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Inflation benefits people in debt and light labor markets benefit people who earn a wage. It hurts people who already have accumulated capital in the form of bo

Inflation benefits people in debt and light labor markets benefit people who earn a wage. It hurts people who already have accumulated capital in the form of bonds and stocks. The Fed acts to protect the interests of the very rich, at the expense of the lower and middle class. It is a balance. The government is a democracy and corporations need customers, but the wealth gap must be maintained, lest you lose the support of the wealthy who fund politics and buy newspapers to shape public opinion. This tension between the rich and everyone else has existed in every society since the shift to agriculture.

Reason077 4y ago
> "Inflation benefits people in debt" Only if that debt is at fixed rates of interest, like corporate bonds or a fixed-rate mortgage. If your rate is variable, then inflation leads to higher interest rates which increases the cost of servicing that debt. Note that the US mortgage market is unusual in that 30-year fixed rates are quite common. In most of the world, mortgages are variable-rate, or fixed for much shorter periods.
- gymbeaux 4y ago
  Actually, higher inflation doesn’t necessarily correspond to higher variable interest rates. Indirectly, yea, but only because the fed is raising the benchmark rate to “fight inflation”.
  - lazide 4y ago
    No one is going to write a mortgage for a lower rate than inflation unless they’re crazy (so the gov’t might, but even then not usually!). They’d be signing up to 100% burn their cash doing so. Inflation absolutely impacts mortgage rates, and all other lending.
    - luckylion 4y ago
      So the standard mortgage rate is agreed on as "official inflation rate + x%"?
      - lazide 4y ago
        Nope. But ‘cost of money’ + x% (where x% is based on risk of repayment, and cost of money includes inflation) is a hard rule for a lender to avoid without going bankrupt. Lenders who go bankrupt tend to not be lenders very long.
        luckylion 4y ago
        Oh, you mean for long-term high inflation, right? I mistook that to apply to today. Someone who signed a mortgage 5 years ago should be pretty happy if their salary kept up with inflation, wouldn't they?
        lazide 4y ago
        Oh for sure, assuming they got a fixed rate. Inflation that starts AFTER the loan was written/that wasn’t priced in to the loan helps the debtor. The lender, not so much. So mortgages written today need to include the lenders best guess about future inflation, or they’ll expect to go bankrupt in the future. Which is generally a bad business practice. They also have to give competitive rates, or someone else will end up writing that loan, and they’ll be out of business due to lack of customers. As the future is unpredictable, that is of course a risky business unless they’re a special entity like the Fed that can do whatever it wants.
      - refurb 4y ago
        No, but lenders demand interest in excess of inflation. Inflation can be transitory, so just because its 7% now doesnt mean a 10 year bond has to be more. And the mortgage interest rate is set by the bond market, because thats who funds mortgages in the end (see Fannie and Freddie).
        lazide 4y ago
    - looping__lui 4y ago
      I totally have a mortgage rate that was lower than inflation at the time because it was sth like 0.7% above market rate for 20 years fixed… Banks don’t care about the real value of money the way normal people do. Borrow 100k, pay 1% interest, buy a piece of stone and sell it for 200k after a couple of decades because of inflation and pay back a banks 100k: they are happy because the math adds up.
      - lazide 4y ago
        well, except the math doesn’t actually add up in that case for anyone ‘real’ including any bank using normal lending sources, as that 100k paid back is now worth far less than 100k back when the loan was written. The reality is that for a long time the Fed was using QE to buy up mortgage bonds written at nearly arbitrarily low rates. Bonds that no one else would buy/fund because the odds of losing money were too great. They’d been doing so since ‘09 or thereabouts to keep that market liquid. So they were willingly taking the risk of money destruction, and as the one entity that could do so, that’s pretty good. They’re probably the only one that could really do so without going bankrupt, as they are the only entity that can ‘create’ money arbitrarily in the system. It’s around 2.6 trln dollars right now [https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB] The vast majority of the banks haven’t been underwriting mortgages themselves for a very long time, and the ones that were had been getting put in scarier and scarier positions because of the Fed’s actions. Right now, the entire sector is in the process of imploding because the Fed has stopped doing what it was before, and trying to push the markets back to reflect a more realistic cost of money, which of course dries up demand as prices are still based on ‘free cash’ as the benchmark - https://www.bloomberg.com/news/articles/2022-08-19/mortgage-lenders-are-starting-to-go-broke-as-loan-volumes-plunge https://www.bloomberg.com/news/articles/2022-08-19/mortgage-...
