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.
A lot of people don't realise inflation is essentially a stealth cash wealth tax. It applies to savings, debt, dollar-denominated contracts, etc.
Yes, bigger down payments suck but that is mostly a zoning/housing supply issue.
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.
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-fin...
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.
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).
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.
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.
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
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.
TIPS have a yield that is referenced to the CPI (attempting to present a real yield), not a yield expressed in nominal dollars, so direct comparisons against mortgage rates (inherently nominal yield) are not very productive.
The close equivalent to the 30YR mortgage rate is either the 10-year Treasury (currently yielding ~+1.6%) or, if you insist on matching maturities, the 30-year (currently yielding ~+2.0%)
So, whatever risk premium the lender is demanding on a 0-points, 30-year fixed mortgage, it's a maximum of 1.4% (3.0%-1.6%). As a borrower, I'll happily take that deal.
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.
How? I'm pretty sure that is determined by the market. 10 year treasuries are yielding 1.587% which is less than inflation and people still buy them because your alternative is cash with even worse returns.
Hard to predict, in general. Would you have predicted we’d be looking at 5% inflation right now, three years ago? We haven’t seen inflation like this in decades.
> That hurts debtors.
Only if they have variable-rate loans.
The broader point here is that it’s creditors (and the wealthy) who bemoan inflation the most because it means their rents are going to be worth less.
No, they do not, because they typically only hold the note for a few days before it gets securitized and sold onto a market that is pinned by a very large, inflation-agnostic player: The Fed.
Now, we'll see what happens to this market if and when they begin to taper, but I think all the non-Fed players in this market remember what happened the last time they tried it, and they're all betting, correctly, that Powell will be forced into not only NOT tapering, but increasing purchases.
All of these markets: treasuries, mortgages, auto loans, and junk bonds, know for a fact that there will always be an artificially high bid for their toilet paper. Why would they care?
- 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.
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.
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.
Mind you, it's literally impossible to get evicted from your primary home here, which is presumably what drives the differences.
How does this work? Do they get a free house and a check cut monthly? Or is the mortgage cheaper than what it would have been?