11 ms·

That harm does not capture the reduction in debt caused by inflation though. Inflation benefits debtors over creditors, even if it also effectively lowers wages

by jolux 5y ago

That harm does not capture the reduction in debt caused by inflation though. Inflation benefits debtors over creditors, even if it also effectively lowers wages.

seanhunter 5y ago
That's true although if you're spending all of your income on debt service and basic living costs, then reducing the real value of the nominal of your debt doesn't in fact increase your standard of living at all. Theoretically you're better off, but all of your income still goes on debt service and basic living costs. The basic living costs have gone up in nominal terms while the debt service is still the same. It's depreciated in real value but the nominal is still the same.
- dannyw 5y ago
  On a statistical basis, the poor holds more debt. From that basis, inflation is good. A lot of people don't realise inflation is essentially a stealth cash wealth tax. It applies to savings, debt, dollar-denominated contracts, etc.
  - webreac 5y ago
    Inflation is good only for long term debt.
  - kzrdude 5y ago
    Inflation is "progressive" in this sense, however everyone wealthy would hold mostly assets, not cash.
    - imtringued 5y ago
      They still hold a decent amount of cash as a percentage of their portfolio. 10% of a million dollar portfolio is still $100k which is more than the average joe has. He would use that money to buy a house instead of letting it sit around. Yes, bigger down payments suck but that is mostly a zoning/housing supply issue.
      - sokoloff 5y ago
        I’d guess that many (perhaps most) wealthy households hold far more dollar-denominated debt in their real-estate and business interests than they do cash.
      - nradov 5y ago
        It's very rare for wealthy people to hold 10% of their assets in cash (or even cash equivalents). When they purchase real estate they usually take out loans secured by their other assets.
  - usrusr 5y ago
    But as you correctly put it, it's a cash wealth tax. The poor have all the wealth they do have in cash. Similar for those somewhat above poverty, if they done go deep on debt. The poor don't hold debt. "I live in a nice house that's still owned by the bank" is not poverty. And you might find that even many of the rich (who have far more in assets than they have in debt or cash) will still have more debt than cash, because while investing on debt is generally considered stupid, investing on debt that could be fully cleared by the the object invested in (house/land) as collateral is the exception. People rich enough to buy houses for renting out rarely pay them in cash. The winners of inflation debt decay are not who you think they are.
    - throw0101a 5y ago
      > The poor have all the wealth they do have in cash. I would think that the poor have no cash… that's why they're called "poor" after all. The bottom 50% of income earners can barely cover the 'necessities' (housing, food, transportation, healthcare): * https://ofdollarsanddata.com/the-biggest-lie-in-personal-finance/ https://ofdollarsanddata.com/the-biggest-lie-in-personal-fin...
      - nybble41 5y ago
        > I would think that the poor have no cash… that's why they're called "poor" after all. They have contracts denominated in cash—for example, their wages from employment. That's where inflation tends to hurt the most since wages tend to trail behind inflation (or deflation). And of course being "poor" doesn't imply that you literally have zero savings, though you probably don't have enough to be worth the hassle and expense of a brokerage account to invest in stocks, ETFs, or mutual funds. For small amounts the transaction fees alone would be more than the gains. Regarding the article you cited, it occurs to me that the authors never mentioned how long any given household remains in a particular category. If I took a year-long sabbatical from work, for example, then I would end up in that "lowest 20%" group with zero income while I lived off my savings, but that doesn't mean I'm experiencing any kind of financial difficulty. The same goes for students still receiving support from their parents, or for anyone who is retired and living off of a lifetime's worth of investments (though probably not pre-tax 401(k)/IRA, depending on the study methodology, since these distributions are generally considered "income" for tax purposes). "Lowest 20% by income" is not a fixed group. This is apparent simply from the fact that expenses cannot exceed income indefinitely; eventually you must either increase your income, at which point you are no longer counted in that statistic, or else decrease your expenses. But the idea of a shifting group of households which temporarily earn less than they spend paints a very different picture than the one the article implies.
  - imtringued 5y ago
