Inflation does not affect (relatively speaking) the poorest more. On the contrary, it's a tax on people that have a lot of cash or cash-equivalent assets. That's not the poor. The poor have either very little cash or even negative (via debt), so inflation benefits them.
You can literally see how the wealth gap inequality nose dives in the high-inflation environment of the 70s and then continually increases after low-inflation rates become the norm for decades after around 1982.
Inflation is a tax, should be seen as such but is a tax on the rich in cash (I keep insisting on the term cash because that's what inflation taxes, if you are rich in other assets inflation may or may not result in an effective taxation of your wealth). Monetary and fiscal policy should be designed with this in mind.
This is completely wrong, it disproportionally affects the poor and middle class the most because all they have is their wages and a little bit of cash. Wages are not that elastic and will certainly lag behind.
Rich are heavy on assets and it doesn't affect them at all unless they are stupid enough to convert those assets to cash during high inflation period (it of course doesn't happen).
I agree. I'm not ashamed to admit though, I'm still a little baffled by Buffet's backing off into "cash" - or out of the market - I guess cash means different things to different people...
This is so wrong I don't know where to start. I'll just say 2 things:
a) your charts are a classical example of "try hard enough and you will find 2 charts that correlate"
b) Inflation affects the poor because they don't, and sometimes can't, hold assets that traditionally protects the rich from inflation, such as real hard assets (such as real estate) and a sizeable chunk of stocks (some types) and bonds (TIPS and short duration). The poor lives paycheck to paycheck and see their income staying the same while everything else around them is increasing in price.
As I explained above, some assets protect you from inflation. Like stocks in companies with pricing power, real estate... But almost no assets protect you from the raise in the risk-free-rate that is usually following a high inflationary periods. As the risk-free-rate enters into model valuations of future cash-flows and a raise to it implies a multiple contraction.
Without looking back at the wealth inequality chart. What would you say was the result of the highly deflationary period of the 1920s? Increase of wealth inequality or decrease of wealth inequality?
Without looking back at the wealth inequality chart. What would you say was the result of the high inflationary period of the 1940s? Increase of wealth inequality or decrease of wealth inequality?
I think you are confusing two things. The poor may struggle to reach ends-meet more than the rich, of course. But that doesn't mean that relatively speaking inflation is a regressive tax that the poor have to carry the burden of disproportionately.
No, wealthy people tend to invest theirs saving in various things that resist or often even beat inflation.
This is easier said than done. Given a risk-free rate it's not that hard to find investments that beat it. What usually happens is that the risk-free rate is around inflation. But right now the risk-free rate is significantly lower than inflation. If the Fed raises the risk-free rate to match inflation then high valuations will correct resulting in a strong correction in the stock market.
Look at the 70s, same period of high-inflation I was referring to above. The wealthy didn't beat inflation back then, which again is reflected in the previous wealth inequality chart.
All things being equal (income for one) inflation in the most practical sense dis proportionally affects the poor and the middle class.
In a numerical sense the rich may suffer more but they won't eat a sandwich less because of it, whereas poor people may end up much poorer and the middle class (aka the comfortably poor) are significantly impacted.
Keep in mind that at the same time there’s a high tax on cash central banks have arranged things such that there are no safe investments. They’ve pushed people into memecoins, electric car companies that haven’t made any cars, and flipping homes in the exurbs of Las Vegas.
Only if wage inflation doesn't keep up with price inflation. If wage inflation keeps pace, it's actually a fairly progressive result since debt loses value relative to wages.
For people without income or assets it's a disaster.
Very true. And, unfortunately, thus far, the wage growth we saw earlier on in the pandemic has not held, because it was largely the result of lower paid people becoming unemployed. Wages have barely budged relative to inflation since 2019, even if you only consider employed people. We're definitely in the "very not good" scenario here.
Minimum wage is always going to lag way behind inflation. In practice, almost all wages lag behind inflation. But "people without income or assets" is my definition of "poor" and ...yeah, inflation basically takes a meager $1200/mo government check and makes it worthless. they're already on the brink of starvation.
> I do think defining poor as unemployed is way too narrow.
Definitely. You floated the idea that inflation would be progressive if the creditors have to pay higher wages (if wages rise in sync) while their loan portfolios in "old dollars" become essentially a worthless write down. There's a beautiful, even just economic logic to that. The trouble is that the lag itself becomes wealth under inflation. Normally, TTL between promising a worker a check and sending it gives a nominal value for holding that money as long as possible in an interest bearing or inflation-proof asset. Under inflation that time differential goes wild. Sometimes within a day or two, the value of the payment is gone by the time it gets to the employee. This is before it even enters the system as purchasing power.
Time becomes the most crucial element of profit and control, under inflation.
If there was a scale of value in terms of being between the borrower (people in debt) and people lending (people with cash). It swings heavily in favour of people in debt.
