“Inflation is bad. Everybody knows that.” There are those words again: “everybody knows.” Any time I hear them, my defenses spring up because this phrase is usually used when the wool is about to be pulled over someone’s eyes.
Is inflation bad? Should the discussion be about whether inflation should be no more and 2% rather than no more than 3% as it is now or are we debating whether inflation should be “low” or “low”? Let’s explore this.
I don’t want to go all economic theory on this topic, mainly because I don’t know the economic theory. I am approaching this as an ordinary citizen. Let’s start with a thought experiment: what happens if inflation gobbles up half of your purchasing power? Immediately, you would really have to tighten your belt just to afford food and utilities, the prices of which will rise rapidly. But some of your expenses are fixed, like your mortgage payment, so you could deal with this disaster most probably. Usually, there is pressure on wages and interest rates to “keep up with inflation” and those adjustments result in what? They result in your biggest expense, your mortgage, becoming a smaller and smaller fraction of your budget. The inflation caused some problems but also had some positive offsets.
Now consider an example of a rich person, living off of assets (stocks, bonds, interest, etc.). If inflation gobbled up half of his purchasing power, half of his accumulated wealth basically disappears. Whereas his wealth could have bought 2X quantity of goods and services, it can now only buy X quantity of goods and services.
So, who do you think is more “anti-inflation?”
Yep, you got it in one. But why do rich and poor alike decry the effects of inflation? In one word: propaganda. Rich people really, really hate inflation because it devalues their accumulated wealth, of which they have a great deal. Poor and middle class people should not hate mild inflation because it devalues their debts. The propaganda, though, focuses in on the effect of inflation on “people on fixed incomes,” especially old pensioners. (It is easier to frighten old people.) And you will notice that they only focus on the immediate impacts, not on the corrections that take place over time.
“Rich people really, really hate inflation because it devalues their accumulated wealth, of which they have a great deal.
Poor and middle class people should not hate mild inflation because it devalues their debts.”
When inflation is higher, interest rates tend to go up because who would invest in anything that has a 3% return when inflation gobbles up 4% of the total, for example. (Currently nominal interest rates are near 0% and my bank accounts are paying about 1.2% when I last checked. There is no inflation to speak of at the moment.) Interest rates were in the 20% range when Jimmy Carter was President, for example. That makes it hard to get a loan, but remember we are talking about pensioners living off of interest on savings, etc. If our pensioner is getting Social Security, automatic inflation adjustments kick in and payments go up.
This is a little like the little girl whose cat is “stuck in a tree!” and she must get a fireman or a neighbor with a ladder to get it down. But, have you ever seen a cat’s skeleton in a tree? Or a cat, dead from a fall, at the base of a tree? No? Neither have I. The same skepticism needs to be placed upon the utterances of the “inflation hawks.”
If you hear someone warning of “Inflation! Inflation! Danger, Will Robinson,” ask yourself if they represent the interests of rich people or poor people. Is this person a stock broker, a banker, an economist, someone working at Fox (sic) News, etc? Then they more that likely represent the interests of rich people and what they are saying is probably at least >50% propaganda and <50% realistic.
“But you said you don’t want to invoke economic theory and economic theory says that inflation hurts economic growth,” the economic theorists insist. That’s interesting because those very same theorists have been trying to prove that assertion for decades now and, well, <sound of crickets>. One economist claimed that the data show that inflation as high as 40% doesn’t hurt economic growth. So, if you hear an economist claiming that “inflation hurts economic growth” you’ll know immediately whose interests he represents (and they ain’t yours).