On 03.01.2017 4:48, Randy Yates wrote:> Evgeny Filatov <filatov.ev@mipt.ru> writes: > >> On 02.01.2017 22:12, Randy Yates wrote: >>> Evgeny Filatov <filatov.ev@mipt.ru> writes: >>> >>>> On 02.01.2017 6:40, Randy Yates wrote: >>>>> I've been thinking in the back of my mind about inflation and how it >>>>> possibly affects investment decisions. >>>>> >>>>> A basic (yes, very oversimplified) scenario is this. Inflation is at 0 >>>>> percent. I have a loan at 10 percent interest. I have extra money on >>>>> which I can earn 5 percent interest if invested. Well it seems obvious >>>>> that we should pay down the loan rather than invest since our money >>>>> would "do the most work" that way. >>>>> >>>>> But now let's consider inflation at some positive (non-zero) value. Now >>>>> it seems less clear that we should pay down the loan. The loan was made >>>>> in yesterday's dollars. At time period n (say, in months), this money is >>>>> is worth Pc = [(1 + i/12)^n * P] dollars in current dollars, where Pc is >>>>> current (effective) principal and P is the original principal. >>>>> >>>>> So one could view the situation as having a lot of money at a small >>>>> interest rate. Of course this depends on the (yearly) inflation rate i >>>>> and n. >>>>> >>>>> Another way of looking at it is that, with inflation, we will be making >>>>> more and more money while our loan principal remains relatively small. >>>>> >>>>> Indeed in general it would seem that high inflationary periods encourage >>>>> people to borrow rather than pay down debt. This somewhat assumes though >>>>> that income will rise according to inflation, and that inflation is >>>>> going to continue in the future. >>>>> >>>>> Has anyone thought about these things? Am I correct? Is it trivial? Is >>>>> it worth thinking about?!? >>>>> >>>> >>>> The answer is that you pretty much cannot outsmart the banks. If the >>>> inflation rate increases, so would do interests on (new) loans. >>> >>> Hi Gene, >>> >>> Then don't take a loan unless it's a dire need! That's pretty much a >>> good rule no matter what the interest rates are (unless they go >>> negative...). >> >> Hi, Randy, >> >> That's what everybody sais. Actually 25 percent interest on a loan is >> not a fantasy. That's what my bank offered to me a couple years ago >> when inflation peaked here. I don't know how it works in the rest of >> the world, but here banks consistently advertise loans, making phone >> calls, etc. So you'd know everything about current interest rates even >> if you have never taken a loan. ;-) > > 25 percent?!? Sheesh! > > There's some loan advertising here in the US. Mainly what I see > are credit card offers in the mail, though. > > Where are you located? >Russia. That city: https://www.google.com/maps/@56.0088104,38.3854725,13z?hl=en Gene
OT: inflation and investments
Started by ●January 1, 2017
Reply by ●January 3, 20172017-01-03
Reply by ●January 3, 20172017-01-03
On 03.01.2017 4:48, Randy Yates wrote:> Evgeny Filatov <filatov.ev@mipt.ru> writes: > >> On 02.01.2017 22:12, Randy Yates wrote: >>> Evgeny Filatov <filatov.ev@mipt.ru> writes: >>> >>>> On 02.01.2017 6:40, Randy Yates wrote: >>>>> I've been thinking in the back of my mind about inflation and how it >>>>> possibly affects investment decisions. >>>>> >>>>> A basic (yes, very oversimplified) scenario is this. Inflation is at 0 >>>>> percent. I have a loan at 10 percent interest. I have extra money on >>>>> which I can earn 5 percent interest if invested. Well it seems obvious >>>>> that we should pay down the loan rather than invest since our money >>>>> would "do the most work" that way. >>>>> >>>>> But now let's consider inflation at some positive (non-zero) value. Now >>>>> it seems less clear that we should pay down the loan. The loan was made >>>>> in yesterday's dollars. At time period n (say, in months), this money is >>>>> is worth Pc = [(1 + i/12)^n * P] dollars in current dollars, where Pc is >>>>> current (effective) principal and P is the original principal. >>>>> >>>>> So one could view the situation as having a lot of money at a small >>>>> interest rate. Of course this depends on the (yearly) inflation rate i >>>>> and n. >>>>> >>>>> Another way of looking at it is that, with inflation, we will be