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> If inflation were allowed to run a bit higher, it could deliver a long-overdue win for young people who have had to face a combination of stagnant wages and r

> If inflation were allowed to run a bit higher, it could deliver a long-overdue win for young people who have had to face a combination of stagnant wages and rising housing costs what the hell? Inflation exists as a policy to stiff wage-earners. This is arguably more likely to go exactly the other way than the author expects. Take it from a nobel laureate: https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-higher-inflation/ https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi... > it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts [...but when you have inflation, their wages get cut without anyone being the wiser!!].

fennecfoxen 5y ago
Don't worry, it'll be great! You'll get a 10% raise, and prices will only be up 15%.
- dnautics 5y ago
  To be frank, for a small sliver of wage:mortgage ratios this could be fucking fantastic... for "young wage-earners" who already have a house (like me! but I'm not really that young anymore). For other wage-earners, not so much, sad trombone.
  - fennecfoxen 5y ago
    Yeah, if you're at all on the fence, or close to the fence, it's a fine time to get a mortgage, even if house prices have gone up somewhat. An excellent inflation hedge!
    - Nbox9 5y ago
      Rising interest rates is likely to have a significant downward pressure on home prices. Think carefully before entering a very leveraged position (like the 3.5% down FHA loan) in the current market.
      - xapata 5y ago
        Owner-occupied real estate investments don't suffer from margin calls. If the asset price crashes, what does it matter so long as I can afford the monthly payments? If the home value is "underwater" then I can walk away and rent for 7 years, if I think that's better value.
        NovemberWhiskey 5y ago
        Only if you live in a non-recourse state.
  - giaour 5y ago
    Or for young wage earners who have significant student debt. Pretty much anybody who has more current liabilities than current assets can expect to benefit from some degree of inflation
    - tharne 5y ago
      > Pretty much anybody who has more current liabilities than current assets can expect to benefit from some degree of inflation Except for the fact that they're getting a pay cut year after year. This is why the general public gets so mad about inflation. Like another commenter mentioned, inflation screws over anyone who works for a wage.
      - dragonwriter 5y ago
        > Like another commenter mentioned, inflation screws over anyone who works for a wage. At worst, anyone who works for a fixed wage (and even then, the demand dynamics that create a fixed wage with inflation mean instead people just lose their jobs without inflation, because of the stickiness of nominal wages.)
        giaour 5y ago
        > anyone who works for a fixed wage This includes anyone who works for minimum wage (assuming it's not indexed to inflation), and they are not likely to be able to handle a cut in real pay as easily as, say, middle class homeowners.
        dragonwriter 5y ago
        > This includes anyone who works for minimum wage No, it doesn't, unless they have a contract fixing their pay at minimum wage; being currently paid minimum wage doesn't mean you don't get raises.
        giaour 5y ago
        That's true; "anyone" was a bit too strong of a word. All things being equal, someone making minimum wage is less likely to get a raise than someone making more, since there's a possibility that the wage represented a statutory minimum and not the employee's "true value" to the employer.
  - NovemberWhiskey 5y ago
    If interest rates don't rise, then sure - inflation is likely to show up in higher housing costs, which means you'll deflate away that loan and your asset will appreciate. If interest rates rise, then you have one or two problems. If your loan isn't at a fixed rate, then you'd better hope you can still afford your mortgage. Say you paid a 20% downpayment on a home worth $375K. A $300K note at 3% is a $1,250 per month expense, but at 8% it's $2,200 a month. People forget, but mortgage rates were 8% as recently as 2000. Even if your rate is fixed, new buyers have affordability problems due to the same phenomenon, which hits valuations. If you can afford $1,250 a month, maybe you can afford $1,500 after some inflation pads out your pay check. But, with rates at 8%, that's only a $200K mortgage, so maybe a $375K home is only a $250K home in the new rate environment and you're in negative equity all of a sudden. If you need to sell, then you're losing the initial downpayment and you may still end up owing the bank. If you can't cover it, say goodbye to your creditworthiness.