        looping__lui 4y ago
        Thats the problem. The FEDs gave the banks the money for free. And we gave it to them for free as well because we didn’t get any savings on our accounts… Those who borrowed money and bought assets literally took a tiny little bite from everybodys savings account every year..
    - gymbeaux 4y ago
      I don’t think so… I mean which inflation figure are you talking about? The one that happens to be about what a 30-year mortgage would also be right now? That’s not usually the case. Mortgage rates are “fed benchmark” + a couple percentage points. Beyond that, correlation to inflation is coincidental.
      - lazide 4y ago
        See my other comments - the fed has been intervening as part of QE since ‘07-‘09 and until recently. they gradually tapered then stopped Dec ‘22. No surprise that mortgage rates started doing weird stuff about then eh? The relationships to the fed funds rate is also because that is the rate a bank or other big entity can always borrow at, and the fed is happy to ‘print’ as much money as necessary to satiate all qualified applicants at that rate.
looping__lui 4y ago
I think I would argue inflation benefited those who were wealthy the most in the past. But keep in mind that the increase in asset value was not factored into that inflation math. So: assets got more expensive because of inflation; net wages went down because of inflation that wasn’t recognized as such; the rich paid the same for labor but benefited from an increase in their asset prices. Bonds were a really bad investment in that respect…
deleted 4y ago
[deleted]
kspacewalk2 4y ago
Inflation (but not hyperinflation) benefits people in debt, and hurts people with savings. Is having savings nowadays considered intrinsically less moral or something? Inflation targeting of, say, 2%, is the balance that takes into account the sometimes competing interests of all these groups (savers, borrowers, wage earners, people who live off investments, etc). Deviation into either direction causes long-term structural problems.
- harimau777 4y ago
  In my experience, service sector working class people generally have no savings due to low wages and high cost of housing. I think it's not that people view saving as immoral; rather they view it as a class indicator. It appears that if the lower class starts seeing wage increases, then our economy falls apart and/or the Fed steps in to stop it. That suggests that our economy is broken with respect to the lower class.
  - PragmaticPulp 4y ago
    > In my experience, service sector working class people generally have no savings due to low wages and high cost of housing. Statistically, a lot of middle class people save their wealth in their houses, which are bought via mortgages. Inflation benefits those people significantly by raising the value of their house and making their 30-year fixed mortgages (in the US) easier to pay off. It's not so great for people in other countries with variable rate mortgages, though.
    - harimau777 4y ago
      I agree that's the case for people who own homes. However, many (most?) lower class people do not own homes. Even the lower side of middle class can't afford homes in much of the country.
  - refurb 4y ago
    No, what happens is wage pressure translates into higher input costs and higher prices thus fueling inflation. And that hurts low wage workers because any wage increase gets eaten up by inflation and cycle continues. If we were in a low inflation environment then the fed wouldnt be concerned about low unemployment and rising wages at all.
PragmaticPulp 4y ago
> It hurts people who already have accumulated capital in the form of bonds and stocks. The Fed acts to protect the interests of the very rich, at the expense of the lower and middle class. You're forgetting the primary asset of the middle class: Housing. People purchase housing with mortgages. Inflation raises the price of their home and diminishes the impact of their mortgage debt. Inflation also helps people with a lot of college loan debt, which has furthermore been paused for many people. You'd rather pay of a hypothetical $50K of student loans after inflation (including wages) has made that $50K worth less. I often think about the few people whose late 20s coincided with record low interest rates, the COVID pause on student loan debt, the extreme job boom where a little LeetCode would hand you a high-paying tech job, and the small window where home prices hadn't yet shot up. Anyone who lucked into the right combination of these factors would have set themselves up for a financial future that I could have only dreamed of in my mid-20s. It's not a large number of people, but I am jealous. This isn't meant to be an "inflation is good" post, because out of control inflation is definitely not. However, it's not so simple as to say that only the wealthy see any benefit from inflation.
