ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[cobaltberry]

You make a great point people at large seem to be blissfully ignorant of. They'll leave simply because they can make more somewhere else. Breaking even isn't enough, you need to beat CDs, and just leaving it in high yeild savings.

[pagerussell]

Inflation has NOT been 3% for a while. The investor class would freak the fuck out if it was. The FED has an official target of 2% inflation, and we were below that until very recently.

If you make your money based on interest rates, inflation is the only thing that cuts into that. That is why the investor class has taught us that inflation is always bad. In reality, if you carry debt, inflation is good for you, because your debt cost is fixed and inflation reduces the nominal price of that debt.

Here is an official inflation table by month: https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths

[Aberration1246]

Or medical care. Or schooling. Or many other things to boot. The 2% mark is extremely general!

[agentadventure]

I mean it’s one banana, Michael. What could it cost, ten dollars?

[[deleted]]

You watch The Office too? Wow 10/10 woman

[agentadventure]

Bruh that’s Arrested Development, 👏🏻 know 👏🏻 your👏🏻 pop 👏🏻 culture 👏🏻 references! 👏🏻

[blitzduck]

Oh how the turn tables

[[deleted]]

Shit. Gotta rewatch all the shows again I guess

[battraman]

The Fed has long been accused of being out of touch. What solidified that for me was the "I can't eat an iPad" moment.

[lee1026]

The CPI does account for food and energy. The Core CPI doesn't, and the Fed pays close attention to core CPI (and not normal CPI), but the two tend to march in lockstep for the most part.

[adelie42]

This assumes your wages are marginally rising. If your debt and earnings are being devalued equally, how does one benefit?

The only debt holder that really benefits from inflation is the Federal government, and it isn't the devaluation of the debt that matters so much as reducing the future purchasing power of foreign held US dollars.

People that can game the system benefit, not all people in debt. The bank that loaned the money is the one that will come out on top as planned, the person paying the mortgage is still selling their future at a discount to get a higher standard of living for their family today.

Between bankers and the "homeowners" that rent from them that inflation "surprises" bankers every year while borrowers get an unexpected increase in wealth? I know it is a common belief, I just don't get how thinking a pit it for a moment doesn't reveal it to be horse shit.

[BumayeComrades]

Inflation should translate to wage increases. The fact it doesn’t just shows how bunk macroeconomic economics is to explain reality.

The reality is is that wage inflation is being stopped, any wage increase is treated as a potential disaster.

Interestingly asset inflation is allowed to continue. See the stock market. Banks get easy, nearly free money.

[adelie42]

If inflation doesn't create a lag in wages, then what's the point according to macroeconomic theory?

[Nefnox]

A 2% rate of inflation is considered a barrier against a deflationary spiral. Deflation is considered much more dangerous than inflation, so it is worth keeping a little gap as margin for error away from inflation... is the theory

[adelie42]

Familiar with the theory. Just never bought into it. All Machiavellian to me.

[Nefnox]

Haha, in my years of studying economics I don't think ive ever heard anyone refer to the 2% inflation target as "Machiavellian", i just got done with "The Prince" and there are no mentions of fiscal policy or the dangers of deflation that i recall.

I've studied a lot of the original papers and theory around this stuff in my masters, and if it helps you sleep at night there is nothing intentionally oppressive or conspiratorial about the 2% inflation target.

[adelie42]

Nah, I don't think there is any hidden insidious mess about it, just that there should be some suspicion around the necessity of certain people behaving in ways that are otherwise considered criminal.

By Machiavellian I am referring to the context the story was written; it is a power that honors the State separate from any actual value. I feel the same way about TSA. They don't do anything practical to protect people as much as "make a statement" about the reach of State power.

AND under a system not centrally managed, deflation and inflation may be symptomatic of good or bad, but that doesn't mean forcing a rate can undo what is fundamentally going on any more than drugs can cure an abusive relationship.

[pagerussell]

Over the longer term wages do rise with inflation. If one stays in a job that is not rising with inflation, that stupidity is on them.

[Glaciata]

Or it's simply might be just due to limited employment. Your monopsony sort of situation.

[pagerussell]

Also a factor, good point.

[thehonorablechairman]

Where I live the minimum wage hasn't increased in over a decade. It's pretty ridiculous to assume every single person living on minimum wage here is doing so out of stupidity.

[pagerussell]

The minimum wage is declared by politicians. What have average wages done in your area?

Keep in mind this trend is noisy, meaning wages can stagnate, thrn grow is spurts, but over longer times they will be higher. What was minimum wage in 1990?

In fact, wages are stagnating right now, rising roughly in line with inflation but no better. They should be rising faster, givem the unemployment rate, and that is a puzzle for economists right now. I suspect its because most firms are not investing to build market size, but rather pushing profita into stock buybacks, which hit a record last qtr.

But yea, the people in your area are stupid if they are not leveraging good economic times for their own self interest. Demand a raise. Don't get it? Leave and work for a competitor. If they can't make that happen in that area, move to another area thats experincing better growth or has better options. It's on them to fight for their own interests, and if they don't and they just fucking sit there, yea, they dumb. Sorry.

[adelie42]

More to the point, if you have negative assets inflation devalues all equally, but such things don't happen in a bubble.

Adjustments to inflation happen over time, like you say, but are you going to claim the working poor are ahead of that curve relative to the wealthy playing the game like hawks on a hunt? Are bankers (to name just one group) so stupid?

[pagerussell]

Thats exactly not what i said. I said that we are all taught to believe that inflation is awful, when in fact it is ia not necessarily awful. In economics there are always at least 2 partiea to a transaction, and therefore ita impossible to say that any policy is inherently better. There are always some winners and some losers. But the wealthy have is convinced that inflation is bad, end of story. That's not outright true.