    It's not a stealth cash wealth tax. It's literal debt forgiveness. You can even call it a collectivized form of continuous insolvency. E.g. instead of every 20th debt contract being forgiven entirely 5% of every debt contract is forgiven. The benefit is that if the creditors (mostly upper classes) refuse to forgive the debt then you don't need an angry mob with pitchforks to cancel the contract (revolution).
markvdb 5y ago
Upper middle class and rich people benefit from debt. Lower middle class and poor people suffer from it. - lower middle class/poor: A cleaner working hand-to-mouth taking a payday loan isn't inflation hedging. She's paying through the nose for the privilege of a 33% loan because she's a risky debtor. - middle class: I make money on my mortgage. I see my 1.22% 20 years fixed mortgage melt away against a salary that is raising with inflation. Plus I get rewarded by government with a tax deduction. Similar story for our rental. - rich: Elon Musk can live off margin loans against a fraction of his investment portfolio if and when it makes sense.
- lotsofpulp 5y ago
  > middle class: I make money on my mortgage. I see my 1.22% 20 years fixed mortgage melt away against a salary that is raising with inflation. Plus I get rewarded by government with a tax deduction. Similar story for our rental. The mortgage interest tax deduction only applies if you itemize, which literally 90% of people do not do as of 2019 IRS statistics. Effectively, there is no mortgage interest tax deduction for middle class since the 2017 tax cut ACA jobs act.
  - markvdb 5y ago
    I don't live in the US. Plenty of places have some form of mortgage fiscal stimulus. Even without the fiscal advantage, I would still be making money on this.
    - lotsofpulp 5y ago
      My bad. I did not know anywhere else offered mortgage incentives. Chalked tax deduction up to being uniquely US way of implementing regressive taxes.
    - disgruntledphd2 5y ago
      > see my 1.22% 20 years fixed mortgage melt away Wow, if you don't live in the US, where are you getting a 20 year fixed rate? Honestly just curious as I thought those were really only a US thing.
rsj_hn 5y ago
Creditors take inflation into account when making loans. Only higher than expected inflation helps debtors. Lower than expected inflation hurts debtors. I'm not sure why you think Creditors would consistently underestimate inflation. Maybe they do, but why would they? One thing I am sure of, is that when inflation expectations change a lot so that there is a lot of doubt as to what future inflation will be, then creditors charge a higher premium for that perceived increase in inflation risk. That hurts debtors.
- sokoloff 5y ago
  What you say makes logical sense, but is hard to square against the fact that, as a nobody, I can borrow $1M at under 3% fixed interest for 30 years to buy a house. The creditor who will ultimately hold that paper has a very different outlook on inflation rates than I do, but I’m happy to take the loan, especially since a side-effect is having a place to live.
  - gruez 5y ago
    > What you say makes logical sense, but is hard to square against the fact that, as a nobody, I can borrow $1M at under 3% fixed interest for 30 years to buy a house. that's canceled out by prices being higher because every other buyer has access to the same rates. Your monthly payments works out to be the same in the end because everybody bids up to the max they can afford.
  - rsj_hn 5y ago
    > What you say makes logical sense, but is hard to square against the fact that, as a nobody, I can borrow $1M at under 3% fixed interest for 30 years to buy a house [...] The creditor who will ultimately hold that paper has a very different outlook on inflation rates than I do, Such questions deserve answers. There is a lot that I skipped over, not wanting to get into the weeds of economic theory and start more arguments about whether the Fed controls rates or whether markets do (orthodox theory says markets control real rates and the fed only controls nominal rates, and thus inflation), and how savings demands respond to interest rates, and whether mortgages are risk free rates or not. All of that complicates the simple picture I painted, but I think that picture is basically correct. Suffice it to say that in terms of risk-free rates, the creditor's alternative is to buy a TIPS -- inflation protected bond -- which currently yields -1% https://www.cnbc.com/quotes/US10YTIP https://www.cnbc.com/quotes/US10YTIP So we are living in a very low interest rate world right now. Given that most likely your mortgage is government guaranteed (what mortgage isn't?) the entirety of the 3% you are paying is just as an inflation hedge plus some risk of pre-payment -- again, I have no idea what kind of points you have and the specific terms of the loan. If inflation was believed to be zero, you could probably get the same mortgage for less than 1%, maybe even 0%. We live in a world with very low real rates, but that does not mean that creditors don't take inflation risk into account.