This. Let's not discount the fact that this is why I've been loading up on everything I always wanted to buy on 2-3% APR for the past year. I'm a person who never had any debt or credit for the last 25 years. But now's the time. Me and everyone else in America. That's the demand spike. Everyone wants to lock in the rate before the party stops.
Taxation is deliberate and easily measured. Inflation is much more difficult to measure and it results from many parts of a complex system interacting with each other. The only thing in common is that people end up with less money.
This is a foreign concept, but Americans have caught on just fine: When the currency is inflating, people buy hard physical goods or whatever they can get their hands on now before the price goes up. Cars, white goods, remodels, houses, jewelry. It's funny to watch the whole universe of punditry wring its hands over the supply chain crisis when in fact what we're seeing is Americans attempting to cash out of the dollar (wittingly or by brute instinct), and China narrowing the umbilical by which those dollars can be redeemed for goods.
in fact what we're seeing is Americans attempting to cash out of the dollar
Interesting! Did not look at it like that. I've had that subconscious instinct as well to purchase important things I need now because tomorrow feels so unstable.
Investments have to meet an estimated inflation barrier of 6% right now just to break even with inflation THEN they get taxed as well on that 6% gain!
And 6% isn't an easy target to reach for safe conservative investments like a retirement account.
So the gov't borrows money, has the power to make the money they borrowed worth less to pay back, then taxes everyone on earnings on this newly inflated money.
Comments
Inflation is boiled frog style taxation.
Unfortunately, it's taxation that makes the weakest suffer the most.
Oh, and the govt would like you to believe they have a way to control it.
Yeah sure, I'm going to turn that knob that is one input of a perfectly chaotic system, and I know what is going to happen.
Let's see how that empty promise actually turns out.
Inflation does not affect (relatively speaking) the poorest more. On the contrary, it's a tax on people that have a lot of cash or cash-equivalent assets. That's not the poor. The poor have either very little cash or even negative (via debt), so inflation benefits them.
And you can see this historically, too:
Historical inflation rate chart: http://www.aboutinflation.com/_/rsrc/1369736825466/inflation...
Wealth gap inequality: https://external-content.duckduckgo.com/iu/?u=https%3A%2F%2F...
You can literally see how the wealth gap inequality nose dives in the high-inflation environment of the 70s and then continually increases after low-inflation rates become the norm for decades after around 1982.
Inflation is a tax, should be seen as such but is a tax on the rich in cash (I keep insisting on the term cash because that's what inflation taxes, if you are rich in other assets inflation may or may not result in an effective taxation of your wealth). Monetary and fiscal policy should be designed with this in mind.
This is completely wrong, it disproportionally affects the poor and middle class the most because all they have is their wages and a little bit of cash. Wages are not that elastic and will certainly lag behind. Rich are heavy on assets and it doesn't affect them at all unless they are stupid enough to convert those assets to cash during high inflation period (it of course doesn't happen).
I agree. I'm not ashamed to admit though, I'm still a little baffled by Buffet's backing off into "cash" - or out of the market - I guess cash means different things to different people...
This is so wrong I don't know where to start. I'll just say 2 things:
a) your charts are a classical example of "try hard enough and you will find 2 charts that correlate"
b) Inflation affects the poor because they don't, and sometimes can't, hold assets that traditionally protects the rich from inflation, such as real hard assets (such as real estate) and a sizeable chunk of stocks (some types) and bonds (TIPS and short duration). The poor lives paycheck to paycheck and see their income staying the same while everything else around them is increasing in price.
As I explained above, some assets protect you from inflation. Like stocks in companies with pricing power, real estate... But almost no assets protect you from the raise in the risk-free-rate that is usually following a high inflationary periods. As the risk-free-rate enters into model valuations of future cash-flows and a raise to it implies a multiple contraction.
Is it? What if we go even farther?
http://www.aboutinflation.com/_/rsrc/1369736776695/inflation...
Without looking back at the wealth inequality chart. What would you say was the result of the highly deflationary period of the 1920s? Increase of wealth inequality or decrease of wealth inequality?
Without looking back at the wealth inequality chart. What would you say was the result of the high inflationary period of the 1940s? Increase of wealth inequality or decrease of wealth inequality?
Not at all: people with low incomes struggle the most to get raises.
And those who barely get to the end of the month struggle the most when their purchase power decreases by 5%.
No, wealthy people tend to invest theirs saving in various things that resist or often even beat inflation.
I think you are confusing two things. The poor may struggle to reach ends-meet more than the rich, of course. But that doesn't mean that relatively speaking inflation is a regressive tax that the poor have to carry the burden of disproportionately.
This is easier said than done. Given a risk-free rate it's not that hard to find investments that beat it. What usually happens is that the risk-free rate is around inflation. But right now the risk-free rate is significantly lower than inflation. If the Fed raises the risk-free rate to match inflation then high valuations will correct resulting in a strong correction in the stock market.
SP500 historical chart: https://www.macrotrends.net/assets/images/large/sp-500-histo...