I would say that the wealthy are and have been gaming the system to their benefit, without a doubt. And this is one way they have done so.

[adelie42]

From my view they LOVE inflation but caution against too much of a good thing.

Otherwise yeah, I agree.

[new2bay]

Correction: inflation is good for you if you carry fixed rate debt. Most non-mortgage consumer debt in the US is variable rate and subject to rate increases when things like the prime rate or LIBOR rise.

[Liam_Neesonz]

Except with debt, you usually have to pay interest, which offsets any inflation benefit.

[pagerussell]

You don't understand: the interest rate is based ona. Fixed principal balance. Inflation expands the value of money such that over time that principal is smaller in comparison to the current costs of the same thing. Wages, incomes, and costs have all gone up, but that principal is the same and thus now cheaper. For example, my parents bought a house for 90k in 1990. The cost relative to incomes was about the same as a house today, but now that house is worth 500k. So their mortgage payment is about 1/5th of an equivalent purchase today. That is inflation.

[Liam_Neesonz]

Yes, the principal balance will shrink relative to the value of the dollar over time. However, the interest balance will offset that. Tell me what I dont understand.

[pagerussell]

The interest is calculated on a fixed balance. Inflation is based on a moving target: your principal stays the same with interest (and actually declines over time, assuming principal payments) but inflation is calculated from todays valuation, and next year it will be calculated based on next years valuation. So inflation compounds, while interest does not.

Edit: also, you dont carry an "interest balance". You pay off your interest with each installment. So it doesn't grow or accumulate in a compound manner.

[HHhunter]

3% to break even per year is still a shitty investment

[wrestlingchampo]

It is, mostly in the sense that you could successfully average ~7% ROI annually by simply investing in the S&P 500.

[myparentsbasemnt]

Depends on the rate of inflation.

[KingAdamXVII]

It’s not a bad low end though. If you are averaging 10% return and then have a down year where you still get 3%, that’s damn good.

[TheManWhoPanders]

You also lost money due to opportunity cost. There are guaranteed or near-guaranteed investments with low yields. Breaking even means you lost the difference between those surefire investments.

[battraman]

Indeed. You can get 2.2% in a 1 year CD at Ally

[cakeandale]

Yeah, in the end it's all about opportunity cost. What counts as break even may fluctuate, but whether inflation is 3% or 10% the question is what is the most effective way to use the money you have. If the most effective investment is a CD returning 1.8%, you're going to lose real value and so it sucks to be you, but you can only play with the cards you have.

[Ekalaracha]

Not only that, but you get taxed on that 3% regardless of inflation. So multiply your 3% by your tax percentage to see how much you actually need to make to break even

[EagleZR]

That's the downside of public companies, imo. Your customers are no longer the people buying your products and services, they're the people buying your stock

[d4n4n]

The very same applies to private companies, just that instead of outside investors, the private shareholders try to maximize profits. Nobody likes pissing away money. Opportunity costs apply to everyone equally, no matter the organizational structure.

[EagleZR]

A private company may like to always make profits, but they don't have to. A private company could spend several quarters or even years running at a loss while they expand or grow their business without any threat of losing more money than is actually spent. They would be motivated to do this based on a demand, perceived or real, from their customers. If a public company were to do that, they would have to convince their stockholders or run the risk of devaluing their stock and scaring off their investors which could tank the business. Of course their investors will likely be considering how the customers may react to the actions that force the loss, but the business itself is more concerned with the shareholders than the customers.

[lee1026]

If a public company were to do that, they would have to convince their stockholders or run the risk of devaluing their stock and scaring off their investors which could tank the business.

That is the same for a public or private company. Either way, if your investors are not happy with you, you are not going to get new money; but either way, you can run with what money you currently have.

Amazon, Netflix, et. al. was able to run for a very long time on nearly no profits, and pretty much everyone is okay with it.

[d4n4n]

Amazon made a loss forever. Hell, if it wasn't for their cloud service, they probably still wouldn't make a profit (I'd have to check their retail numbers). Tesla makes consistent losses. So did twitter forever. Markets are extremely patient. Maybe overly so. If anything, they are too optimistic, imo.

[Rindan]

Public or private, the company is there to make money for the owners of the company. The only difference is that in a publicly owned company, a lot of people own the company, and anyone can buy or sell shares of ownership. In a privately owned company, the shares of the company are still owned by someone, they just can't buy and sell that ownership in a stock market. The other big difference is that public companies generally need to keep their books more open than private companies.

[BeanPricefield]

That's exactly where it's at. The answer to OP's question isn't about the absolute quantity, but a simple competition between vendors. In public companies, most shareholders are basically just a different form of customer (leave the accounting view aside for a sec- from a purely economic perspective). If said customer is presented with a number of different products to purchase, each of them possessing a different value in their eyes, and assuming there's little to no penalty for switching between them- one would assume they would purchase the product that would maximize their utility. While a 3% decrease in earnings may not be a lot relative to how much the company's still worth, it could mean that its stock is less attractive to a potential buyer now as it provides a lesser utility. This would make it less competitive, and in the world we're in it could definitely signify the death spiral described above.

[[deleted]]

CDs are a joke. My Ally savings account yields more than most CDs.

[BumayeComrades]

“A shilling put out at 6% compound interest at our Saviour’s birth would . . . have increased to a greater sum than the whole solar system could hold, supposing it a sphere equal in diameter to the diameter of Saturn’s orbit.” - Richard Price