- dougmwne 4y ago
  Exactly! Hyperinflation is terrible and economy destroying. But I think a good argument can be made that moderate inflation, much higher than the typical 3% target is very good for most people.
- actually_a_dog 4y ago
  You seem to be making a number of assumptions here that don't necessarily hold. For instance, yes, a house is often a middle class family's biggest asset. But, there's no way to directly tap into that asset without selling or taking out some kind of loan against it (second mortgage, HELOC, even a reverse mortgage if they're old enough). All of those things have, let's say, significant costs and disadvantages. Yes, "imputed rent" is a thing, but that doesn't generally appear on a household balance sheet. You're assuming people with student debt are actually able to get jobs that can service that debt. That's not the case for 4/10 with student loans [0]. I'd even dispute that inflation is good for most Americans, given that just over 50% can't cover a $1000 emergency expense from savings[1], and nearly 2/3 are living paycheck to paycheck [2]. Nearly 3/4 of middle class Americans say their earnings are falling behind their cost of living [3]. I know you specifically weren't trying to paint inflation as an unvarnished good for middle class people, but other people commenting are making these points, and I just don't feel like making multiple comments to pick at those arguments. --- [0]: https://money.usnews.com/loans/student-loans/articles/survey-almost-four-in-10-cant-afford-their-student-loan-payments https://money.usnews.com/loans/student-loans/articles/survey... [1]: https://www.cnbc.com/2022/01/19/56percent-of-americans-cant-cover-a-1000-emergency-expense-with-savings.html https://www.cnbc.com/2022/01/19/56percent-of-americans-cant-... [2]: https://www.cnbc.com/2022/12/15/amid-high-inflation-63percent-of-americans-are-living-paycheck-to-paycheck.html https://www.cnbc.com/2022/12/15/amid-high-inflation-63percen... [3]: https://www.cnbc.com/2023/01/18/amid-inflation-more-middle-class-americans-struggle-to-make-ends-meet.html https://www.cnbc.com/2023/01/18/amid-inflation-more-middle-c...
actually_a_dog 4y ago
> The government is a democracy... No, it isn't, and this isn't some "it's a reeeeepublic" rant, either. When half the population couldn't legally vote for most of the country's history, that's not very democratic. "Oligarchy" is a better fit, but apparently we only reserve that for countries we don't like. Average individuals working average jobs and making average incomes get next to no say in anything that happens at a national level, and I would be surprised if it were any better at the state level. https://act.represent.us/sign/usa-oligarchy-research-explained https://act.represent.us/sign/usa-oligarchy-research-explain...
- dougmwne 4y ago
  That point I was trying to make is that if the economy were bad enough, people would vote out the incumbent government in droves. The vote is a safety value that prevents riots and armed revolution. Autocracies are brittle to changing public perception and can go the way of the guillotine.
  - actually_a_dog 4y ago
    The phrase "bad enough" is doing an awful lot of work here. Besides, whatever party is in charge, the other party is always nearly as bad or worse. First past the post, the Electoral College, and campaign finance law all but ensure that your only two choices are the right wing neoliberal party or the ultra right wing neoliberal party.
usrusr 4y ago
> Inflation benefits people in debt And weighed by the amount of debt, those are mostly people rich enough to hire specialists for the tedious parts of using some (most) of their assets as collateral for further investment. People living paycheck to paycheck, on maxed out credit cards, those are not the winners of inflation you are looking for.
- dougmwne 4y ago
  Those people have lots of debt in the form of home, car and student loans.
  - usrusr 4y ago
    Hardly more than few years of wages. And when inflation hits, those wages usually trail behind quite considerably. Some may still come out positive, but not by much. The winners of inflation are the leveraged investment class.

