Why the Wealthy Are Numb to Inflation – WSJ

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.

via www.wsj.com

Jeff Yass