Inflation, living costs and divergence between EU and US

Reading articles like the below, I do wonder about the risks of early retirement and whether inflation (and wage inflation) is maybe an under-appreciated risk. I was in France at the weekend and prices were very high - to an extent, I wondered how those on a local salary could even survive.

“I accepted an offer at $85,000. I thought it was good. In reality, I’d been had,” said this young graduate of the HEC business school and mathematician. In the meantime, this data scientist has changed jobs several times, moved to New York and now earns almost $400,000 a year, including bonus shares.

“In France, I could never have seen my salary quadruple. The opportunities are fantastic,” he said. "When I come back to Paris, I feel like I’m super-rich. When I go out with my friends, I pay the bill.

I believe this is why Mr Draghi is “allegedly” proposing that wages in Europe need to go up.

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Investment stocks is really good against inflation.
If there is inflation, the value and revenue of the company will increase.

The main issue is if you are located in a country or region with high inflation than global average.

I feel that this as almost inevitable now - prices have gone up and may now well be ingrained and the next step is for wages to increase in response to this (or recession to come to reset everything).

Yes I’m in the US for a business trip this week and I can confirm that costs are very high - even from a Swiss perspective.

I strongly doubt I would be able to survive for a long time here with the relatively frugal FIRE plan I’m following :thinking:

That‘s why a home bias can help. Hedges in part against local inflation.

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I am always suspect when these world wide rankings rank swiss cities at top places in cost. I just refuse to believe that Silicon Valley places and the likes are not even more expensive.

I haven’t been there in a while. One reason could be that most major US cities are huge in area, so are the differences between different neighborhoods.
And while you have more very high paying jobs in the US compared to Europe, you also have a lot of very low paying ones.
So on average, Zurich or Singapore might be more expensive than San Francisco, whereas a visitor looking for a room and a restaurant in a popular area experiences the opposite.

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I feel the same way. It obviously depends on the model used, and that lends to a lot of bias. For example, these comparisons often do not account for taxes and mandatory social insurance. It is true that there are still a few EU capitals where average rents are around 50% lower than, say, Zurich or Geneva, BUT taxes and social security can knock out up to 40% of your income.

My basic budget in Zurich, for myself and three kids, is around 4000 francs a month, including taxes and social security contributions. Would the same standard of living cost me less in Berlin or Rome or Madrid, accounting for taxes and social security? Not likely. Until there are studies with real functional models that account for all factors, these comparisons will not be very useful in the real world.

The one comparison that I do find useful and relatively accurate in spite of its simplicity, is the Big Mac Index.

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How do you manage that? :sweat_smile:
Own home I suppose?

No, I’ve just been lucky with finding affordable housing (1700 francs for 4.5 rooms). Otherwise just basic frugal living. Granted, my family situation means that my taxes in Zurich are exceptionally low.

In most other major European cities a good chunk of that would go to taxes and social security (accounting for my family situation), so I’d be left with around 2000-2500, which would get me a similar living standard to the one I have here in Zurich. I’ve researched this a fair amount because moving elsewhere in Europe has been a consideration for family reasons.

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This is a topic that I was thinking of for quite some time actually. In my view, US Salaries and Cost of Living don’t make much sense anymore. I think that this will lead to a combination of three situations:
1) The USD FX will collapse as it simply needs to go down to level set US Salaries and Cost of Living. Given the (perceived) low share that imported goods in US CPI, this does not nescecarily call for massive inflation. Other than Energy, John Sixpack won’t face a major challenge if the USD collapsed by lets say 40-50%
2) Non-USD Stagflation: Salaries will heavily increase outside of the USD Zone whilst economies are in trouble; this would probably be less fun for all of us
3) Deep USD Recession: I don’t see this happening as the FED does all it can to shift these risks towards the first scenario

So long story short, there are two learnings for me:
i) DO NOT take on excessive USD Exposure. The risk of the USD going down to CHF 0.5 in the next 3-5 years is there
ii) DO NOT take Duration risk. If we indeed face stagflation (or even just inflation) until salaries are again in-line with USD Salaries; this will be brutal for Bonds

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On a lighter note, this made me remember this oldish live stream from a FED meeting.

Well, last time I checked, the US was running a fiscal deficit of 7% and debt at 120% of GDP. Interestingly, someone must still be buying their bonds as the Fed is now actually reducing its treasury holdings.

This may end very badly but then again, I have thought that before… perhaps those concepts apply to inferior countries only.