    - rory 5y ago
      While everything you said is true: 1) <10% of the US mortgage market is ARMs. 2) Treasury rates are still super low, even with high CPI inflation. It's not at all obvious interest rates will go up by much even with sustained 5-10% inflation, since society's ratio of capital to productivity is at an unprecedented level.
      - NovemberWhiskey 5y ago
        At this point, most of those who perform augury on the intentions of the Fed are predicting five to six 25bp interest rate increases before the end of 2023.
        rory 5y ago
        Yes, but fixed mortgage rates aren't affected much by the fed funds rate, compared to treasury yields.
  - hparadiz 5y ago
    Bought a house 4 months ago and suddenly all this inflation stuff is basically just telling me I can pay it off much faster than I thought.
    - dnautics 5y ago
      Sadly it doesn't work that way, unless you can get pay raises that match inflation. Remember, inflation is a policy choice to screw you out of your wages because you have "sticky" preferences. So, if you are getting pay raises that match inflation, the policy isn't working.
      - hparadiz 5y ago
        I got a significant bump well over inflation numbers just by switching jobs. The current inflation situation and shortage of qualified engineers coupled with my experience is giving me insane leverage when negotiating.
- flavius29663 5y ago
  The thing is this: inflation raised every year, whether you want it or not. Job hopping only happens every few years.
uses 5y ago
Inflation doesn't exist as a policy to stiff wage earners. Inflation exists as a reality of a growing economy (more goods and services needs more money to cover them). The alternative is deflation, which would be extremely bad. So what we aim for, is low inflation. Which we've had for ~40 years. Low, controlled inflation is the vastly preferable alternative to any amount of deflation, so it's the side of the scale we target, giving a ~2% margin of error (~2% is the inflation level usually targeted by modern central banks). What Krugman is talking about is that cutting wages is extremely hard for employers to do. Nobody wants to take a paycut. So what employers do instead, being put in the situation of needing to cut payroll, is eliminate entire positions. Which on the whole is worse than a paycut because of the destabilizing effect to the individual and society. So a positive side effect of inflation (not the main effect, a side effect), is that in the absence of pay raises, low inflation creates a constant mild paycut unless there is specifically a pay raise. It makes the economy more resilient.
- friedturkey 5y ago
  Yeah, deflation is awful. Imagine our continuously increased production and efficiency resulting in goods becoming cheaper and the value of the working person’s dollar going farther. Horrifying.
  - imtringued 5y ago
    Imagine money capitalists abandoning physical capital and laying off workers because their grocery bill turns the yield on employment negative while the yield on money itself is positive. You'd be foolish to sell products for lower prices, you don't get a discount on debt for example (negative interest rates).
  - jokethrowaway 5y ago
    With deflation there would be no reason to invest your money, paralysing the economy. Some inflation is needed; what we don't need is https://brrr.money/ https://brrr.money/
    - 5y ago
fuzzfactor 5y ago
>what the hell? Hell, no. You have exceeded the wisdom normally allocated to economists. Do not pass GO, do not collect $200. More than ever it seems there should be a prize for this. It didn't used to be that way. Fewer and fewer workers will be able to pass GO and there will not be as many $200 bills in your pocket even if there are more in "circulation" overall. Much less likely to afford any houses on your property, or very much property at all. Odds are not looking good when there are so many decision makers and advisers who don't appear to have been paying any attention at all during the Nixon Recession and the still-lingering incomplete recovery in the USA.

