[quote=Rich Toscano]davelj, in the graph of household net worth you linked to:
– inflation was rising during a long-term decline in household wealth as a % of gdp in the late 60s and 70s
– inflation fell pretty consistently during the big runup in household net worth from the late 80s to the early oughts
I’m just noting that a secular decrease in household net worth can happen over an inflationary backdrop, and an increase in net worth over a disinflationary one.[/quote]
Yes, this is a tricky relationship. One could argue that household net worth as a % of GDP was declining during the inflation of the ’70s as a RESULT of that inflation. That is, higher inflation led to higher interest rates which led to (substantially) lower stock prices (higher discount rate leading to lower valuations). Although, RE basically kept up with inflation during the ’70s. Likewise, from the ’80s to the mid naughties, part of the reason asset prices were increasing was a persistent (apparent) decline in inflation (which led to lower interest rates and a lower cap rate for stocks and CRE). So, there is a constant push and pull between lower inflation (and interest rates) that raises asset valuations (all else being equal) – and, conversely, higher inflation (and interest rates) that lowers valuations (all else being equal) – and an asset’s pricing power relative to that inflation. For example, if I own a piece of rental real estate and I’m able to constantly raise the rent by whatever the inflation rate is – be it 2% or 10% – then the valuation isn’t going to change much as a result of inflation because increases in Rate and Growth of the Gordon Growth Equation are going to offset one another (Value = Cash Flow/(Rate – Growth) and the denominator will remain the same. So, not only do we not know how much inflation is coming (or when), we also don’t know how it’s going to manifest itself in various assets’ pricing power. During the ’70s, for example, stocks were slammed, but real estate held up pretty well as rents kept up with inflation by and large. We don’t know whether that will be true once inflation returns the next time around.
[quote=Rich Toscano]
Anyway, to your question: I don’t know what the number is either. But I feel pretty confident that whatever it is, they’re going to go past it. That is the nature of the pressures in our political system (run by hyper-keynesians who only care about getting elected and a voting populace that is over-indebted and unwilling to take short-term economic pain).[/quote]
Yup. We the People – in aggregate, if not individually – want inflation.
