Rich people aren’t just hoarding money in a bank like Scruge Mcduck, unless they’re not very smart. If most of their money was tied into bank bonds that didn’t out perform inflation, then it’s bad for them. But if it’s tied to business stock or ownership, then those stocks are now worth more money for one to be willing to give up that stock. Inflation benefits some types and hurts others.
You were not mistaken though. Read my comment about net debtors benefitting from inflation.
Your general idea of inflation being bad for those who hold money is correct. Stocks and real estate don’t counteract inflation, they are just less affected by it.
Wealthy people are net lenders because they usually hold more bonds than they borrow. That means they are negatively affected by inflation.
This isn’t true. Wealthy people do not hold more bonds than they issue. Berkshire Hathaway for example has less than 1% of their funds invested in bonds
The mantra is that bonds are part of diverse portfolio but this for people who are investing in retirement funds.
Bonds are often held for this purpose. They are a useful for an income steam but they are not where the majority of anyone’s investments are held because they are not fast growers. Furthermore, bonds are a hedge against inflation because they grow faster when inflation is high which obliterates your entire argument.
This is incorrect and harmful to people who read it. See below:
Inflation is a bond’s worst enemy. Inflation erodes the purchasing power of a bond’s future cash flows. Typically, bonds are fixed-rate investments. If inflation is increasing (or rising prices), the return on a bond is reduced in real terms, meaning adjusted for inflation.
Do not trust anyone who uses investopedia as a primary source on what or how to invest. It’s magazine level content. The equivalency here is using popular science as a reference for how to engineer a bridge.
The actual thing that determines whether someone gains or loses from inflation is: are they a net debtor or lender?
Donald Trump has “money” but may actually benefit from from inflation if he’s so highly leveraged that his net worth is negative. A relatively poor retired couple with no debt may be worse off, because they borrow no money and pay for everything with cash.
You’re describing who benefits from changes in the rate of inflation. Someone with a lot of credit card debt is worse off from high inflation because the rate of inflation was already priced into the rate they were forced to accept.
So let’s say we’ve got 25% inflation. The only loans you’ll be offered will be at >25%. An increase once you’ve already gotten the loan helps reduce its real value, but that initial 25% is coming out of your paycheck.
This is because the lender can just invest in anything else, while you need dollars now - the burden falls on the less elastic side of the trade.
Yup, and also those furthest away from the source of the cash flow when new coins are minted (and the equivalent generation of money in fractional banking loans) also tend to suffer more from inflation while those closest often benefit. It’s like being upstream vs downstream of a popular river as a fisherman.
Rich people aren’t just hoarding money in a bank like Scruge Mcduck, unless they’re not very smart. If most of their money was tied into bank bonds that didn’t out perform inflation, then it’s bad for them. But if it’s tied to business stock or ownership, then those stocks are now worth more money for one to be willing to give up that stock. Inflation benefits some types and hurts others.
Thanks! I’ll edit my post with this knowledge in mind.
Kudos to you for not doubling down!
You were not mistaken though. Read my comment about net debtors benefitting from inflation.
Your general idea of inflation being bad for those who hold money is correct. Stocks and real estate don’t counteract inflation, they are just less affected by it.
Wealthy people are net lenders because they usually hold more bonds than they borrow. That means they are negatively affected by inflation.
This isn’t true. Wealthy people do not hold more bonds than they issue. Berkshire Hathaway for example has less than 1% of their funds invested in bonds
The mantra is that bonds are part of diverse portfolio but this for people who are investing in retirement funds.
Bonds are often held for this purpose. They are a useful for an income steam but they are not where the majority of anyone’s investments are held because they are not fast growers. Furthermore, bonds are a hedge against inflation because they grow faster when inflation is high which obliterates your entire argument.
This is incorrect and harmful to people who read it. See below:
https://www.investopedia.com/articles/bonds/09/bond-market-interest-rates.asp
Still not true. I Bonds.
Do not trust anyone who uses investopedia as a primary source on what or how to invest. It’s magazine level content. The equivalency here is using popular science as a reference for how to engineer a bridge.
The actual thing that determines whether someone gains or loses from inflation is: are they a net debtor or lender?
Donald Trump has “money” but may actually benefit from from inflation if he’s so highly leveraged that his net worth is negative. A relatively poor retired couple with no debt may be worse off, because they borrow no money and pay for everything with cash.
You’re describing who benefits from changes in the rate of inflation. Someone with a lot of credit card debt is worse off from high inflation because the rate of inflation was already priced into the rate they were forced to accept.
So let’s say we’ve got 25% inflation. The only loans you’ll be offered will be at >25%. An increase once you’ve already gotten the loan helps reduce its real value, but that initial 25% is coming out of your paycheck.
This is because the lender can just invest in anything else, while you need dollars now - the burden falls on the less elastic side of the trade.
Yup, and also those furthest away from the source of the cash flow when new coins are minted (and the equivalent generation of money in fractional banking loans) also tend to suffer more from inflation while those closest often benefit. It’s like being upstream vs downstream of a popular river as a fisherman.