Reason077 4y ago

> "Inflation benefits people in debt" Only if that debt is at fixed rates of interest, like corporate bonds or a fixed-rate mortgage. If your rate is variable, then inflation leads to higher interest rates which increases the cost of servicing that debt. Note that the US mortgage market is unusual in that 30-year fixed rates are quite common. In most of the world, mortgages are variable-rate, or fixed for much shorter periods.

gymbeaux 4y ago
Actually, higher inflation doesn’t necessarily correspond to higher variable interest rates. Indirectly, yea, but only because the fed is raising the benchmark rate to “fight inflation”.
- lazide 4y ago
  No one is going to write a mortgage for a lower rate than inflation unless they’re crazy (so the gov’t might, but even then not usually!). They’d be signing up to 100% burn their cash doing so. Inflation absolutely impacts mortgage rates, and all other lending.
  - luckylion 4y ago
    So the standard mortgage rate is agreed on as "official inflation rate + x%"?
    - lazide 4y ago
      Nope. But ‘cost of money’ + x% (where x% is based on risk of repayment, and cost of money includes inflation) is a hard rule for a lender to avoid without going bankrupt. Lenders who go bankrupt tend to not be lenders very long.
      - luckylion 4y ago
        Oh, you mean for long-term high inflation, right? I mistook that to apply to today. Someone who signed a mortgage 5 years ago should be pretty happy if their salary kept up with inflation, wouldn't they?
        lazide 4y ago
        Oh for sure, assuming they got a fixed rate. Inflation that starts AFTER the loan was written/that wasn’t priced in to the loan helps the debtor. The lender, not so much. So mortgages written today need to include the lenders best guess about future inflation, or they’ll expect to go bankrupt in the future. Which is generally a bad business practice. They also have to give competitive rates, or someone else will end up writing that loan, and they’ll be out of business due to lack of customers. As the future is unpredictable, that is of course a risky business unless they’re a special entity like the Fed that can do whatever it wants.
    - refurb 4y ago
      No, but lenders demand interest in excess of inflation. Inflation can be transitory, so just because its 7% now doesnt mean a 10 year bond has to be more. And the mortgage interest rate is set by the bond market, because thats who funds mortgages in the end (see Fannie and Freddie).
      - lazide 4y ago
  - looping__lui 4y ago
    I totally have a mortgage rate that was lower than inflation at the time because it was sth like 0.7% above market rate for 20 years fixed… Banks don’t care about the real value of money the way normal people do. Borrow 100k, pay 1% interest, buy a piece of stone and sell it for 200k after a couple of decades because of inflation and pay back a banks 100k: they are happy because the math adds up.
    - lazide 4y ago
      well, except the math doesn’t actually add up in that case for anyone ‘real’ including any bank using normal lending sources, as that 100k paid back is now worth far less than 100k back when the loan was written. The reality is that for a long time the Fed was using QE to buy up mortgage bonds written at nearly arbitrarily low rates. Bonds that no one else would buy/fund because the odds of losing money were too great. They’d been doing so since ‘09 or thereabouts to keep that market liquid. So they were willingly taking the risk of money destruction, and as the one entity that could do so, that’s pretty good. They’re probably the only one that could really do so without going bankrupt, as they are the only entity that can ‘create’ money arbitrarily in the system. It’s around 2.6 trln dollars right now [https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB] The vast majority of the banks haven’t been underwriting mortgages themselves for a very long time, and the ones that were had been getting put in scarier and scarier positions because of the Fed’s actions. Right now, the entire sector is in the process of imploding because the Fed has stopped doing what it was before, and trying to push the markets back to reflect a more realistic cost of money, which of course dries up demand as prices are still based on ‘free cash’ as the benchmark - https://www.bloomberg.com/news/articles/2022-08-19/mortgage-lenders-are-starting-to-go-broke-as-loan-volumes-plunge https://www.bloomberg.com/news/articles/2022-08-19/mortgage-...
      - looping__lui 4y ago
        Thats the problem. The FEDs gave the banks the money for free. And we gave it to them for free as well because we didn’t get any savings on our accounts… Those who borrowed money and bought assets literally took a tiny little bite from everybodys savings account every year..
  - gymbeaux 4y ago
    I don’t think so… I mean which inflation figure are you talking about? The one that happens to be about what a 30-year mortgage would also be right now? That’s not usually the case. Mortgage rates are “fed benchmark” + a couple percentage points. Beyond that, correlation to inflation is coincidental.
    - lazide 4y ago
      See my other comments - the fed has been intervening as part of QE since ‘07-‘09 and until recently. they gradually tapered then stopped Dec ‘22. No surprise that mortgage rates started doing weird stuff about then eh? The relationships to the fed funds rate is also because that is the rate a bank or other big entity can always borrow at, and the fed is happy to ‘print’ as much money as necessary to satiate all qualified applicants at that rate.