by jolux 5y ago

That harm does not capture the reduction in debt caused by inflation though. Inflation benefits debtors over creditors, even if it also effectively lowers wages.

seanhunter 5y ago

That's true although if you're spending all of your income on debt service and basic living costs, then reducing the real value of the nominal of your debt doesn't in fact increase your standard of living at all. Theoretically you're better off, but all of your income still goes on debt service and basic living costs. The basic living costs have gone up in nominal terms while the debt service is still the same. It's depreciated in real value but the nominal is still the same.

dannyw 5y ago
On a statistical basis, the poor holds more debt. From that basis, inflation is good. A lot of people don't realise inflation is essentially a stealth cash wealth tax. It applies to savings, debt, dollar-denominated contracts, etc.
- webreac 5y ago
  Inflation is good only for long term debt.
- kzrdude 5y ago
  Inflation is "progressive" in this sense, however everyone wealthy would hold mostly assets, not cash.
  - imtringued 5y ago
    They still hold a decent amount of cash as a percentage of their portfolio. 10% of a million dollar portfolio is still $100k which is more than the average joe has. He would use that money to buy a house instead of letting it sit around. Yes, bigger down payments suck but that is mostly a zoning/housing supply issue.
    - sokoloff 5y ago
      I’d guess that many (perhaps most) wealthy households hold far more dollar-denominated debt in their real-estate and business interests than they do cash.
    - nradov 5y ago
      It's very rare for wealthy people to hold 10% of their assets in cash (or even cash equivalents). When they purchase real estate they usually take out loans secured by their other assets.
- usrusr 5y ago
  But as you correctly put it, it's a cash wealth tax. The poor have all the wealth they do have in cash. Similar for those somewhat above poverty, if they done go deep on debt. The poor don't hold debt. "I live in a nice house that's still owned by the bank" is not poverty. And you might find that even many of the rich (who have far more in assets than they have in debt or cash) will still have more debt than cash, because while investing on debt is generally considered stupid, investing on debt that could be fully cleared by the the object invested in (house/land) as collateral is the exception. People rich enough to buy houses for renting out rarely pay them in cash. The winners of inflation debt decay are not who you think they are.
  - throw0101a 5y ago
    > The poor have all the wealth they do have in cash. I would think that the poor have no cash… that's why they're called "poor" after all. The bottom 50% of income earners can barely cover the 'necessities' (housing, food, transportation, healthcare): * https://ofdollarsanddata.com/the-biggest-lie-in-personal-finance/ https://ofdollarsanddata.com/the-biggest-lie-in-personal-fin...
    - nybble41 5y ago
      > I would think that the poor have no cash… that's why they're called "poor" after all. They have contracts denominated in cash—for example, their wages from employment. That's where inflation tends to hurt the most since wages tend to trail behind inflation (or deflation). And of course being "poor" doesn't imply that you literally have zero savings, though you probably don't have enough to be worth the hassle and expense of a brokerage account to invest in stocks, ETFs, or mutual funds. For small amounts the transaction fees alone would be more than the gains. Regarding the article you cited, it occurs to me that the authors never mentioned how long any given household remains in a particular category. If I took a year-long sabbatical from work, for example, then I would end up in that "lowest 20%" group with zero income while I lived off my savings, but that doesn't mean I'm experiencing any kind of financial difficulty. The same goes for students still receiving support from their parents, or for anyone who is retired and living off of a lifetime's worth of investments (though probably not pre-tax 401(k)/IRA, depending on the study methodology, since these distributions are generally considered "income" for tax purposes). "Lowest 20% by income" is not a fixed group. This is apparent simply from the fact that expenses cannot exceed income indefinitely; eventually you must either increase your income, at which point you are no longer counted in that statistic, or else decrease your expenses. But the idea of a shifting group of households which temporarily earn less than they spend paints a very different picture than the one the article implies.
- imtringued 5y ago
  It's not a stealth cash wealth tax. It's literal debt forgiveness. You can even call it a collectivized form of continuous insolvency. E.g. instead of every 20th debt contract being forgiven entirely 5% of every debt contract is forgiven. The benefit is that if the creditors (mostly upper classes) refuse to forgive the debt then you don't need an angry mob with pitchforks to cancel the contract (revolution).

