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Old 01-11-2018, 01:27 PM
Status: "delete" (set 28 days ago)
3,189 posts, read 1,280,483 times
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While this is old, it's still relevant.


Another good article.


It's BS.

Articles lie, politicians lie, people on tv lie, etc. Numbers don't lie.

"Vast volumes of oil were squandered at low prices for the sake of cash flow to support unmanageable debt loads and to satisfy investors about production growth. The clear message is that investors do not understand the uncertainties of tight oil and shale gas plays."

100% on the money.
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Old 01-12-2018, 02:02 AM
Location: Silicon Valley
2,776 posts, read 1,224,558 times
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Originally Posted by mathjak107 View Post
what you are really doing is playing the currency market as an investor would . so you are buying a currency investment on margin in effect with the money that let you profit . it could easily have gone down too if you used the wrong currency .

you are trying to dream up scenario's where a loan will be an inflation hedge . it will never be a hedge. . only what you do with the money will ever be the actual hedge. it could be stocks , it could be foreign currency , real estate ,commodities ,etc . in the 1970's people were doing it with the swiss franc.
I'm trying to dream up an example yet. I'm trying to illustrate that getting a loan IS a hedge...but it's harder to evaluate, because people value the assets in money.

Money is a convertible bond. You can convert cash into anything. That's what makes it valuable. When you were a kid, you could convert $5 into a lot of fun things. $5 could get you a sundae, ball cards, a trip to the roller rink and probably pay the gas for it too. Let's say you had $10 and you lent $5 of it to your buddy artillery.

Well I scampered off for a few decades but I come back now and say...hey buddy, I forgot to pay you back that $5 I owe you.

Regardless of whether or not I pulled a Mickey Mantle from the baseball cards is irrelevant. You should be pissed at your ole buddy artillery because even though I paid you back in full, the entire time you had the loan out to me you were losing convertibility on your $5.

Getting a loan is a hedge against inflation. It's up to the banks to price it correctly, which is why the central bank is owned by banks...

Now, I take on the exact same loan risk if I in turn loan the $5 to someone else or keep the cash as cash. Even if I can borrow at 3% and loan at 6%, it doesn't save me from a 20% drop in the currency. I mean, that's part of the big home equation problem. On its own, it doesn't make sense. If a house goes up by 3%, but you're paying 5% interest on 80% of the cost...that's 103 of nonconvertible value to 104 past paid and future paid money in year 1. By the time you're through a 30 year loan, you've paid for the house twice or even three times. Yet the wealth difference is staggering in the country between home owners and non-home owners...even in areas where home prices have been stagnant.

Because home-owners had a large hedge against dollar inflation...often with more dollars then they even had to deflate as well as eliminating inflationary rent price increases.

Of course we want to stop with the single transaction and say...no. But debt allows someone else to take on your holding cost while you go hold something else.
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Old 01-12-2018, 04:48 AM
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the concept of a loan as an inflation hedge was looked at by researcher michael kitces .

verdict : without dreaming up all kinds of scenarios in your head and currency swaps , and looking at a fixed rate mortgage as an inflation hedge , which is what you hear all the time the answer is NOPE!

Executive Summary
Having a mortgage is often framed as a way to hedge against inflation. As the conventional wisdom goes, with a mortgage your monthly payment is locked in (assuming it’s not an Adjustable-Rate Mortgage [ARM]), even if inflation goes up and interest rates rise. In fact, rising inflation would just devalue the mortgage in nominal (future) dollars.

Yet the reality is that ultimately, a mortgage may be paid off with inflation-adjusted wages, free up funds to be invested into inflation-hedging vehicles (from TIPS to equities), used to create a reserve for investing in bonds at higher rates in the future (a form of call option on interest rates), or be deployed to purchase a residence that provides a hedge against rising rents. In all of these scenarios, though, it is actually how the mortgage-related funds are deployed, or the income sources used to fund it, that are the actual inflation hedges… not the mortgage itself!

