Perspectives on money

[Scott 2]

When yields rise, a previously purchased bond, offers a below market yield. Holding it to maturity doesn't change that. A bond fund reflects the loss via real time valuations, but the individual bond is also in a diminished position. IIRC the bond fund investor automatically reinvesting dividends experiences performance very similar to the individual bond holder, assuming similar duration and risk.

as long as your purchases are similar to the average consumer's (as polled by the government), purchasing power of your money is guaranteed.

I like this approach because there's literally no volatility in it

Again - I don't know how Polish inflation protected securities work. In the US though - your only promise is a yield adjustment based upon a very specific CPI metric:

https://www.bls.gov/news.release/cpi.t01.htm

The metric changes definitions:

https://www.bls.gov/cpi/additional-reso ... hanges.htm

It also allows for substitutions in the basket of goods over time. It's a limited guaranteed, subject to relative valuations. The government has strong incentive to make low inflationary assumptions. More on the limitations of CPI:

https://www.investopedia.com/articles/0 ... eindex.asp

So while the inflation protected security will track predictably with the specific metric, I say there is still volatility. Especially if you convert units from the domestic currency to another measure of value - ounces of gold, or some other commodity.

With the US dollar being the global currency, we've been somewhat insulated from that. But I do not assume it will always hold true.

[jacob]

The biggest generalization of all these takes is that they mostly fall into two categories:

1. Money as stock.
2. Money as flow.

It is also interesting if not obvious that one does not exist without the other. Money as stock makes no sense unless it can flow(?). Conversely, flow without stock makes it very hard to match up the "impedance" of the transaction system. The invention of money was a solution to that problem.

In any case, what was interesting to me in the OP quote was the perspective of thinking of what is otherwise a flow perspective (credit card usage) was treated in a stock perspective (credit limit = my money).

[7Wannabe5]

In any case, what was interesting to me in the OP quote was the perspective of thinking of what is otherwise a flow perspective (credit card usage) was treated in a stock perspective (credit limit = my money).

I don't think this is so odd given that credit issuers are increasingly looking at a wider variety of data related to human capital when issuing credit or establishing credit limit and/or interest rate, especially given the fact that credit may be issued to students with no current flow of earnings based on their field of study. A counter-example would be my current older female landlord's bitterness about not being able to get a mortgage from a bank when she was younger simply because she was female.

Also, this is more like how many/most businesses operate. Although, of course, a business would be more likely borrowing towards a venture planned to be more lucrative due to their specialization in a less efficient market than the financial market. For simple example, when I was engaged in retail arbitrage, I could have made more money using a credit line if I was willing to expand my field and work more hours. Obviously, W2-oriented individuals also make use of credit in this manner on occasion. For example, buying a new suit on credit for job interview or a new used car when higher paying job requires longer commute.

[suomalainen]

As to Scott’s point, I would differentiate price and value. While the price of an existing bond fluctuates on the secondary market over time after issuance, the value can remain the same as at the issuance date to a hold-to-maturity buyer, i.e., you buy a fixed income bond knowing its price (if you were to sell) will fluctuate (i.e., interest rate risk), but if you are a hold-to-maturity buyer, mark-to-market prices are entirely irrelevant and you don’t have to mark to market. Liquidity of a bond in a secondary market is therefore an optional feature and not a bug. Whether you “feel” the volatility is I guess up to you, but as you get closer to maturity, the price will converge to the principal amount and no value is lost.

[Scott 2]

The principal amount will be returned, in the predetermined amount of government currency. What that now buys, is not stable. One can zoom way out, accepting long durations and macro measures of inflation as absolutes. But they are not. And currency risk remains.

Underlying that model, is continuously changing relative prices. At the level of the individual consumer, both in duration and scope of expenditures, the volatility is present.

Measuring one's wealth in a single asset, obfuscates the underlying fluctuatons. $1000 is not an absolute measure of wealth.

[suomalainen]

Not sure I understand your point. Nihilism? Nothing matters?

Nothing is absolute but you gotta make SOME assumptions to even bother living another day. We’re all born into a biological world in the arrangement it happens to be in at the time. Financially speaking, government bonds are the “safest” asset out there given the violence inherent in the system. Monkeys gonna monkey.

[jacob]

The principal amount will be returned, in the predetermined amount of government currency. What that now buys, is not stable.

It's as stable as the CPI(*). At maturity I-bonds return the principle + the cumulative known interest payment + the cumulative inflation adjustments. TIPS pay out the interest (it's been 0% for many years) and the inflation adjustment on an ongoing basis. If you reinvest TIPS as they pay out, you get the ~same result.

(*) With I-bonds and TIPS, you are for all practical purposes buying the CPI. The only argument is whether CPI fluctuates relative to whatever else. However, $100 of CPI now will likely afford a similar relative level of "ordinary/representative consumption" a hundred years from now as it does now. Of course, if your personal basket of goods differ substantially from the CPI basket (as it may very well do in a very frugal household), the CPI may not be the best conservation of value.