fennecfoxen 5y ago

Don't worry, it'll be great! You'll get a 10% raise, and prices will only be up 15%.

dnautics 5y ago
To be frank, for a small sliver of wage:mortgage ratios this could be fucking fantastic... for "young wage-earners" who already have a house (like me! but I'm not really that young anymore). For other wage-earners, not so much, sad trombone.
- fennecfoxen 5y ago
  Yeah, if you're at all on the fence, or close to the fence, it's a fine time to get a mortgage, even if house prices have gone up somewhat. An excellent inflation hedge!
  - Nbox9 5y ago
    Rising interest rates is likely to have a significant downward pressure on home prices. Think carefully before entering a very leveraged position (like the 3.5% down FHA loan) in the current market.
    - xapata 5y ago
      Owner-occupied real estate investments don't suffer from margin calls. If the asset price crashes, what does it matter so long as I can afford the monthly payments? If the home value is "underwater" then I can walk away and rent for 7 years, if I think that's better value.
      - NovemberWhiskey 5y ago
        Only if you live in a non-recourse state.
- giaour 5y ago
  Or for young wage earners who have significant student debt. Pretty much anybody who has more current liabilities than current assets can expect to benefit from some degree of inflation
  - tharne 5y ago
    > Pretty much anybody who has more current liabilities than current assets can expect to benefit from some degree of inflation Except for the fact that they're getting a pay cut year after year. This is why the general public gets so mad about inflation. Like another commenter mentioned, inflation screws over anyone who works for a wage.
    - dragonwriter 5y ago
      > Like another commenter mentioned, inflation screws over anyone who works for a wage. At worst, anyone who works for a fixed wage (and even then, the demand dynamics that create a fixed wage with inflation mean instead people just lose their jobs without inflation, because of the stickiness of nominal wages.)
      - giaour 5y ago
        > anyone who works for a fixed wage This includes anyone who works for minimum wage (assuming it's not indexed to inflation), and they are not likely to be able to handle a cut in real pay as easily as, say, middle class homeowners.
        dragonwriter 5y ago
        > This includes anyone who works for minimum wage No, it doesn't, unless they have a contract fixing their pay at minimum wage; being currently paid minimum wage doesn't mean you don't get raises.
        giaour 5y ago
        That's true; "anyone" was a bit too strong of a word. All things being equal, someone making minimum wage is less likely to get a raise than someone making more, since there's a possibility that the wage represented a statutory minimum and not the employee's "true value" to the employer.
- NovemberWhiskey 5y ago
  If interest rates don't rise, then sure - inflation is likely to show up in higher housing costs, which means you'll deflate away that loan and your asset will appreciate. If interest rates rise, then you have one or two problems. If your loan isn't at a fixed rate, then you'd better hope you can still afford your mortgage. Say you paid a 20% downpayment on a home worth $375K. A $300K note at 3% is a $1,250 per month expense, but at 8% it's $2,200 a month. People forget, but mortgage rates were 8% as recently as 2000. Even if your rate is fixed, new buyers have affordability problems due to the same phenomenon, which hits valuations. If you can afford $1,250 a month, maybe you can afford $1,500 after some inflation pads out your pay check. But, with rates at 8%, that's only a $200K mortgage, so maybe a $375K home is only a $250K home in the new rate environment and you're in negative equity all of a sudden. If you need to sell, then you're losing the initial downpayment and you may still end up owing the bank. If you can't cover it, say goodbye to your creditworthiness.
  - rory 5y ago
    While everything you said is true: 1) <10% of the US mortgage market is ARMs. 2) Treasury rates are still super low, even with high CPI inflation. It's not at all obvious interest rates will go up by much even with sustained 5-10% inflation, since society's ratio of capital to productivity is at an unprecedented level.
    - NovemberWhiskey 5y ago
      At this point, most of those who perform augury on the intentions of the Fed are predicting five to six 25bp interest rate increases before the end of 2023.
      - rory 5y ago
        Yes, but fixed mortgage rates aren't affected much by the fed funds rate, compared to treasury yields.
- hparadiz 5y ago
  Bought a house 4 months ago and suddenly all this inflation stuff is basically just telling me I can pay it off much faster than I thought.
  - dnautics 5y ago
    Sadly it doesn't work that way, unless you can get pay raises that match inflation. Remember, inflation is a policy choice to screw you out of your wages because you have "sticky" preferences. So, if you are getting pay raises that match inflation, the policy isn't working.
    - hparadiz 5y ago
      I got a significant bump well over inflation numbers just by switching jobs. The current inflation situation and shortage of qualified engineers coupled with my experience is giving me insane leverage when negotiating.
flavius29663 5y ago
The thing is this: inflation raised every year, whether you want it or not. Job hopping only happens every few years.

uses 5y ago

Inflation doesn't exist as a policy to stiff wage earners. Inflation exists as a reality of a growing economy (more goods and services needs more money to cover them). The alternative is deflation, which would be extremely bad. So what we aim for, is low inflation. Which we've had for ~40 years. Low, controlled inflation is the vastly preferable alternative to any amount of deflation, so it's the side of the scale we target, giving a ~2% margin of error (~2% is the inflation level usually targeted by modern central banks). What Krugman is talking about is that cutting wages is extremely hard for employers to do. Nobody wants to take a paycut. So what employers do instead, being put in the situation of needing to cut payroll, is eliminate entire positions. Which on the whole is worse than a paycut because of the destabilizing effect to the individual and society. So a positive side effect of inflation (not the main effect, a side effect), is that in the absence of pay raises, low inflation creates a constant mild paycut unless there is specifically a pay raise. It makes the economy more resilient.

friedturkey 5y ago
Yeah, deflation is awful. Imagine our continuously increased production and efficiency resulting in goods becoming cheaper and the value of the working person’s dollar going farther. Horrifying.
- imtringued 5y ago
  Imagine money capitalists abandoning physical capital and laying off workers because their grocery bill turns the yield on employment negative while the yield on money itself is positive. You'd be foolish to sell products for lower prices, you don't get a discount on debt for example (negative interest rates).
- jokethrowaway 5y ago
  With deflation there would be no reason to invest your money, paralysing the economy. Some inflation is needed; what we don't need is https://brrr.money/ https://brrr.money/
  - 5y ago

fuzzfactor 5y ago

>what the hell? Hell, no. You have exceeded the wisdom normally allocated to economists. Do not pass GO, do not collect $200. More than ever it seems there should be a prize for this. It didn't used to be that way. Fewer and fewer workers will be able to pass GO and there will not be as many $200 bills in your pocket even if there are more in "circulation" overall. Much less likely to afford any houses on your property, or very much property at all. Odds are not looking good when there are so many decision makers and advisers who don't appear to have been paying any attention at all during the Nixon Recession and the still-lingering incomplete recovery in the USA.