Evil Inflation -- Or Is It?

As you may know, I'm a big fan of inflation.

I think inflation is the best way to pay off our national debt (makes it a smaller percentage of the GDP) and the only people who really hate inflation are the people who lend you money. They get paid back in dollars that are worth less (worthless?) than the dollars they lend you.

That's why the Federal Reserve, a bunch of Bankers, spend day and night combating inflation. They're not doing it for you -- you borrow money! They are doing it to make sure that your mortgage stays at 30% of your income. If you keep getting raises due to inflation that mortgage (and you should always have a fixed, of course) might go down to 10% of your income over time leaving you with extra money.

Too much inflation leads to high interest rates which causes consumers not only to borrow less (gasp!) but to save more. I remember a time when you got a CD that paid 12% AND a toaster for putting money in the bank! Now you get 3% and a $1.25 fee for reviewing your statement -- and they wonder why Americans save less!

You often hear that we are not a nation of savers but Americans have deposited $1.5T since 2002, bringing our people's total savings to just under $4 Trillion, about as much as the rest of the planet combined! While it may be a small part of our total income, it's quite a large total income to begin with!

The joke is that we are being paid less money for our savings than at any time since 1960 so again I will point out that you are being fed a line of crap by bankers! They are holding $4T of your money and paying you 3% interest yet if you want to buy a home you must pay 7% (plus fees!).

This is what is holding rates down -- the massive availability of cheap cash right here in our own country yet you will never hear it from our government (other than Ben hinting at "Global liquidity") because they work for the guys that borrow your money and lend it back to you.

Their mandate is to keep inflation down at all costs: At the cost of your wages, at the cost of your home's value, at the cost of runaway commodities, just to make sure you pay back the bank in a way that they get to maximize their inflation adjusted profits. That is our government's policy. What would you really care if gas were $5 a gallon as long as the minimum wage was $15 an hour?

You could afford a $1M home if you could count on a 5% raise every year to bring down your mortgage payment. Even the property tax increases wouldn't seem so bad if your salary kept going up...

The math is simple. You take on a $4,000 a month mortgage on a $600K home and you take home $7,000 a month -- it's a struggle but you make it happen. If you get a 7% raise every year in just 11 years you will be taking home $14,000 a month and paying the same $4,000 mortgage.

Great for you, bad for the banker who has to pay his clerk double what she made when you first came in there. It's also great for the economy as you have much more disposable income to spend. Even if your $3,000 in living expenses also doubled in 11 years you would still be making $4,000 a month more than you need to live on.

If you had taken half of that money and invested it at 7% in the bank, you would also have $150,000 in savings tucked away. Keeping up at this rate and by year 20 you would have saved $500,000 for your retirement with a salary of $28,000 a month in a fully paid for $2.4M home with just $12,000 of monthly living expenses.

Who needs social security? Oh the horror of inflation!!! It's not so terrible for the bankers, they still make plenty of money - just not the obscene amounts of money they make by rigging the system to keep inflation from eating into their profits at your expense! Since Ben liked my last position paper, let's make this the next one he gives a speech on... Inflation can be our friend, let's make peace with it!

Nancy Pelosi mentioned "Draining the Swamp", and much has been made of it, but I think she may have been making a slightly different reference... There is a book called "Draining the Swamp" that espouses the anti-fed positions of the National Economic Stabilization and Recovery Act, something that's got to keep bankers tossing and turning at night as we await the coming of the 110th Congress!

Thomas Jefferson, once said "If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around the banks, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."

Read all of Phil Davis's articles on Seeking Alpha

Comments

[Jim Richmond:]

Hmmm, I'm not sold on this argument.

As a retiree, inflation would be very bad indeed for me. First, even if real interest rates remain unchanged, the taxes due on the "extra" interest/stock growth that I'd need to earn to keep up my savings' purchasing power would be killer. So just to keep even, real rates would have to increase enough to cover the extra taxes.

Further, unstable prices make predicting the future very difficult for both producers and consumers and the result is a large drag on the economy. The idea that increased inflation causes increased savings flies in the face of history. Increased inflation induces people to consume more (buy it now since it will cost much more next year). This is a dangerous game to play with a fiat currency since everything depends on everybody keeping their cool. Surely you wouldn't welcome runaway inflation!

All and all, I'd prefer a fed that holds the line on inflation and keeps things on an even keel. Although the idea of inflating our way out of debt might sound enticing, it's a fools game that will cause more damage in the long run.

No, we have to get out of this mess the old fashioned way, by tightening our belts, reducing gov't spending (especially entitlements), and maybe even increasing taxes. We should probably start with a gas tax to offset the external costs built into the consumption of fossil fuels.

2006 Nov 11 07:11 PM

[Philip Davis:]

I wish I believed we had the stomach to "tighten up" but I'm going to stick with my plan!

I'm all for leaving the long-term capital gains tax in place at a low rate to take care of retirement incomes and encourage long-term savings and yes, I do think runaway inflation would be bad but I think the damage is being done by keeping an artificial lid on inflation, not just in the US, but around the world.

When did a person expect that the salary they got out of college would be only 25% greater 10 years later? We all earned our way into retirement one way or the other but think about how insurmountable it is for the average person starting out today.

There is a very spirited discussion going on at the main blog at: philstockworld.wordpre.../ that I think you'd enjoy!

2006 Nov 12 02:12 PM

[deodand:]

This is a terrible notion. Inflation punishes savers, and rewards prolifigate borrowers and irresponsible people living beyond their means -- be it real estate 'investors' like some 24 year old kid with $2 million in liar loans (iamfacingforeclosure.... or the federal government with their trillions of unfunded obligations.

Furthermore government statistics regarding the 'core' rate of inflation are so twisted and manipulated as to be ridiculous; see John Williams' Shadow Government Statistics site.

I would prefer a mild deflation rather than chronic inflation, and I am horrified at the prospect of hyperinflation and the destruction of the value of the dollar.

2006 Nov 11 10:26 PM

[Philip Davis:]

Rewarding this prilifigate borrower (the US) is exactly what I'm talking about!

It's too late, this country screwed up big time and needs deux ex machina to bail it out - 20 years of belt tightening just isn't going to happen unless it's forced by a horriffic economic downturn so we either grow our way out of this (with the obvious attendent consequences) or we all grow old in a very sad little world of global recession. The last time we did that it took a World War to end it, I'd hate to see that happen with the kind of weapons that are available today.

Also, as you rightly point out, the people who suffer most (people with now-fixed incomes) are the same people who borrowed (or voted for the people who borrowed) us into this mess in the first place so - sorry but it's time to pay the piper! Keeping a lid on inflation and paying off this debt over the next 20-30 years is just shucking the responsibility off to your children - tsk, tsk...

2006 Nov 13 01:04 AM

[h4x5k8:]

Wow man....

Look into history, unsound paper money fails because people try to print their way out of debt. It never works, we are postponing the the collapse for posterity, instead of feeling the recession we need now. The indebted westerners have been the reapers of what the indirect slaves laboriously sow. In all relativity, we live like kings, and labor like them as well; while starving serfs perish in their sorry ignorance... ignorance perpetuated by the whip excessive labor.

2008 Oct 14 06:58 PM