Compare the Pugsley's Alpha Strategy where one literally fills a warehouse of goods to be used later. Here you really know exactly what you're getting. An Alpha Strategy from 100 years ago would likely contain a bunch of now unusable things like horse shoes, vacuum tubes, etc.

[loutfard]

Compare the Pugsley's Alpha Strategy where one literally fills a warehouse of goods to be used later. Here you really know exactly what you're getting. An Alpha Strategy from 100 years ago would likely contain a bunch of now unusable things like horse shoes, vacuum tubes, etc.

This reminds me of the couple still having sugar cubes from 1938 with their tea in 1998...

[Scott 2]

Not sure I understand your point. Nihilism? Nothing matters?

I was very attached to my net worth high score, watching it climb, because math. I thought it offered certain security. After stopping work, that all changed.

Recognizing that a dollar is relative, helped me accept fluctuations. I started think of decisions as trades between relative values, continuous opportunities for micro-optimization.

I think in terms of - how are others pricing this choice, at this time? How will it change in six months? Is there another path to the same outcome, that leverages better relative values?

Financial capital became less of a security blanket, more of a tool. I think the understanding is a precursor to using capital as a fulcrum, creating the leverage that produces massive wealth.

That is not a step I've attempted. But I observe, once someone masters creating leverage, it's a permanent mindset shift. Those are the people who hit a seemingly impossible number of home runs. It becomes their habitual way of existing.

MMM bridged this gap. At the extremes, it's what the tech oligarchs are crushing.

[suomalainen]

Ah. The hardness of your position (i.e., how it comes across) is derivative of that forceful shift of your perspective. I agree that there's no absolute measure of security, financial or otherwise. I think it was @ego who has been hinting at a forceful shift of his own perspective after a seemingly healthy friend died suddenly in relative youth. I might be misremembering the details, but that kind of idea has been on my mind lately as well.

Nevertheless, I think there's a balance to be drawn between the fear of insecurity (which is kind of how your first posts read) and its embrace (which is how this last post read):

Death is the epitome of the truth that in each moment we are thrust into the unknown. Here all clinging to security is compelled to cease, and wherever the past is dropped away and safety abandoned, life is renewed. Death is the unknown in which all of us lived before birth.

Or

The whole problem of justifying nature, of trying to make life mean something in terms of its future, disappears utterly. Obviously, it all exists for this moment. It is a dance, and when you are dancing you are not intent on getting somewhere. You go round and round, but not under the illusion that you are pursuing something, or fleeing from the jaws of hell.

In the investing context, it is all a game. You don't play it to win; there is no winning; you play it to play it.

[thef0x]

Business-y phrases:

1. "Cash-flow is king"

2. "You gotta spend money to make money"

3. "This purchase is a capital investment".

None of these are necessarily bad ideas, but there are reasons to break each of these rules:

1. Appropriate debt is required for many large scale business ideas (think telecom infrastructure).

2. Too often, looking to money as a way to grow a business creates a very fragile structure, e.g. increasing cost of customer acquisition to get more customers ruins margins, and instead asking "how can I increase customers while reducing expenses" can be far more fruitful.

3. The ROI on that investment is what matters, not that it might contribute *some* value to a future purchase price.

I hear a lot of these phrases in VC and real estate land.

[delay]

Money is a claim on future goods. People are naturally conservative and like safety. Therefore there are more savers than spenders. Society counters this by offering incentives to spending and discouragements for saving. Despite this, the savers eventually "win", claims on future goods abound, and nobody is willing to work for more claims. At this point a cleaning of claims is required, a new form of money emerges, and the cycle starts again.

ERE discourages saving by showing the hardships involved. This helps to prolong the lifespan of the cycle we live in.

This planet has – or rather had – a problem, which was this: most of the people on it were unhappy for pretty much of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movements of small green pieces of paper, which is odd because on the whole it wasn’t the small green pieces of paper that were unhappy.

Thanks for bringing that in! I love the mixture of taboo breaking and absurdism.

My mom keeps fixing her house like she is going to live forever (which is mostly good).

Sounds like the mindset where one is visiting Earth for a short while. It is one's duty to take good care of the parts assigned to you. This way of thinking about life seems to have good results.

[conwy]

It's as stable as the CPI(*). At maturity I-bonds return the principle + the cumulative known interest payment + the cumulative inflation adjustments. TIPS pay out the interest (it's been 0% for many years) and the inflation adjustment on an ongoing basis. If you reinvest TIPS as they pay out, you get the ~same result.

(*) With I-bonds and TIPS, you are for all practical purposes buying the CPI. The only argument is whether CPI fluctuates relative to whatever else. However, $100 of CPI now will likely afford a similar relative level of "ordinary/representative consumption" a hundred years from now as it does now. Of course, if your personal basket of goods differ substantially from the CPI basket (as it may very well do in a very frugal household), the CPI may not be the best conservation of value.

