If you depend on a fixed nominal income, then inflation is bad for you, since the prices of everything around you go up while your income does not.
I think poor and lower-middle-class people are more likely to be in the first group than the second.
Let's say you're poor, and spending 90% of your income on day to day needs. Versus if you're rich, and spending 20% of your income on day to day needs.
a 10% inflation (absent corresponding wage inflation - which lags, but I'll omit it to keep things simple, the numbers have been rounded to make the math easy anyways) takes the poor person to 99% day to day and the rich person to 22% day to day.
That represents a 90% decrease in ability to save or pay off debt. Versus the rich person who has lost 2.5% ability to save or pay off debt.
Now. With a 10% inflation, your real debt burden has gone down 10%. Would you trade a 10% loss of debt burden for a 90% loss of ability to pay off the debt? I would not.
Who is it that has promulgated this myth that inflation is good for poor people? I keep hearing it everywhere, and it appalls me that no one has really stopped to think about it.
It doesn't just keep things simple, it changes things. You can't leave out wage inflation. Of course inflation is bad if your wages don't keep up, but what if they do? That's the actual question. Inflation also lags, printing money doesn't instantly create inflation, it takes time for the market to adjust to the new circulation.
http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation...
Also please consider that I'm not taking into account the mechanism of inflation, just inflation as a policy. I don't care if it's done by printing money or by relaxing reserve requirements, or by smelting impurities into the gold.
Consider this: With continual slight inflation, in order to keep up, society is pressured to keep expanding exponentially. Well, I'm sorry to tell you son, but we live on a finite planet, and exponential expansion at some point is going to hit a limit.
> With continual slight inflation, in order to keep up, society is pressured to keep expanding exponentially.
True, but this assumes no corrections, like the one we're currently in. Ideally there'd be no inflation or deflation, but that's just not practical as wealth is not fixed nor can the money supply be. So the balancing act either tries to stay centered or slightly to one side or the other.
> continual slight deflation is the best option.
Deflation increases the value of my debt load putting me in deeper and deeper and reduces the value of my assets; how is that good? Deflation increases the value of saved cash. If anything, that sounds way worse for the poor than slight inflation. If I'm rich I just keep all my wealth in cash and steal from the poor via deflation.
Under continual inflation, I can't do that, I have to convert my wealth into hopefully appreciating assets-and I could easily bet wrong-and the poor have continually decreasing debt as long salaries keep up with inflation. Sounds like a better deal to me.
> Deflation is the natural order of things,
That's not an argument, being natural doesn't equal being good.
> Anything more inflationary than natural deflation (of course society will go through occasional inflationary bouts) is effectively stealing the fruits of societal progress from the poor, and reappropriating it to the rich or politically connected.
You assert that, but I don't see any proof or evidence of it. You've shown me why you think inflation is bad, but now why you think deflation is good; you just assert it is.
The value of your assets is untouched, the value of your assets relative to money goes down. There's nothing wrong with that. Who told you to go into debt in the first place? Islamic Finance, for example, doesn't allow for interest bearing fractional reserve debt, and Indonesia largely rode out the most recent economic crisis? I think with modest deflation, borrowing will not cease, but will largely be confined to collateral-backed loans (like car and home loans) and investment loans (like a loan to start out a second restaurant where the first succeeded). Revolving debt will disappear, and I don't really have much of a problem with that.
I'm also unclear as to how deflation steals from the poor. If I am rich, and spending 20% of my income on day to day expenses, and there's 10% deflation, I will be spending 18% of my funds on day to day. That's a 2.5% increase in discretionary spending/investing power (80%-82%). If I'm poor, and spending 90% of my income on day-to-day expenses and there's 10% deflation, I will then be spending 81% of my income on day to day expenses. That is a 90% increase in my discretionary spending/investing power (10%-19%). Sounds to me like a good deal for the poor.
> Under continual inflation, I can't do that, I have to convert my wealth into hopefully appreciating assets-and I could easily bet wrong-and the poor have continually decreasing debt as long salaries keep up with inflation. Sounds like a better deal to me.
1) any situation where you feel like "have" to do something is generally a red flag, if you ask me.
2) Who told the poor to go into debt in the first place? Under continual inflation, you encourage financiers to seek out more and more predatory loans (so they can make money off of the delta-interest and exert the strong arm of the law against the poor to wring the last of their money out). In a deflationary environment, instead of having to borrow money, from ever more-centralized banks, and when people get in trouble you will see them seek help from decentralized, local, institutions, like families, churches, charities, and mutual aid societies. This naturally limits the spread of risk. In a debt-based society, a catastrophe (like say, katrina, or say a meteor hits NYC) ripples throughout the debt network, as the victims are unable to repay their immediate lenders, whose power to pay back their lenders also gets hurt, and so on like dominoes. In a savings based society, the damage done by a catastrophe is largely a sunk cost.
3) I went over the mathematics of how the endebted poor are not helped by inflation many, many, posts up. The gist of it is the erosion of amortization power far far outstrips any benefit gained from loss of real debt value... And the reason for it is:
>as long salaries keep up with inflation
They don't.