markvdb 5y ago

Upper middle class and rich people benefit from debt. Lower middle class and poor people suffer from it. - lower middle class/poor: A cleaner working hand-to-mouth taking a payday loan isn't inflation hedging. She's paying through the nose for the privilege of a 33% loan because she's a risky debtor. - middle class: I make money on my mortgage. I see my 1.22% 20 years fixed mortgage melt away against a salary that is raising with inflation. Plus I get rewarded by government with a tax deduction. Similar story for our rental. - rich: Elon Musk can live off margin loans against a fraction of his investment portfolio if and when it makes sense.

lotsofpulp 5y ago
> middle class: I make money on my mortgage. I see my 1.22% 20 years fixed mortgage melt away against a salary that is raising with inflation. Plus I get rewarded by government with a tax deduction. Similar story for our rental. The mortgage interest tax deduction only applies if you itemize, which literally 90% of people do not do as of 2019 IRS statistics. Effectively, there is no mortgage interest tax deduction for middle class since the 2017 tax cut ACA jobs act.
- markvdb 5y ago
  I don't live in the US. Plenty of places have some form of mortgage fiscal stimulus. Even without the fiscal advantage, I would still be making money on this.
  - lotsofpulp 5y ago
    My bad. I did not know anywhere else offered mortgage incentives. Chalked tax deduction up to being uniquely US way of implementing regressive taxes.
  - disgruntledphd2 5y ago
    > see my 1.22% 20 years fixed mortgage melt away Wow, if you don't live in the US, where are you getting a 20 year fixed rate? Honestly just curious as I thought those were really only a US thing.

rsj_hn 5y ago

Creditors take inflation into account when making loans. Only higher than expected inflation helps debtors. Lower than expected inflation hurts debtors. I'm not sure why you think Creditors would consistently underestimate inflation. Maybe they do, but why would they? One thing I am sure of, is that when inflation expectations change a lot so that there is a lot of doubt as to what future inflation will be, then creditors charge a higher premium for that perceived increase in inflation risk. That hurts debtors.

sokoloff 5y ago
What you say makes logical sense, but is hard to square against the fact that, as a nobody, I can borrow $1M at under 3% fixed interest for 30 years to buy a house. The creditor who will ultimately hold that paper has a very different outlook on inflation rates than I do, but I’m happy to take the loan, especially since a side-effect is having a place to live.
- gruez 5y ago
  > What you say makes logical sense, but is hard to square against the fact that, as a nobody, I can borrow $1M at under 3% fixed interest for 30 years to buy a house. that's canceled out by prices being higher because every other buyer has access to the same rates. Your monthly payments works out to be the same in the end because everybody bids up to the max they can afford.
- rsj_hn 5y ago
  > What you say makes logical sense, but is hard to square against the fact that, as a nobody, I can borrow $1M at under 3% fixed interest for 30 years to buy a house [...] The creditor who will ultimately hold that paper has a very different outlook on inflation rates than I do, Such questions deserve answers. There is a lot that I skipped over, not wanting to get into the weeds of economic theory and start more arguments about whether the Fed controls rates or whether markets do (orthodox theory says markets control real rates and the fed only controls nominal rates, and thus inflation), and how savings demands respond to interest rates, and whether mortgages are risk free rates or not. All of that complicates the simple picture I painted, but I think that picture is basically correct. Suffice it to say that in terms of risk-free rates, the creditor's alternative is to buy a TIPS -- inflation protected bond -- which currently yields -1% https://www.cnbc.com/quotes/US10YTIP https://www.cnbc.com/quotes/US10YTIP So we are living in a very low interest rate world right now. Given that most likely your mortgage is government guaranteed (what mortgage isn't?) the entirety of the 3% you are paying is just as an inflation hedge plus some risk of pre-payment -- again, I have no idea what kind of points you have and the specific terms of the loan. If inflation was believed to be zero, you could probably get the same mortgage for less than 1%, maybe even 0%. We live in a world with very low real rates, but that does not mean that creditors don't take inflation risk into account.