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naraburns  nihil supernum  1yr ago (text post)   31686 thread views

Culture War Roundup for the week of December 5, 2022

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This post is silly for several reasons.

At the broadest level, there's a question as to whether the government should target 0 inflation or not. Most mainstream economists agree that a small amount of inflation is good for a variety of reasons (incentive to invest, implicit cheaper cost of borrowing, relief valve for employers in lean times, etc.). I feel that reasonable people could disagree on these points, however, and there are some interesting points to be made for the overall net-benefits calculus of targeting a lower inflation rate. Certainly the recent inflation has been much higher than what anyone wants, which is why the Fed has been jacking up interest rates.

But instead of having that discussion, this post goes off in another direction. Firstly, the target of this article is simply wrong. Main street banks aren't stealing your money because they're not the ones causing inflation. The same loss of purchasing power would occur if you took your money and stuffed it under your mattress. It's the federal government's decision to target a positive nonzero inflation rate that's causing the issue, and that decision is no more of a "theft" of your money than simple taxation is. Some people might think the implicit tax of inflation is sneaky and therefore illegitimate, but there's nothing really secret about it.

The second, larger issue is that this post compares bank savings to gold, real estate, or the S&P 500 index. The problem is that these investments entail a significant amount of risk, so what's really being done here is an analysis of opportunity cost that the post tries to smuggle in as an argument towards the magnitude of supposed "theft". If you specifically want to save with inflation-protection as your main goal, there are investments specifically designed for that purpose. If you don't want to bother with something specialized for long-term savings like that, you can just put your money in a target date fund geared towards your retirement horizon and inflation shouldn't be an issue.

Finally, comparing inflation to the fraud (at least that's how I currently understand what happened) that happened with FTX is just goofy. The effects of inflation are known, and it's not hard to prevent erosion of purchasing power with minimal risk if that's your main goal. On the other hand, taking clients' money under pretenses that they couldn't discover without insider information like what FTX did is quite a different issue, and is something that regulation could indeed help with.

Firstly, the target of this article is simply wrong. Main street banks aren't stealing your money because they're not the ones causing inflation. The same loss of purchasing power would occur if you took your money and stuffed it under your mattress. It's the federal government's decision to target a positive nonzero inflation rate that's causing the issue, and that decision is no more of a "theft" of your money than simple taxation is.

The TLDR in my post cut out a more full explanation of this:

Well, to be more accurate, it is the government stealing your money, not the banks. Actually, to be more accurate, it is impossible to pin down who exactly is stealing your money, because banks should be seen as arms of the state, and the state is the arm of an ecosystem of elites and elite clients, and the entire thing has grown fiendishly complex because it is in everyones interest to allow it to be complex. In fact, the real bandit may be your neighbor who bought a million dollar home with a 30-year, 2% interest rate loan. Or maybe the thief is your friend who cashed out on Apple stock after Apple funded a stock buyback with a loan at 1% interest. (Don’t go screaming at your friend – hate the game not the player).

and that decision is no more of a "theft" of your money than simple taxation is. Some people might think the implicit tax of inflation is sneaky and therefore illegitimate, but there's nothing really secret about it.

Diluting the currency in the modern system is far, far, far less transparent in terms of how much dilution is occuring and who is getting it. It is far less transparent than taxation, and far less transparent than when a company board publicly votes new shares to be created to reward employees with bonuses.

The effects of inflation are known, and it's not hard to prevent erosion of purchasing power with minimal risk if that's your main goal.

"It's not a fraud because everyone knows it is a fraud and so avoids it." For a normie steel-worker retiring in 2013 it was not at all obvious that they needed to invest in the stock market simply to preserve purchasing power. The standard Vanguard retiree fund has lost out compared to inflation: https://investor.vanguard.com/investment-products/mutual-funds/profile/vasix#price

But actually it is really difficult to preserve purchasing power, because it requires buying extremely volatile assets and it is difficult to know if said assets are in a bubble or not. Consider the historically high P/E ratios we are experiencing -- are stocks still in a bubble or is this the new normal?

Your point about banks "stealing" seems more reasonable in context, as it seems you're casting the "stealing" label broadly which... I don't agree with, but I can see why you're doing from a writing standpoint. It's definitely worth summarizing more conscientiously, as not everyone will go read your entire post.

The point about inflation being bad because it's sneaky in some ways is understandable, but we live in a complicated world, and in the grand scheme of things inflation isn't that hard to understand. I can't speak for everyone, but I at least had a vague idea of what it was many years ago before I had any deep knowledge of economics. Any financial planner will be able to tell you about inflation quite easily if you ask. In a world where the legal system is impenetrable without the help of a lawyer, where medicine is impenetrable without the help of a specialized doctor, and where even taxes can be impenetrable without an accountant (or at least software like Turbotax), the sneakiness of inflation really isn't that bad. And the federal government isn't doing it because it's sneaky, at least for the most part. There are genuine arguments in favor of positive nonzero inflation that I detailed earlier.

The standard Vanguard retiree fund has lost out compared to inflation: https://investor.vanguard.com/investment-products/mutual-funds/profile/vasix#price

Firstly, this isn't a "standard retiree fund" as it's actually quite conservative, with ~80% of the assets being in bonds. Second, your math isn't right because it gives returns in an annualized format. A dollar invested from the start of the fund in 1994 to the present day would be worth about $4.50, whereas a dollar indexed to inflation from 1994 to today would only be worth about $2.00.

But actually it is really difficult to preserve purchasing power, because it requires buying extremely volatile assets

Again, if you just want to preserve your purchasing power while minimizing return/risk, TIPS are the exact opposite of "extremely volatile".

But instead of having that discussion, this post goes off in another direction. Firstly, the target of this article is simply wrong. Main street banks aren't stealing your money because they're not the ones causing inflation. The same loss of purchasing power would occur if you took your money and stuffed it under your mattress. It's the federal government's decision to target a positive nonzero inflation rate that's causing the issue, and that decision is no more of a "theft" of your money than simple taxation is. Some people might think the implicit tax of inflation is sneaky and therefore illegitimate, but there's nothing really secret about it.

I think a case can be made if banks are not paying full interest on deposits. For example, savings accounts yielding less than the federal funds rate.

The purpose of savings accounts is convenience in not having to store physical currency under your mattress. The selling point of savings accounts has never been returns or inflation protection or as a long-term retirement vehicle. If you want those things instead, then... go for a financial product that gives them.

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