Ultimately, this doesn’t mean that a mortgage can’t indirect lead to beneficial outcomes if inflation (and interest rates) rise. But in the end, the benefits will not actually come from the use of the mortgage itself as an inflation hedge, but the other inflation-adjusted assets and income an individual has to support the mortgage instead! Of course, the caveat is that the use of leverage to hedge inflation can cut both ways, and magnify the unfavorable outcomes in non-inflation scenarios as well!

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Old 01-12-2018, 09:32 PM
Location: Silicon Valley
2,776 posts, read 1,224,558 times
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I can understand what's being said in the article, but I think it defeats the reality of any situation. Taking a loan won't allow you to profit on its own, yes. But it does pass the inflation eroding loss to the person receiving the payments, which they need to include in their pricing.

Switching sides, say I win the lottery. Now I'm the bank and I have someone that owes me money. I can either receive the proceeds advertised in an annuity, or I can take it as a lump sum. If the two are the same amount, everyone would take the money up front so they will not be exposed to convertibility loss from inflation.

If I take the annuity, I am at risk of the money losing convertibility power because of inflation. I won't be able to change this. If inflation hits 7%, I still get the same amount of dollars.

Now the article (and thanks for posting that) is correct from a valuation standpoint that if I take my money and put it in a hole in my backyard, or I simply have annuity receivable, both are susceptible to losing value to inflation.

The main driver of getting money sooner (assuming no credit risk, stable tax rates, similar capital situations etc.) is that the annuity receivable is only convertible into cash at a future date, where as cash is convertible into anything at any time. Some actuary then comes in and does a present value on the payments and the winner has a choice. Pay your expected losses up front with a reduced payout, or bet that inflation will be lower than the PV calculation and roll with it.

That then becomes the value differential, and it's not a small haircut. We value a stream of payments at present value to show the value of an entity today. That difference is the expected loss of value in today's money because the receiver of the payments bears the inflation risk of loss (and potential for deflationary gain). I think we can agree the holder of a stream of payments bears risk of loss here.

For the payer, it is a dreamed up situation to stop the transaction at cash. Strictly speaking a mortgage is often for cash...in purchase of a home, but there are many times where a loan will be made where only one side of the equation is cash. I will sell you my gold coin for 14 payments of $110. Or I will sell you my used truck for 20 payments of $1,000. The gold buyer may have FX risk, and the truck buyer may face certain depreciation, but only the person receiving the payments will have inflationary risk.

However if I take the loan, and CHOOSE to hold it in cash, then I have chosen to take the exact SAME inflationary risk as the person who loaned me cash. It is a separate risk though. One is the risk of loan payments with less convertibility and the other is the inflationary risk affecting cash converting into less in the future. If I buy bonds (effectively taking a loan and making a loan) I also take the very SAME risk as the person loaning the money to me.

The difference is, until the money is spent, the person receiving the money has inflation risk, but they are also convertible into anything. The person holding the stream of payments has inflation risk, and can't do anything about it except possibly buy a hedge from the interest received.

So I guess my argument is that the author can't stop it where he does. The transaction is only half done. Agreeing to receive a stream of payments means the inflation risk goes to the receiver of said payments. The person receiving something of value may choose an option still subject to inflation risk, but it is a separate risk.

As to the home example, while I also use inflation as a proxy for expected real estate gains, it is quite independent. Inflation is a decent proxy when # of families in an area are stable and wage raises are stable and similar to inflation rate, as that will dictate the buyer affordability range. Homes themselves are subject to depreciation, taxation (which has some inflation risk) and supply/demand valuation risk, but not inflation risk. Inflation risk stays with the bank.

Hence buying a home right before the Weimar Republic on a fixed mortgage means you just got a free home...though overall economic conditions may mean your home is going to sell for less in terms of convertibility to what it may have gotten before.
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Old 01-13-2018, 03:34 AM
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no matter what you do with borrowed money you are either investing it in a purchase which is either going to act as a hedge or not or you are converting to currencies that will act as a hedge . once again , the money itself is no hedge unless itself is the currency investment . in which case it can act as a hedge OR NOT
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