Agree very much with this assessment.

On the topic of "representative consumption" - it's certainly possible, even likely, that constituents of the CPI basket will shift and change over time. However it seems unlikely (though of course possible) that any one constituent would dramatically come to outweigh the others in the basket or that CPI as a whole would persistently and dramatically undershoot one's personal inflation.

Certain goods/services can experience big fluctuations but long-run things stabilise. You find a substitute or a way of doing without the good/service, the market produces a substitute, the price regresses to the mean, etc.

The benefit of CPI adjustment isn't so much that it perfectly tracks your own spending but that it gives you some form of reliable inflation adjustment based on some framework, allowing you to maintain purchasing power at least within that framework. This seems definitely the most practical way of hedging inflation without taking (much) risk. It's still up to you as an individual to figure out how to optimise your lifestyle around whatever current prices are and try to use the framework as best you can. CPI is very imperfect but it's better than nothing.

I would never put all my money in ILBs of course - diversification into stocks, some nominal bonds and interest-bearing cash should help smooth out any small deviations of my personal spending from CPI.

[jesmine]

From an ERE perspective, CPI is irrelevant insofar as it tracks items you would never expect to pay money for. If one was to compile an ERE CPI number, what would be included in the basket of goods and services?

1.Energy (oil, propane, diesel, electricity, natural gas)
2. Food (85% staples, 15% other)
3. Services (insurance, limited health care)

Hypothetically, USA CPI could run at 4% and the same time an ERE CPI would run significantly lower. It's possible an investment in USA oil/gas industrials would track inflation quite well.

[zbigi]

It's possible an investment in USA oil/gas industrials would track inflation quite well.

IMO it's far more risk. Even in the US, someone like Bernie might win the elections some day and slash big oil's profits. Not to mention possibilities of corporate ineptitude and mismanagement (Kodak-like) or fraud (Enron-like), the risk that the entire stock market will go down by a lot (because of e.g. changes in monetary policy, generational changes such as boomers selling their stocks etc.). There're just so many risks in stocks.

[2Birds1Stone]

Some of those ERE staples have/are going up faster than the official CPI metric. Energy and food costs have exploded in recent years while new flat screen TV's and clothes have gone down in price.....everyone needs to do a pulse check and figure out their own basket of goods.

The other missing thing from your list would be housing, whether ownership and all that entails or the costs of living at someone else's place (rent or otherwise). This has also gone up quite a bit beyond the CPI in many areas.....though not everywhere.

[jesmine]

There're just so many risks in stocks.

Agreed. One of the downsides to the characterization of the ERE lifestyle as a financial strategy is that it has attracted those whose lives are heavily financialized. I think this was designed as a feature of ERE, not a bug. Whatever the case, these heavily financialized types typically fall prey to the risk = reward paradigm. The risk/reward of $5,000 in the S&P would vary considerably from person to person. Simply put, people value the same $20 bill differently.

If you have ANY savings, staying out of financial markets is not an alternative because cash is also a market position. Then there's Pugsley's Alpha Strategy. You name the strategy. There's someone out there is pursuing it profitably. I know Amish people who have a tamped earth kitchen floor and make very "poor" financial decisions. Yet, they have the same view of money that the wealthiest in the country do: It's on tap. There's plenty there and whenever you need more, you open the valve. Regardless of the baseline, leaving "the valve" open for long enough establishes a new baseline for that particular lifestyle.

The trick may be to continually evaluate what your baseline is and adjust accordingly.

[loutfard]

Some of those ERE staples have/are going up faster than the official CPI metric. Energy and food costs have exploded in recent years

Food is just one of many proxies for fossil fuel prices. Just observe the situation in Europe after February 2022 for an example. Looking at it that way, fossil fuel miners might be a very useful inflation hedge.

everyone needs to do a pulse check and figure out their own basket of goods.

The other missing thing from your list would be housing

ERE can be used as an impressively coherent inflation defense strategy. ERE probably _is_ the most effective inflation defense strategy.

[Qazwer]

Money (price) is a measure of how much society values something (information - econ view)
Personal actions (earn “purchase money” or spend) on money occur when the marginal personal value is different than the societal average

[Scott 2]

Circling back to the OP post - I called to close a credit card today. There was no option to bypass the automated greeting, including:

"You have $XX,XXX of purchasing power left on this card."

No wonder consumers see a credit limit as an asset. I admit, it made closing the card feel like losing something. I ran a quick total on my remaining open credit. I had a moment of self doubt.


I see that prompt in two ways:

1. The bank is predatory. They are normalizing a broken financial mindset.
2. The bank prioritizes efficient customer service. The greeting immediately delivers what the majority want. Most see their credit limit as a key asset.