A few years ago, at a Cato event, Your Survival Guy and Gal had the great pleasure of sharing a table with billionaire investor Jeff Yass, among others. (You can read about my experience dining with Yass here). Yesterday, Yass wrote an excellent editorial in The Wall Street Journal: “Why the Wealthy Are Numb to Inflation: Asset appreciation eases the impact of price rises, but only in the short run.” He writes:
Left-wing commentators and economists are upset that the Biden economy isn’t getting the credit they say it deserves. Especially frustrating to them is that polls show working-class voters are at the front of the pack in calling the economy subpar. The reason is that working-class voters by and large aren’t fooled by inflation distortion, while wealthy asset owners are more likely to be deceived.
Why? Try this example. A wealthy person has $1 million in the stock market, and inflation over the past few years has taken it to $1.2 million—a nice $200,000 gain. She spends an additional $10,000 a year on rent, which has gone from $50,000 to $60,000. Inflation, she thinks, has cost her $10,000, but it’s only a minor nuisance as she’s still gotten a healthy $190,000 gain. What she ignores is that she’ll have to spend an extra $10,000 every year, and 20 years’ time (20 is the approximate price-earnings ratio of her stock-market holdings) will wipe out her entire gain. She would be under no such illusion if she went to buy the home of her dreams, which used to cost $1 million and now costs $1.2 million.
Take a counterexample. A working-class person has little savings and little in the stock market. He lives paycheck to paycheck. He used to make $50,000, and now he makes $60,000. But at the end of the year, he has no additional savings. He lives as he always has but pays more for rent, gas and other utilities. He’s treading water and feels the pain. Much to the chagrin of left-wing economists, he doesn’t capitalize his gains and avoids capitalizing his future losses. That’s because he has no investments that trade at 20 times earnings to capitalize.
The wealthy are often fooled into thinking their gains are permanent and their losses are temporary. Unfortunately, for the mostly Keynesian-minded economists at the Federal Reserve, this trickery is a feature, not a bug. High asset prices encourage the wealthy to consume or invest more. The goal of stimulus is to get them to do exactly that, even though in real terms they aren’t any wealthier.
This is the Fed’s fatal conceit: that it can manipulate its subjects because it knows more than each individual does about his own circumstances. That logic is a fallacy and must end.
Action Line: Make sure you have a defense plan against Bidenomics. If you think Kamala Harris will be better, you’re sadly mistaken. Prepare your family and your portfolio accordingly. When you want to get serious about preparing your family, click here to subscribe to my free monthly Survive & Thrive letter. When you want to get serious about preparing your portfolio, let’s talk.