>You assert that, but I don't see any proof or evidence of it.
Well, the two mechanisms of inflation are printing money (which sends money to the politically connected) and debt expansion (by lowering fed rates or by loosening reserve requirements) which sends money to the financiers, or rich people.
That's my point. It's not the naturalness of deflation that makes it good, but the fact that inflation is a policy choice with bad results that makes inflation bad. It is possible to have natural, secular inflation, if population expands faster than technology can accomodate feeding mouths and housing the new people - and I'm more neutral on that situation.
But a side effect of secular, natural, deflation is that we live in a savings-based society, which is more stable. I consider this to be good. There will also be a natural redistribution of wealth to the poor. I consider this to be fine. Artificial deflation can be catastrophic, and even kleptocratic, as happened just prior to the great depression as well as in argentina during the 70s.
If you can't see why deflation is 'natural' consider any technology where government has not instituted price controls. You would be hard pressed to argue that there hasn't been "price deflation" - a phrase I cringe to use because it's a malignment of the concept - in computers, TVs, cars, voluntary medical procedures like lasik or breast implantation...
Which is a depreciating asset. We trade in money, the value in money has gone down, I've lost money.
> Who told you to go into debt in the first place?
Irrelevant. We're talking about people, and people are not rational actors, they are in debt, so any solution needs to accept that as a fact.
I can see now that you're not talking about our economy, but some idealised economy you've envisioned.
> In a deflationary environment, instead of having to borrow money, from ever more-centralized banks, and when people get in trouble you will see them seek help from decentralized, local, institutions, like families, churches, charities, and mutual aid societies. This naturally limits the spread of risk.
It also limits the availability of help; that approach doesn't scale as well as debt does to all classes of people.
> In a debt-based society, a catastrophe (like say, katrina, or say a meteor hits NYC) ripples throughout the debt network, as the victims are unable to repay their immediate lenders, whose power to pay back their lenders also gets hurt. In a savings based society, the damage done by a catastrophe is a sunk cost.
We don't have a savings based society, and we're unlikely to, so this is just intellectual masturbation; the world runs on debt and credit now, we're not suddenly going to go back no matter what happens.
>> as long salaries keep up with inflation > They don't
They do, if you lose the idea of staying in one place too long. Change jobs every few years and you'll have no problem keeping up with inflation.
> I went over the mathematics of how the endebted poor are not helped by inflation many, many, posts up.
That's not relevant if they are hurt by deflation even more.
> I'm also unclear as to how deflation steals from the poor. If I am rich, and spending 20% of my income on day to day expenses, and there's 10% deflation, I will be spending 18% of my funds on day to day. That's a 2.5% increase in discretionary spending/investing power (80%-82%). If I'm poor, and spending 90% of my income on day-to-day expenses and there's 10% deflation, I will then be spending 81% of my income on day to day expenses. That is a 90% increase in my discretionary spending/investing power (10%-19%). Sounds to me like a good deal for the poor.
Because you continue to ignore debt. Your arguments assume ideal conditions rather than actual conditions. In this country, in this time, most people are carrying a good amount of debt and deflation hurts them because of that debt. You can't fix that by saying they shouldn't have borrowed in the first place.
> If I'm poor, and spending 90% of my income on day-to-day expenses and there's 10% deflation, I will then be spending 81% of my income on day to day expenses. That is a 90% increase in my discretionary spending/investing power (10%-19%). Sounds to me like a good deal for the poor.
It's also a good example of how to lie with statistics. For a 50k salary, my expenses dropped 4500 a year, nice, but my 200k house just went 20k in the hole as it's now worth only 180k but I still owe 200k. I can throw the entire 4500 savings at paying down the debt, but the net effect is that I'm still down 15.5k; ouch. Debt and deflation do not mix well.
It looks all fine when you're just talking percentages, but plug in actual numbers and the size of the debt load makes a big difference; it's like leverage in reverse, and it's specifically those on lower incomes who will suffer the most as they're the ones who's debt load is going to kill them the most with deflation.
If you're just saying we shouldn't be a debt based society, well ok, I agree that'd be nice, but it's also a fairy tale, because we are a debt based society. And in a debt based society-which isn't going to change-continual inflation is the best option.
Actually, I'm not, because last I checked, debt was amortized in nominal terms.
>It's also a good example of how to lie with statistics. For a 50k salary, my expenses dropped 4500 a year, nice, but my 200k house just went 20k in the hole as it's now worth only 180k but I still owe 200k. I can throw the entire 4500 savings at paying down the debt, but the net effect is that I'm still down 15.5k; ouch. Debt and deflation do not mix well.
