[arcticbull]

> I'll admit I'm pretty furious at the fed right now though.

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.

[landemva]

OP said he or she is upset with price inflation and now has a pile of cash losing purchasing power.

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.

[arcticbull]

I'm aware, however a mortgage also requires a job to obtain, which was what I was pointing to in the statement. Unless we saw truly spectacular deflation, I'm talking 500% year over year, it wouldn't have mattered. I suspect OP would have lost their job well before their admittedly less than 20% down-payment amount deflated enough to buy a house outright.

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 ;)

[dnautics]

why do you assume a deflation will cause job loss, in particular for the poster? Maybe they have a deflation-proof job (most jobs that aren't a result of malivestment). Deflation is not a magic wand where "boom, it happens, and people lose their job". Just as, much as the central bank might wish it to be, inflation is not a magic wand where "boom it happens, and jobs are created" (hence the word "stagflation").

[deelowe]

There is a gigantic difference between inflation and deflation from a policy perspective. Deflection has a positive feedback loop which does tend to cause situations where liquidity dries up literally overnight and then "boom, it happens, and people lose their jobs." Inflation tends to happen more gradually. It's manageable as long as people don't lose confidence in the currency. The fed generally wants to avoid deflation if at all possible. As people leave the job market due to automation and median age trends higher, this because more and more difficult. Japan has had serious struggles fighting off deflation for decades now.

"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.

[dnautics]

Surely you're kidding, right? If inflation didn't have a positive feedback loop we wouldn't have the hockey stick exponential devaluation as seen in: Venezuela, Yugoslavia, Zimbabwe, Brazil, etc...

> 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.

[bb88]

Gentle inflation is what the fed targets. Out of control inflation is what you're talking about.

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)

[deelowe]

I covered the examples you cited already. Rampant inflation happens when people lose faith in the currency. That isn’t what’s happening here.

[landemva]

'spectacular deflation, I'm talking 500% year over year ...'

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.

[pvitz]

You are confusing deflation with inflation.

[landemva]

A dozen yummy donuts experience 100% increase. A double so you now have two dozen yummy donuts. Inflation.

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?

[pvitz]

I am not talking about the rate, but rather about your sentence: > If currency loses 100% of value, it will be worth zero. A complete, 100%, total loss.

Inflation is about the loss of value, not deflation. 1£ today will be worth x£ tomorrow, where x < 1.

[diatone]

Just confirming I’m on the right page here, what about supply and demand? Doesn’t inflation increase the quantity of cash in existence, reducing its value relative to other units of exchange, and vice versa for deflation?

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)?

[betterunix2]

The economic consequences of deflation are very destruction. Cash may become more valuable, but a prolonged economic contract will leave you with less to buy with that cash.

[01100011]

> 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.

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.

[godot]

> Generally speaking, you shouldn't put your money in the market if you need it in the next 5 years.

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.

[niij]

Asset prices don't always go up. The downturns have lasted much longer than 5 years. So if you want relative certainty you'll have $X at a certain date then you need to be in cash years beforehand. Otherwise you're gambling or have a backup source of cash.

[01100011]

Yes, 5 years. http://nerdwallet.com/article/investing/where-to-put-short-t...

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.

[ant6n]

> 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...

[icedchai]

Do you remember the lost decade? 2000-2009-ish... the markets went no where for almost 10 years.

[eru]

> 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).

What should the government have done?

[01100011]

Fiscal stimulus. More jobs programs. More infrastructure. Put people in affected industries to work doing something productive.

[quickthrowman]

> Generally speaking, you shouldn't put your money in the market if you need it in the next 5 years.

According to whom? Right now, nothing pays out any yield, it’s stocks or lose to inflation.

[arcticbull]

BDCs are paying ~10%. It’s not without risk, of course, they saw large drawdowns in 2020 but have recovered alongside the rest of the economy. I personally generate income borrowing on margin to purchase the Goldman Sachs BDC (GSBD) and using a risk reversal (selling a call, using the premium to buy a put) to hedge against a large draw down. NFA.

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.

[eru]

You can try real estate as well. Or junk bonds.

[eru]

> 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.

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.

[aksss]

> you shouldn’t hold cash

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.

[divbzero]

> 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.

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.

[frockington1]

I did this a month ago. 2.3% interest on a second home, refinanced the other for close to that. Assuming (big assumption) this transitory inflation doesn't go away it's stupid not to load up on 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

[hirvi74]

When interest rates on mortgages are lower, doesn't the prices of homes increase to compensate (like what's happening right now)?

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?"

[dpweb]

A $2000 mortgage payment at 4% interest is not equivalent to a $2000 payment at 2%.

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.

[SilasX]

People absolutely should be holding cash if, as in the parent’s case, they’re looking for a home to buy :-p

Also, “don’t worry, just look at the monthly payment” is something that should only ever be said by a car salesman.

[arcticbull]

On a 30 year fixed mortgage what else matters? That’s your monthly payment. Taxes I guess?

Depends how long you’re planning to save. You can hold treasuries or risk parity adjusted pairings. Or CDs ladders. Lots of stuff!

[SilasX]

As above, the same reasons why it’s bad to think of a car purchase purely in terms of the monthly payment.

> 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.

[wahern]

>> Also, “don’t worry, just look at the monthly payment” is something that should only ever be said by a car salesman.

> 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.)