looping__lui 4y ago

I think I would argue inflation benefited those who were wealthy the most in the past. But keep in mind that the increase in asset value was not factored into that inflation math. So: assets got more expensive because of inflation; net wages went down because of inflation that wasn’t recognized as such; the rich paid the same for labor but benefited from an increase in their asset prices. Bonds were a really bad investment in that respect…

deleted 4y ago

[deleted]

kspacewalk2 4y ago

Inflation (but not hyperinflation) benefits people in debt, and hurts people with savings. Is having savings nowadays considered intrinsically less moral or something? Inflation targeting of, say, 2%, is the balance that takes into account the sometimes competing interests of all these groups (savers, borrowers, wage earners, people who live off investments, etc). Deviation into either direction causes long-term structural problems.

harimau777 4y ago
In my experience, service sector working class people generally have no savings due to low wages and high cost of housing. I think it's not that people view saving as immoral; rather they view it as a class indicator. It appears that if the lower class starts seeing wage increases, then our economy falls apart and/or the Fed steps in to stop it. That suggests that our economy is broken with respect to the lower class.
- PragmaticPulp 4y ago
  > In my experience, service sector working class people generally have no savings due to low wages and high cost of housing. Statistically, a lot of middle class people save their wealth in their houses, which are bought via mortgages. Inflation benefits those people significantly by raising the value of their house and making their 30-year fixed mortgages (in the US) easier to pay off. It's not so great for people in other countries with variable rate mortgages, though.
  - harimau777 4y ago
    I agree that's the case for people who own homes. However, many (most?) lower class people do not own homes. Even the lower side of middle class can't afford homes in much of the country.
- refurb 4y ago
  No, what happens is wage pressure translates into higher input costs and higher prices thus fueling inflation. And that hurts low wage workers because any wage increase gets eaten up by inflation and cycle continues. If we were in a low inflation environment then the fed wouldnt be concerned about low unemployment and rising wages at all.

PragmaticPulp 4y ago

> It hurts people who already have accumulated capital in the form of bonds and stocks. The Fed acts to protect the interests of the very rich, at the expense of the lower and middle class. You're forgetting the primary asset of the middle class: Housing. People purchase housing with mortgages. Inflation raises the price of their home and diminishes the impact of their mortgage debt. Inflation also helps people with a lot of college loan debt, which has furthermore been paused for many people. You'd rather pay of a hypothetical $50K of student loans after inflation (including wages) has made that $50K worth less. I often think about the few people whose late 20s coincided with record low interest rates, the COVID pause on student loan debt, the extreme job boom where a little LeetCode would hand you a high-paying tech job, and the small window where home prices hadn't yet shot up. Anyone who lucked into the right combination of these factors would have set themselves up for a financial future that I could have only dreamed of in my mid-20s. It's not a large number of people, but I am jealous. This isn't meant to be an "inflation is good" post, because out of control inflation is definitely not. However, it's not so simple as to say that only the wealthy see any benefit from inflation.

