Savers vs. Borrowers A story of Peter vs. Scott

Transcription

1 Savers vs. Borrowers A story of Peter vs. Scott Peter is our hero. He has saved for retirement. paid down debts built up retirement assets He has $100,000 in hard-earned savings.

2 Savers vs. Borrowers Scott is our irresponsible villain. He does not see wisdom in being debt-free. Scott has a use for $100,000, he sees that Peter has the money, so Scott borrows $100,000 from Peter.

3 Savers vs. Borrowers Virtuous Peter has $100,000 asset with no debt. Irresponsible Scott has a $100,000 debt. And then life continues

4 Government desires to spend (and borrows to do so) Chinese stop buying US treasury bonds Japanese stop buying US treasury bonds Federal Reserve creates trillions of dollars to fund the government The value of the drops.

5 Savers vs. Borrowers 90% of the former dollar is gone. And so is 90% of the value of the debt which Scott owes Peter.

6 Savers vs. Borrowers Let s imagine Scott was a good saver, too, and he accumulated $100,000 just like Peter. But Scott saw inflation coming. So Scott put his savings into an asset that rises with inflation. And he took Peter s loan.

7 Inflation Pickpocket Peter Scott Total Starting assets $100 Starting debt $0 Starting net worth $100 Share of goods/services 50% AFTER 90% LOSS OF DOLLAR Ending assets $10 Ending debt $0 Ending net worth $10 Ending goods/services 5% $200 $300 $100 $100 $100 $200 50% 100% $200 $210 $10 $10 $190 $200 95% 100%

8 Inflation Pickpocket Therefore, Peter spends his 70s cleaning tables at a fast food restaurant. Scott enjoys frequent cruises.

9 1970s & 1980s Revisited General inflation: 8.726% Housing inflation: 8.443%

10 Housing values vs. inflation 120 years

11 START $18,267 $18,267 NOMINAL $41,084 $41,084 $0 Property Mortgage Equity $0 Property Mortgage Equity REAL DOLLAR RESULTS $17,796 $17,796 $0 Equity declined 2.6% Property 1972 dollars Mortgage Equity 1972 dollars

12 START $18,267 $3,653 $14,614 NOMINAL $41,084 $28,437 $12,647 Property Mortgage Equity Property Mortgage Equity REAL DOLLAR RESULTS $17,796 $12,318 $5,478 Equity increased +237% Property 1972 dollars Mortgage 1972 dollars Equity 1972 dollars

13 YEAR INFLATION VALUE OF A DOLLAR % 10.3% 4.8% 5.4% 2.6% 11.3% 13.5% 3.0% 3.2% 2.2% 9.1% 6.5% 3.6% 7.6% 2.8% 11.0% 5.8% 1.9% 4.2% 6.2% 4.3% 4.1% 2.3% 1.6% $0.46 $0.24 $0.34 $0.32 $0.30 $0.58 $0.28 $0.51 $0.27 $0.42 $0.25 $0.39 $0.78 $0.69 $0.37 $0.64 $1.00 $0.85 $0.73 $0.38 $0.31 $0.43 $0.40 $0.35 $0.26 $0.94 $0.29

14 Change the names of the participants Savings & Loan Peter Industry Homeowners Scott

15 What happened to housing in the 2000s? Housing prices rose faster than normal (bubble). Millions of Americans bought as much house as they could afford. Using mortgages that would soar with inflation (adjustable-rate). Too many people gambled with an asset that does not historically beat inflation.

16 Buying an inflation hedge - GOLD Kate Jack Starting Assets $100,000 $100,000 Ending Assets $100,000 $200,000 Ending Value of a Dollar Ending Real Assets $50,000 $100,000 Change in Real Assets -50% 0% But what about after taxes???

17 Gold goes to $2,000 Kate Jack Starting Assets $100,000 $100,000 Ending Assets $100,000 $200,000 Profit $0 $100,000 Tax Rate 50% 50% Taxes Paid $0 ($50,000) After-Tax Assets $100,000 $150,000 Ending Value of a Dollar Ending Real Assets $50,000 $75,000 Change in Real Assets -50% -25%

18 Gold goes to $5,000 Kate Jack Starting Assets $100,000 $100,000 Ending Assets $100,000 $500,000 Profit $0 $400,000 Tax Rate 50% 50% Taxes Paid $0 ($200,000) After-Tax Assets $100,000 $300,000 Ending Value of a Dollar Ending Real Assets $20,000 $60,000 Change in Real Assets -80% -40%

19 Gold goes to $100,000 Kate Jack Starting Assets $100,000 $100,000 Ending Assets $100,000 $10,000,000 Profit $0 $9,900,000 Tax Rate 50% 50% Taxes Paid $0 ($4,950,000) After-Tax Assets $100,000 $5,050,000 Ending Value of a Dollar Ending Real Assets $1,000 $50,500 Change in Real Assets -99% -50%

20 Inflation is a wonderful form of taxation and people don t even know it. Imagine you have $100,000 with 10% expected inflation. You put your money into an investment paying 12% for a real return of 2%. You earn $12,000 but have to pay $6,000 in taxes.

21 Inflation is a wonderful form of taxation Result: $100,000 + $12,000 (earnings) - $10,000 (inflation) - $6,000 (taxes) = $96,000. A real loss of 4%. To maintain real purchasing power you need to earn 20%! $100,000 + $20,000 (earnings) - $10,000 (taxes) - $10,000 (inflation) = $100,000. No gain.

22 Inflation is a wonderful form of taxation But observe what happens to your $100,000 4% with 5% inflation. The mortgage falls by amount of inflation. You get a tax deduction for the interest. Gain $5,000 to inflation Pay $4,000 in interest Save $2,000 in taxes Net + $3,000

23 Inflation is a wonderful form of taxation Inflation starts rising to 12% Gain $12,000 to inflation Pay $4,000 in interest Save $2,000 in taxes Net + $10,000

24 Inflation is a wonderful form of taxation Inflation starts rising to 12% Gain $12,000 to inflation Pay $4,000 in interest Save $2,000 in taxes Net + $10,000

25 How does this help us looking forward?

26 Is the U.S. going to return to high inflation? It can be argued the 70s inflation was caused by: Vietnam war Oil embargo But we had the Baby Boomers entering the workforce by the droves, powering our economy ahead. Today things look very differently

27 Is the U.S. going to return to high inflation? We have costs of two wars (one has ended?) No oil embargo, but we compete for oil from major growing nations China, India (and they re not going away). The Baby Boomers are moving into retirement and those expenses (Social Security, Medicare) have to be paid for. With FEWER workers to cover the costs. Where will we get the money?

28 Printing Press Ben

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