Money printing and manias

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Matt Taibbi writes,

In 2021, we’re seeing a surge in con-like corruption cases once again, many involving old-school ripoffs. An economy puffed up by the steroid enhancement of Fed support has led to a great flowering of such creative grifts. Some are not terribly accessible to non-financial audiences at first glance, so to make it a bit easier to keep track of new cases coming in, I’m creating a new feature, “Racket of the Week.”

Charles Kindleberger, in Manias, Panics, and Crashes, pointed out that when there is a lot of new wealth you tend to get a lot of scams.

I would bet that five or ten years from now, people will look back at GameStop, Dogecoin, and Hometown Deli and say it was obvious that monetary policy and regulatory policy were too loose. Future inflation is here–it just hasn’t been evenly distributed.

The thirty-somethings who are driving policy in Washington these days are ignorant. They don’t know history. They don’t know economics. I would not under-estimate the damage they can do.

If you have $200,000 in assets today, it would not surprise me to see that ten years from now inflation and taxes have eroded half of their value. In other words, ten years from now, you will be able to buy what today is $100,000 worth of stuff.

Some assets will hold more of their value. Some will hold less. It is possible that a house could lose even more than half its (inflation-adjusted) value once interest rates go up, because high interest rates make it hard to afford amortizing mortgages. But I expect instead that housing will do well relative to other investments, in part because the Federal government tends to avoid taxing housing wealth as severely as other assets.

19 thoughts on “Money printing and manias”

    • “Higher prices for used autos surged 10% in April compared with the prior month—the largest monthly increase on record. That accounted for more than a third of the increase, the Labor Department said.”

      • Moorific analysis! I’m betting on the inflation side at this point as there are too many signals. Can we regroup on this in a few months? I’m happy to be proven wrong, but my portfolio won’t. Any interest in a bet?

        • Thats just a quote from your wsj link. Heres another:

          “The annual inflation measurements are currently being affected by comparisons with the figures from last year early in the pandemic, when prices dropped steeply due to collapsing demand for many goods and services during Covid-19 lockdowns, said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. This so-called base effect is expected to influence inflation readings until the summer, she said. For example, gasoline prices soared 50% versus April 2020, though they decreased 1.4% versus March.”

          Bet – let me think on that. Or propose something.

          I’m more interested in our host believing that 200k in assets today will only buy 100k worth of goods in 10 years.

          • FWIW – I’d probably bet against our host as well, but wtf do I know or or anyone else. However, over the medium/long term, I guess I’m betting with our host. We think that we are much wealthier than we actually are.

  3. I was very young the last time we had significant inflation (I’m 46) so I’m not sure how to think about the last comment with respect to house prices losing half their value. I’ve owned my home free & clear for many years and it’s appreciated in “value”. However, that just means the asset price is high relative to other things. If I sell my house, it will cost roughly the same (or more) to replace it with a similar one. However, in high inflation, the relative value of homes to each other will stay constant so if I sold my home that lost half its value, I could buy roughly the same one at half the price. The value of the house vs. basket of goods in CPI isn’t a particularly useful or concerning metric.

    • One additional thought, I prefer to prepay for assets such as home, car, etc. In a low inflation world, that is irrational as the time value of money indicates that I should use (artificially cheap) leverage to create returns by levering my consumption and investing the saving for a return. However, in a high inflation world, this doesn’t make sense. Buying a car with cash when the price is expected to increase in the future makes more sense.

      To put consumption aside, I get the whole wealth redistribution aspect of inflation away from investment holding. That’s where the significant damage will be.

    • The whole “NIMBYs are trying to drive up the value of their housing” argument never made too much sense because as you say whenever you sell your home you just turn around and buy another home so its a wash.

      The only real gains people get from rising home values is if housing in one area goes up faster then housing in another area, but the person from the expensive housing area doesn’t see moving to the cheaper area as a downgrade in any way. That was true for the last generation to live near major job hubs that wanted to retire to Florida, but that’s about it. Note that the 2008 bubble was the worst in the sunbelt where people like to retire.

      • It’s similar to a prisoner’s dilemma. You are correct that NIMBYs don’t lose much if their tactics were globally outlawed, and all house prices dropped in concert. However, they have an awful lot to lose from unilateral disarmament.

        This is a very tough political problem.

        • The tough political problem is that “good schools” and safe neighborhoods are amenities with value and zoning is the only avenue people are allowed to use to protect that value. Better public order or school choice would go a long way towards decoupling the amenity value from the mere value of real estate.

      • What? Imagine someone writing: “the argument that investors care about the value of their stock never made too much sense because when you sell your stock, you usually just turn around and buy stock in another company.” The more money you sell your current house for, the better next house you can buy or the more cash you have left over if you buy a same or lower quality house.

        • People often sell stocks to purchase consumption. However, we all need a place to live. If I sell my house, I still need another house to live in. If I sell my stocks, I need not buy new stocks if I don’t want to.

  4. Many people do not well handle newly-acquired wealth; inter alia, they fall prey to simple scams. This has nothing to do with monetary or regulatory policy.

    As for surviving (1) inflation and (2) taxation: (1) hold your wealth in something the nominal value of which will rise with inflation (even a bank account might be all right, if it paid enough interest); (2) (sacrificing liquidity) do not realize your capital gains. If you are worried that the government will tax unrealized capital gains, hold things for which there is no liquid market, the value of which it is difficult to measure. But with taxation, the government can take what it wants, when it wants. The only sure defense is total concealment of wealth, which is difficult even if one is willing to forgo most of the benefits of being wealthy, and impossible if one is not so willing.

  5. My proposal is to require any member of the Federal Reserve Board to completely liquidate their assets and hold all their wealth in the form of cash or maybe long term nominal bonds. The “Institutional Duty To Protect” version of “Skin in the Game”!

    • Wouldn’t that incentivize deflation? Don’t think we want to follow the lead of Japan on that one…

      • That’s a fair criticism. In the alternative then some financial instrument structured to pay out handsomely if CPI or NGDP stays within some narrow band, but which falls off quickly in proportion to how far reality deviated from the purported ‘targets’.

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