dougmwne 4y ago
Exactly! Hyperinflation is terrible and economy destroying. But I think a good argument can be made that moderate inflation, much higher than the typical 3% target is very good for most people.
actually_a_dog 4y ago
You seem to be making a number of assumptions here that don't necessarily hold. For instance, yes, a house is often a middle class family's biggest asset. But, there's no way to directly tap into that asset without selling or taking out some kind of loan against it (second mortgage, HELOC, even a reverse mortgage if they're old enough). All of those things have, let's say, significant costs and disadvantages. Yes, "imputed rent" is a thing, but that doesn't generally appear on a household balance sheet. You're assuming people with student debt are actually able to get jobs that can service that debt. That's not the case for 4/10 with student loans [0]. I'd even dispute that inflation is good for most Americans, given that just over 50% can't cover a $1000 emergency expense from savings[1], and nearly 2/3 are living paycheck to paycheck [2]. Nearly 3/4 of middle class Americans say their earnings are falling behind their cost of living [3]. I know you specifically weren't trying to paint inflation as an unvarnished good for middle class people, but other people commenting are making these points, and I just don't feel like making multiple comments to pick at those arguments. --- [0]: https://money.usnews.com/loans/student-loans/articles/survey-almost-four-in-10-cant-afford-their-student-loan-payments https://money.usnews.com/loans/student-loans/articles/survey... [1]: https://www.cnbc.com/2022/01/19/56percent-of-americans-cant-cover-a-1000-emergency-expense-with-savings.html https://www.cnbc.com/2022/01/19/56percent-of-americans-cant-... [2]: https://www.cnbc.com/2022/12/15/amid-high-inflation-63percent-of-americans-are-living-paycheck-to-paycheck.html https://www.cnbc.com/2022/12/15/amid-high-inflation-63percen... [3]: https://www.cnbc.com/2023/01/18/amid-inflation-more-middle-class-americans-struggle-to-make-ends-meet.html https://www.cnbc.com/2023/01/18/amid-inflation-more-middle-c...

actually_a_dog 4y ago

> The government is a democracy... No, it isn't, and this isn't some "it's a reeeeepublic" rant, either. When half the population couldn't legally vote for most of the country's history, that's not very democratic. "Oligarchy" is a better fit, but apparently we only reserve that for countries we don't like. Average individuals working average jobs and making average incomes get next to no say in anything that happens at a national level, and I would be surprised if it were any better at the state level. https://act.represent.us/sign/usa-oligarchy-research-explained https://act.represent.us/sign/usa-oligarchy-research-explain...

dougmwne 4y ago
That point I was trying to make is that if the economy were bad enough, people would vote out the incumbent government in droves. The vote is a safety value that prevents riots and armed revolution. Autocracies are brittle to changing public perception and can go the way of the guillotine.
- actually_a_dog 4y ago
  The phrase "bad enough" is doing an awful lot of work here. Besides, whatever party is in charge, the other party is always nearly as bad or worse. First past the post, the Electoral College, and campaign finance law all but ensure that your only two choices are the right wing neoliberal party or the ultra right wing neoliberal party.

usrusr 4y ago

> Inflation benefits people in debt And weighed by the amount of debt, those are mostly people rich enough to hire specialists for the tedious parts of using some (most) of their assets as collateral for further investment. People living paycheck to paycheck, on maxed out credit cards, those are not the winners of inflation you are looking for.

dougmwne 4y ago
Those people have lots of debt in the form of home, car and student loans.
- usrusr 4y ago
  Hardly more than few years of wages. And when inflation hits, those wages usually trail behind quite considerably. Some may still come out positive, but not by much. The winners of inflation are the leveraged investment class.