making >>>>> more and more money while our loan principal remains relatively small. >>>>> >>>>> Indeed in general it would seem that high inflationary periods encourage >>>>> people to borrow rather than pay down debt. This somewhat assumes though >>>>> that income will rise according to inflation, and that inflation is >>>>> going to continue in the future. >>>>> >>>>> Has anyone thought about these things? Am I correct? Is it trivial? Is >>>>> it worth thinking about?!? >>>>> >>>> >>>> The answer is that you pretty much cannot outsmart the banks. If the >>>> inflation rate increases, so would do interests on (new) loans. >>> >>> Hi Gene, >>> >>> Then don't take a loan unless it's a dire need! That's pretty much a >>> good rule no matter what the interest rates are (unless they go >>> negative...). >> >> Hi, Randy, >> >> That's what everybody sais. Actually 25 percent interest on a loan is >> not a fantasy. That's what my bank offered to me a couple years ago >> when inflation peaked here. I don't know how it works in the rest of >> the world, but here banks consistently advertise loans, making phone >> calls, etc. So you'd know everything about current interest rates even >> if you have never taken a loan. ;-) > > 25 percent?!? Sheesh! >But that was a couple years ago. The current rates are in the range of 10-15%. Gene
Reply by ●January 3, 20172017-01-03
Randy Yates wrote:> Evgeny Filatov <filatov.ev@mipt.ru> writes:>> Indeed, your reasoning stays correct no matter what. The interest on a >> loan is supposed to be greater than the interest on a deposit. Banks >> profit on the difference between the two. Economics 101 stuff. > > If it's so obvious, why do so many people invest rather than paying down > their loans? Why is the US going further and further into debt, now to > the tune of some 20 trillion bucks?!? >Government debt is not private debt. They're entirely different. Conflating them seems to be everybody's favorite fallacy :) "Government" is accountable ( in broad general strikes ) for maintaining a supply of Official currency. and government debt plays a role in that. I wonder if this will help? http://wfhummel.net/ -- Les Cargill
Reply by ●January 3, 20172017-01-03
> > > > If it's so obvious, why do so many people invest rather than paying down > > their loans? Why is the US going further and further into debt, now to > > the tune of some 20 trillion bucks?!? > > >sorry, but I am going to make it even more complex, if you are taking about a home mortgage loan, the govt in effect reduces your effective interest rate by giving you a tax deduction on home mort interest expenses,.. and you may or may not get a corresponding tax break on earned interest rate on your investments.. m
Reply by ●January 3, 20172017-01-03
On Sunday, January 1, 2017 at 10:40:56 PM UTC-5, Randy Yates wrote:> I've been thinking in the back of my mind about inflation and how it > possibly affects investment decisions. > > A basic (yes, very oversimplified) scenario is this. Inflation is at 0 > percent. I have a loan at 10 percent interest. I have extra money on > which I can earn 5 percent interest if invested. Well it seems obvious > that we should pay down the loan rather than invest since our money > would "do the most work" that way. > > But now let's consider inflation at some positive (non-zero) value. Now > it seems less clear that we should pay down the loan. The loan was made > in yesterday's dollars. At time period n (say, in months), this money is > is worth Pc = [(1 + i/12)^n * P] dollars in current dollars, where Pc is > current (effective) principal and P is the original principal. > > So one could view the situation as having a lot of money at a small > interest rate. Of course this depends on the (yearly) inflation rate i > and n. > > Another way of looking at it is that, with inflation, we will be making > more and more money while our loan principal remains relatively small. > > Indeed in general it would seem that high inflationary periods encourage > people to borrow rather than pay down debt. This somewhat assumes though > that income will rise according to inflation, and that inflation is > going to continue in the future. > > Has anyone thought about these things? Am I correct? Is it trivial? Is > it worth thinking about?!? > -- > Randy Yates, DSP/Embedded Firmware Developer > Digital Signal Labs > http://www.digitalsignallabs.comIf inflation becomes hyper-inflation like 30-50% a month then you would have to immediately allocate all of your disposable cash to buying some stuff you don't even need, and try to delay repaying your fix-interest loans and debts (if your creditors will let you get away with that which they won't) Back in the early 90s in the former soviet union people (the lucky ones) would get their salaries and then immediately run to buy something (mostly food and other necessities) before that stuff gets more expensive next day that type of situation sucks, trust me on this
Reply by ●January 20, 20172017-01-20
Randy Yates <yates@digitalsignallabs.com> wrote:>Indeed in general it would seem that high inflationary periods encourage >people to borrow rather than pay down debt. This somewhat assumes though >that income will rise according to inflation, and that inflation is >going to continue in the future.>Has anyone thought about these things? Am I correct? Is it trivial? Is >it worth thinking about?!?Yes, this is fundamental, and is also why monetary policy is to raise borrowing rates when there is inflaction (to suppress the excess consumption created by inflation, which otherwise goes open-loop). Steve
Reply by ●January 21, 20172017-01-21
Steve Pope wrote:> Randy Yates <yates@digitalsignallabs.com> wrote: > >> Indeed in general it would seem that high inflationary periods encourage >> people to borrow rather than pay down debt. This somewhat assumes though >> that income will rise according to inflation, and that inflation is >> going to continue in the future. > >> Has anyone thought about these things? Am I correct? Is it trivial? Is >> it worth thinking about?!? > > Yes, this is fundamental, and is also why monetary policy is to > raise borrowing rates when there is inflaction (to suppress the > excess consumption created by inflation, which otherwise goes > open-loop). > > > Steve >I don't think there's ever been anything remotely resembling "excess consumption[1]". Consumption is rather the point of all of it, so far as it goes. Er, at least Dickens seemed to think so. [1] the singular exception is https://en.wikipedia.org/wiki/Anthology_of_Interest_II The inflations we're worried about aren't open-loop; they're positive feedback, caused mainly when the ... ground goes on the political system ( as in Venezuela ) . If you want to scare an economist half to death, say the words "variable lag". The definition of a Puritan is someone who is terrified that someone, somewhere, is having a good time :) -- Les Cargill
Reply by ●January 22, 20172017-01-22
On 1/20/2017 23:06, Les Cargill wrote:> Steve Pope wrote: >> Randy Yates <yates@digitalsignallabs.com> wrote: >> >>> Indeed in general it would seem that high inflationary periods encourage >>> people to borrow rather than pay down debt. This somewhat assumes though >>> that income will rise according to inflation, and that inflation is >>> going to continue in the future. >> >>> Has anyone thought about these things? Am I correct? Is it trivial? Is >>> it worth thinking about?!? >> >> Yes, this is fundamental, and is also why monetary policy is to >> raise borrowing rates when there is inflaction (to suppress the >> excess consumption created by inflation, which otherwise goes >> open-loop). >> >> >> Steve >> > > I don't think there's ever been anything remotely resembling "excess > consumption[1]". Consumption is rather the point of all of it, so > far as it goes. Er, at least Dickens seemed to think so. > > [1] the singular exception is > https://en.wikipedia.org/wiki/Anthology_of_Interest_IIThere's "The Midas Plague" by Fred Pohl. https://duckduckgo.com/?q=the+midas+plague+frederik+pohl&t=h_&ia=web> > The inflations we're worried about aren't open-loop; they're > positive feedback, caused mainly when the ... ground goes on the > political system ( as in Venezuela ) . > > If you want to scare an economist half to death, say the words > "variable lag". > > The definition of a Puritan is someone who is terrified that someone, > somewhere, is having a good time :) >-- Best wishes, --Phil pomartel At Comcast(ignore_this) dot net
