Inflation, The Price of Time, PSA for HSA

Global Inflation

Over the past week, the real-time US inflation tracker Truflation has dropped another .5% to 3.36%. The UK is still stuck with high inflation, with official numbers at 10.1% and the Truflation figure at 15.28% (down from 22%). The bad spots are still Argentina with an eye-watering 109% inflation rate and Turkey at 44%. The rest of the world’s inflation is trending down steadily with India, Canada, Brazil, Japan and many others below 5%. Broadly speaking, this is all good news as the goal for the past year has been to get Covid inflation under control, and that’s happening slowly but surely.

The Price of Time – By Edward Chancellor

This book has been circulating recently thanks to the positive press by Stanley Druckenmiller. The book provides a detailed exploration of the history of borrowing and the social and philosophical debates about the usefulness, practicality and morality of charging interest rates.

My main takeaway, so far, is that markets and societies cannot handle interest rates below 2%. Sub 2% rates create dangerous imbalances as the wealthiest borrow as much as possible at cheap levels, equities grow quickly, and anyone stuck earning the 2% or less is left unhappy with the level of compensation. ****Additionally, there has been serious financial pain every time rates have come back from below 2%, like we are going through now. For a perfect representation of this, look at TLT (20-year treasuries). TLT has lost -40% of its value from the peak due to rate rises alone. This is what many bank balance sheets look like.

If there’s any takeaway that we can use going forward as a society, it’s that cutting rates below 2% will always lead to serious instability. I think the reason sub-2% loans don’t work is they just cannot make money for the lender. It’s all risk and no reward, as we saw with SVB and First Republic, who took on that trade because it was the only one available to them at the time.

I spoke to a friend who recently secured a 5.5% commercial loan for his new hotel. 5.5% is not too high or too low. It leaves plenty of room for profit margins as well as an ok return for the lender. Rates have to be fair for both parties for markets and economies to function. Current interest rates will fall from here, but they do not need to go much lower for the economy and markets to function properly.

PSA for HSAs

HSA stands for Health Savings Account. For 2024, the IRS is raising the limit to $8300 for a family and $4150 for an individual. If you’re older than 55 you can contribute an extra $1000 each, meaning a couple could contribute $10,300.

There are a lot of tax benefits in an HSA. This is a tax-deductible contribution, meaning it reduces your taxable income. You can grow the contributions tax-free in an investment account. You can spend the balance on health-related expenses tax free. Everyone eventually has health-related bills and they’re usually fairly expensive.

Please note that we can assist with HSAs for current clients and this is not to be used as tax or financial advice. Please consult with a tax advisor before you act on any of these statements. You can read a recent WSJ article on it here if you’d like to see more.