Loved your commentary on rising labor costs. A big reason why I avoid investing in companies with large labor forces. Additionally, these things play out in cycles...prices will rise, sales will decrease, labor force will be cut, layoffs, higher margins and then stocks will rise back again....cheers
This was excellent. Thank you! Can you explain in plain English for the pay person what it means to "inflate away debt"? I've never read a really good clear explanation of that concept.
Thank you Carol. When we think of a bond or any sort of fixed income, there are coupon payments paid regularly (for example, quarterly or annually). Then, at the end of the bond's life, there is a repayment of the loan amount. If one is a borrower, one is counting on the idea that they will be able to use the borrowed money for something that will generate a higher return on the money than the cost they must pay.
For a government, it is hoping that the money it 'borrows' via fiscal spending, will generate growth in the economy that is higher than the cost of this debt. That was the case in the 50s-60s. It was even the case when the Federal Reserve kept rates so low that even 10 year bonds were only about 1% cost. The US could grow faster than that. However, now that the rate of interest is over 5% in the short term (where the government has been borrowing), growing that fast is difficult. The government could choose to 'restructure' the borrowing, but much of this is in the form of entitlement spending or state pensions. There is no desire to do that.
Some parts of the government could default. We won't see that at the federal level. We can't (by the Constitution) see states default or declare bankruptcy. However, counties and cities can. We saw Orange County California go bankrupt. We have seen Detroit go bankrupt. We may see Chicago or Cook County do so. However, this won't solve the federal problem.
The last option is to inflate the problem away. What do I mean by this? Let's assume we bought a 10-year US government bond. We will get a coupon every 6 months for 10 years. At the end we will get our money back. However, what if the dollars we get in 10 years are worth less than they are now? If that is the case, the $1 million we give them today, for instance, could be 'worth' more in terms of purchasing power than that same $1 million in 10 years. Think about the house you could buy 10 years ago (or 20 or 30) with $1 million versus today. What will happen in 10 years? If the dollar is worth less, that means the government's true 'cost' to repay is actually a lot less based on the purchasing power.
Another way to think about this. If we have high inflation, you would rather have the money now so you can buy things, than money later to buy things when the cost of everything is higher.
This means that high inflation hurts savers and helps borrowers.
Loved your commentary on rising labor costs. A big reason why I avoid investing in companies with large labor forces. Additionally, these things play out in cycles...prices will rise, sales will decrease, labor force will be cut, layoffs, higher margins and then stocks will rise back again....cheers
This was excellent. Thank you! Can you explain in plain English for the pay person what it means to "inflate away debt"? I've never read a really good clear explanation of that concept.
Thank you Carol. When we think of a bond or any sort of fixed income, there are coupon payments paid regularly (for example, quarterly or annually). Then, at the end of the bond's life, there is a repayment of the loan amount. If one is a borrower, one is counting on the idea that they will be able to use the borrowed money for something that will generate a higher return on the money than the cost they must pay.
For a government, it is hoping that the money it 'borrows' via fiscal spending, will generate growth in the economy that is higher than the cost of this debt. That was the case in the 50s-60s. It was even the case when the Federal Reserve kept rates so low that even 10 year bonds were only about 1% cost. The US could grow faster than that. However, now that the rate of interest is over 5% in the short term (where the government has been borrowing), growing that fast is difficult. The government could choose to 'restructure' the borrowing, but much of this is in the form of entitlement spending or state pensions. There is no desire to do that.
Some parts of the government could default. We won't see that at the federal level. We can't (by the Constitution) see states default or declare bankruptcy. However, counties and cities can. We saw Orange County California go bankrupt. We have seen Detroit go bankrupt. We may see Chicago or Cook County do so. However, this won't solve the federal problem.
The last option is to inflate the problem away. What do I mean by this? Let's assume we bought a 10-year US government bond. We will get a coupon every 6 months for 10 years. At the end we will get our money back. However, what if the dollars we get in 10 years are worth less than they are now? If that is the case, the $1 million we give them today, for instance, could be 'worth' more in terms of purchasing power than that same $1 million in 10 years. Think about the house you could buy 10 years ago (or 20 or 30) with $1 million versus today. What will happen in 10 years? If the dollar is worth less, that means the government's true 'cost' to repay is actually a lot less based on the purchasing power.
Another way to think about this. If we have high inflation, you would rather have the money now so you can buy things, than money later to buy things when the cost of everything is higher.
This means that high inflation hurts savers and helps borrowers.
Does that help?