on risk, might as well. As '08 shows you'll even be rewarded when the crash happens
If interest rates decrease and home prices increase vs. interest rates increase but home prices decrease, then there is a point where the two will intersect, and there are many points around the intersection where the difference between the two is fairly insignificant.
How does the common expression go -- "The house always wins?"
That money that would have gone towards your equity, is being spent in interest. This is why people making 60k/yr. buy $65,000 trucks. Interest rates drop and they only look at the monthly payment amount.
You don’t always get the full tax deduction on a first home either. In high tax states the 10k deduction limit kicks in when your paying high state taxes + mortgage interest.
Also, “don’t worry, just look at the monthly payment” is something that should only ever be said by a car salesman.
Depends how long you’re planning to save. You can hold treasuries or risk parity adjusted pairings. Or CDs ladders. Lots of stuff!
> Depends how long you’re planning to save. You can hold treasuries or risk parity adjusted pairings. Or CDs ladders. Lots of stuff!
You don’t know how long the search for a home will take. That’s the point.
> On a 30 year fixed mortgage what else matters?
I think the general criticism regarding monthly payments is more targeted at products like interest-only mortgages, which were hot in the early oughts. Those aren't as common these days. Maybe some people have 10/1 ARMs and similar in mind, but that's a stretch. (Anyhow, today the spreads between ARMs and 30-year are ridiculously small.)
I suspect you would have been a lot more furious at the Fed in the event they had sat back during COVID and presided over a deflationary spiral triggered by the lockdowns. Can't get a mortgage if you're out of work, ya know?
> As someone with a lot of assets in cash who was hoping to buy a house last year...
Let me stop you right there. Generally speaking, you shouldn't hold cash. Nobody should hold cash. Nobody should have ever held cash because even at the baseline expectation 2% inflation that's still a loss.
> I have been double penetrated by inflation...
Inflation is somewhere between 2 and 5%. That's not what I would call "penetration." Mild discomfort maybe.
> ...and spiraling home prices.
Housing affordability hasn't really changed on a monthly basis, because on a 30-year fixed rate mortgage the drop in interest rates from 4.xx% to 2.xx% means that a monthly payment two years ago on a $1M property is the same as it would be today on a $1.2M property. That's napkin math, I believe the spread is even larger IRL.
In fact, if you can lock in a 2.xx% mortgage in a 2-5% inflationary environment then it is in real dollar terms a zero-interest loan. Before factoring in tax deductions.
What's become more painful is making the down-payment.
> Now I'm poorer and I can't help but think Powell effectively just stole from me and I've been punished for being defensive and not participating in the fueling of an asset bubble.
You're not poorer, you're not as rich as you thought you'd be.