What? No. The assumption there is that you are going to resell the house. If your plan is to keep it, then your amortization is still done in nominal terms. So what, (I know home mortgages are usually 30 years but let's make it 20 with a fixed 5% interest so the math is easy), your annual payment is gonna be 20k without deflation and 20k with deflation. Backtracking your math... The person was spending 45k on day to day expenses, so each year was going in the hole (45 + 20 - 50) = -15k per the first year. The next year the day to day goes up to 49.5, so 49.5 + 20 - 50 = -19.5k. Maybe minus a smidgen on the interest... Too lazy to figure it out. Nonetheless it's getting worse.
With deflation, the first year the person is going -15 k in the hole that first year, and the next year (41.5 + 20 - 50) = -11.5k in the hole the next year. In a few years the person has a net positive cashflow and that debt (or savings loss) that they accumulated in the first two years will be smoothed over pretty fast.
With inflation, why the hell did someone sell that 200k house to the person, unless there was a crazy idea that the nominal value of the house would monotonically go up at a rate that beats inflation.
With deflation, it was probably still a stupid sale, but well at least there's a chance s/he'll pull out of it, if they don't sell the house from under, as indeed the nominal value has gone down. I feel like home tenancy (versus default, eviction, and turnover) creates for a stabler society, and I'm all for that.
Now, if I made a mistake in my math somewhere, let me know.
>And in a debt based society-which isn't going to change-continual inflation is the best option.
You haven't convinced me of that. I think continual inflation is the best option if you're a banker. Or a politician. The math I've written up above bears out the notion that deflation is good, even for those who are in debt, unless you are really rearing to sell your assets and jump like a hyper meerkat on arbitrage opportunities. There are reasons why deflation is considered 'bad', namely that it appears to coincide with the loss of jobs, and I think that's mostly because the broad-stroke reason why jobs are lost is because of technology and because technology causes deflation, and indeed, deflation is the mechanism by which technology causes the loss of jobs.
https://spreadsheets.google.com/ccc?key=0AnuVSPZl-I22dHBiRmx...
In the deflation scenario, even though the house has lost nominal value from $200k to $27k, our family spent only a total of 8 years in debt and, amazingly, at the outset of 20 years accumulated 2 millions dollars in real (year 0) value.
In the inflation scenario, although the house has gained nominal value from $200k to $1M, our family spent all those years in debt. Towards the last 8 years, the appreciating nominal value of the home was no longer able to suffice as an investment to counter the loss of spending power, and the family wound up in the hole... 100k in (year 0) value. There was only one year that cashing out on the house would have made nominal sense (year 1) and even so, that represented a net real value loss.
Hell, I was a nice banker and didn't charge interest on the bank debt.
(update: I threw in wage inflation, too, lagged it behind half a year). Now things are looking a bit better for our scrappy family and they come out at the end with a real net worth that's only down about 9k in year zero dollars. But at least they're not in the hole! Of course, that 9k can also be thought as 54k, or probably better, a quarter of the the year's wage.
If I work in a widget factory and the price of widgets goes down because of deflation, while my nominal wages remain constant, then my wages as a share of that price goes up. That situation can’t continue for very long. The factory’s shareholders want a real return on their investment, especially since they could just cash in their stock, put the cash under a mattress, and wait for the price of everything to go down further. If the factory itself is in debt, the creditors will be demanding the same nominal payment as before, further squeezing the shareholders.
So either I have to accept a cut in my nominal wages, or I have to make more widgets per hour for the same nominal wage, or I get laid off. And when I and lots of people like me have less money to spend, the people who manufacture all the things that we buy have to reduce their prices further, thus increasing the squeeze on their employees’ wages, etc., etc.
You also have to consider why the price of widgets is going down because of deflation. If it's going down because the widget is obsolete relative to other technologies, then either the manufacturer is beating margins by improving efficiencies (and growing the scale of the company), leaving it okay for the employee to be paid the same nominal wage... Or else, yes, the person will lose a job. But if it's the case that the manufacturer isn't able to keep up with developing technology, then not even inflation will help that person keep a job, or at the worst, it's just keeping a person in a job that is inefficient for the economy and society.
All this hoarding stuff is nonsense. If people keep hoarding money, then in order to compete with saving, (absent a centrally-decided interest rate) banks have to issue loans at lower interest rates... Which, of course, expands the money supply, and creates competing inflation.
http://en.wikipedia.org/wiki/Panic_of_1873
If, for example, I spend 30% of my income on a fixed-rate mortgage, and both wages and prices go up by 10% across the board, then I would end up spending only 27% of my inflated income on the mortgage, and the nominal value of my house would go up by 10%.
I think my argument is sound. All I'm saying is that the blanket statement that inflation is beneficial to poor people is flat out wrong. Consider also that poor people aren't getting fixed rate mortgages (more like variable rate ones - which are worse) and aren't investing in stocks or bonds which at least have a chance of beating inflation (if you play it right and get out before crashes). If you want to critique my argument, plug in real numbers and show me I'm wrong in our current situation. I believe that the numbers will hold up in my favor.
I read, in a reliable journal, that Kunta Kinte, was accepted at Harvard for a PhD program. He turned it down and was quoted as saying, "There's only so much you can ask a man to do for nothing in return."