Look at the 70s, same period of high-inflation I was referring to above. The wealthy didn't beat inflation back then, which again is reflected in the previous wealth inequality chart.
I explained how salaries are not automatically tracking inflation, especially low ones.
https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us...
https://www.epi.org/productivity-pay-gap/
All things being equal (income for one) inflation in the most practical sense dis proportionally affects the poor and the middle class.
In a numerical sense the rich may suffer more but they won't eat a sandwich less because of it, whereas poor people may end up much poorer and the middle class (aka the comfortably poor) are significantly impacted.
Keep in mind that at the same time there’s a high tax on cash central banks have arranged things such that there are no safe investments. They’ve pushed people into memecoins, electric car companies that haven’t made any cars, and flipping homes in the exurbs of Las Vegas.
"rich in cash"? No. Just those without other assets. Are you rich in cash if all $100 you have is in cash?
Inflation is the most regressive tax possible on the poor.
Only if wage inflation doesn't keep up with price inflation. If wage inflation keeps pace, it's actually a fairly progressive result since debt loses value relative to wages.
For people without income or assets it's a disaster.
Very true. And, unfortunately, thus far, the wage growth we saw earlier on in the pandemic has not held, because it was largely the result of lower paid people becoming unemployed. Wages have barely budged relative to inflation since 2019, even if you only consider employed people. We're definitely in the "very not good" scenario here.
See https://www.pewresearch.org/fact-tank/2021/09/07/despite-the...
Minimum wage is always going to lag way behind inflation. In practice, almost all wages lag behind inflation. But "people without income or assets" is my definition of "poor" and ...yeah, inflation basically takes a meager $1200/mo government check and makes it worthless. they're already on the brink of starvation.
I don't disagree with the overall point that it's likely that inflation will hurt a lot of economically vulnerable people.
I do think defining poor as unemployed is way too narrow. There are plenty of people who are employed and also poor.
Definitely. You floated the idea that inflation would be progressive if the creditors have to pay higher wages (if wages rise in sync) while their loan portfolios in "old dollars" become essentially a worthless write down. There's a beautiful, even just economic logic to that. The trouble is that the lag itself becomes wealth under inflation. Normally, TTL between promising a worker a check and sending it gives a nominal value for holding that money as long as possible in an interest bearing or inflation-proof asset. Under inflation that time differential goes wild. Sometimes within a day or two, the value of the payment is gone by the time it gets to the employee. This is before it even enters the system as purchasing power.
Time becomes the most crucial element of profit and control, under inflation.
And also in a way the opposite.
If there was a scale of value in terms of being between the borrower (people in debt) and people lending (people with cash). It swings heavily in favour of people in debt.
I see your point in theory but in practice:
- poor people have less money to repay interest on the debt after buying necessities at an inflated price
- interest rates rise following inflation which will increase debt repayment costs and likely offset any benefits gained from debt being inflated away
- it is very rare for 'people' to actually issue loans, I imagine 99.99% of loans are issued by banks
Nonetheless, it's a great time to take on debt. (if you can get a fixed rate)
This. Let's not discount the fact that this is why I've been loading up on everything I always wanted to buy on 2-3% APR for the past year. I'm a person who never had any debt or credit for the last 25 years. But now's the time. Me and everyone else in America. That's the demand spike. Everyone wants to lock in the rate before the party stops.
Are you assuming interest rates and inflation are somehow uncoupled?
They’re referring to people with existing, fixed interest rate debt. My student loans for example are 5%
Still not uncoupled, but rather an estimate of future reference interest rates (which is strongly coupled to inflation).
Taxation is deliberate and easily measured. Inflation is much more difficult to measure and it results from many parts of a complex system interacting with each other. The only thing in common is that people end up with less money.
Poor people and the middle class who deal in cash day to day to pay bills, seem to end up with less money.
The rich seem to be asset heavy so are buffeted against inflation.
This is a foreign concept, but Americans have caught on just fine: When the currency is inflating, people buy hard physical goods or whatever they can get their hands on now before the price goes up. Cars, white goods, remodels, houses, jewelry. It's funny to watch the whole universe of punditry wring its hands over the supply chain crisis when in fact what we're seeing is Americans attempting to cash out of the dollar (wittingly or by brute instinct), and China narrowing the umbilical by which those dollars can be redeemed for goods.
Interesting! Did not look at it like that. I've had that subconscious instinct as well to purchase important things I need now because tomorrow feels so unstable.
Keep in mind that nominal inflation-driven gains are taxed, so even perfectly inflation hedged investors (not many are) end up behind in real terms.
Investments have to meet an estimated inflation barrier of 6% right now just to break even with inflation THEN they get taxed as well on that 6% gain!
And 6% isn't an easy target to reach for safe conservative investments like a retirement account.
So the gov't borrows money, has the power to make the money they borrowed worth less to pay back, then taxes everyone on earnings on this newly inflated money.
What a racket!