With all this talk of inflation on the horizon while the US and Europe print money like it’s goin’ outta’ style, it’s instructive to evaluate what the impact of hyperinflation would be on you, the people you know, and the country at large. Without expounding on historical interest rates, the correlation between gold and the dollar and what the “experts” are saying, it’s key to recognize that higher inflation isn’t bad for everyone. At the risk of oversimplifying, people that have a lot of assets actually thrive in periods of high inflation while those at the lower end of the spectrum get absolutely crushed.
Many Are Praying for High Inflation
Why? At its most basic level, inflation is great for people who have “stuff” – hard assets. I’m not talking about designer clothes, iPhones and other “stuff” that is obsolete in 3 months, but rather, real estate, possession of precious metals, ownership in companies with pricing power, etc.
Basically, as inflation rises, a dollar doesn’t go as far as it used to. Everything becomes more expensive, so fixed assets that have real-world tangible value increase in terms of a weakening US Dollar. So, if you own a lot of actual assets, those assets are worth more in terms of US Dollars and if you’re leveraged, all the more delicious! Nevermind what those holdings are worth in yen, Euro and Pound Sterling. In the US, if you’re a real estate magnate, you’re rooting for inflation. Let’s see why:
- Real Estate – When you own real estate, you’re typically leveraged quite heavily and you’re holding an asset with tangible value – pricing power. If the cost of everything is going up, that means wages, goods and guess what else? Rents! Landlords can easily raise rents during inflationary periods because a dollar doesn’t go as far as it used to so it takes more dollars to occupy the same space. While the income from property rentals is going through the roof, your debt servicing is flat! You took on a conventional 25-year commercial mortgage at 6% and you were already cash flow positive. Now, instead of raising rents 3% per year like you did in the good years, you can raise rents 7% year over year when inflation’s taking off. It just increases your ROI with no effort whatsoever! Owners of real estate root for inflation. with all these extra dollars from your real estate holdings, you can now buy CDs yielding 16% like the stories you hear from the 70s. When inflation returns to 3% and you’re earning 16% on a 10 year CD that’s FDIC insured, it just doesn’t get any better than that.
- Stocks – Inflation’s bad for the country, right? So, it strikes people as odd that stocks can do well during a period of high inflation (or a falling dollar – somewhat correlated but not necessarily the same thing). In looking at periods of high inflation, low inflation and moderate inflation, there’s no evidence that there’s any harm to stocks necessarily. There are some reasons why a weakening dollar actually benefits stocks instead of hurting them. Multinationals do especially well when the dollar falls against other currencies. When goods and services are sold abroad in stronger market currencies and then converted back to weak dollars for earnings reports here, there’s often a nice boost due to currency exchange. With a continuing weak dollar, this just boosts the bottom line for large corporations. While it’s tough to quantify, the weak dollar we saw after the financial collapse has certainly helped boost the bottom lines of Us multinationals which comprise the large equity indices most investors hold.
- Jobs in Hot Sectors – While one would anticipate continued stagnant job creation and perhaps a new increase in layoffs in the face of high inflation, employees with jobs in demand will be rewarded by high inflation. In jobs where the employee can name their own price and find higher paying positions elsewhere, wages will be more likely to rise with inflation to stem risk of flight of key employees. Just like we saw with programmers approaching Y2K and the internet bubble and the biotech sector in the 2000s, when a sector is exploding, key employees can write their own ticket. Throw in inflationary pressures and for that small segment of workers, wages are going to skyrocket from current values. For these employees living with fixed costs like a mortgage, a car payment and no high interest debt to speak of, their disposable income increases meaningfully. Conversely, in commoditized jobs, wages will remain stagnant as the unemployed will work for anything above the unemployment insurance rate (if it hasn’t run out already!). If, as a worker, you don’t have a specialized skill set that can demand higher pay and others are fighting for the same position because of high supply and low barrier to entry, it’s reasonable to expect that your wages will not increase to keep pace with inflation, if at all. That means in terms of today’s dollars, these jobs take a salary reduction at the same time they’re paying more for food, gasoline (and Rent!) and other necessary items for routine survival.
I’m not making a social statement here and I’m not convinced we’re going to be facing hyperinflation in the near term given the fact that our 9-10% unemployment rate is likely to supress wage pressures and price increases for some time to come, but it’s good to at least have the perspective of how macroeconomic forces impact people who may not be in your demographic. Like the age-old addages – “You’ve gotta have money to make money” or “The rich get richer while the poor get poorer”, in the context of inflation, these are actually accurate statements.