Inflation Erodes Assets: That’s Why Some People Fear It

August 22nd, 2014 at 8:51 am

Paulie Walnuts Krugman has a nice piece out this AM on why the central bank should downweight the views of those who’ve been wrongly crying hawk wolf re inflation for years now. I’ve made the same point as the din of voices urging the Fed to pre-emptively tighten is getting louder.

One point to add: Paul writes that it’s “less clear” why “the inflation obsession is as closely associated with conservative politics as demands for lower taxes on capital gains.”

I think at least part of the answer is a rule of thumb I’ve been mentally toting around since I read about it 30 years ago: unemployment hurts the poor, inflation hurts the rich.

Obviously, like any such rule, it’s overstated. High and rising inflation hurts everybody, and capital income has taken big hits in recent recessions (though the top 1% has consistently bounced back well ahead of the rest).

But inflation erodes asset values, not unlike a tax on capital gains, and generally speaking, those who depend on portfolios vs. paychecks are going to be less sensitive to unemployment. So, as Paul stresses, they have a class interest to advocate for heading off inflation, even if it’s a phantom menace, while at the same time worrying not so much about the impact of tightening on those who depend on a tight job market.


Back away from the funds rate and nobody gets hurt.


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18 comments in reply to "Inflation Erodes Assets: That’s Why Some People Fear It"

  1. foosion says:

    Inflation may erode asset values, but returns on many financial assets increase with inflation. Also, returns tend to reflect expected inflation.

    Unemployment reduces labor bargaining power and therefore labor costs. This increases corporate margins, increasing returns to capital. To this extent, it’s a zero sum game – the more that goes to labor, the less goes to capital.

    You might respond that economic growth and increased demand from workers spending more benefits capital. However, the increased margin from lower labor costs is immediate and much more certain than the possibility of increased profit from a general increase in spending.

  2. Robert buttons says:

    It is incongruous to believe there is no inflation and a higher minimum wage is necessary.

    As far as who wins in an inflationary environment, ask yourself is the old lady with savings bonds and an interest bearing checking account better off than the hedge fund jet setter with a basket of foreign currencies and bond shorts.

    My well heeled ecuadorian friend became amazingly wealthy with their (pre dollar) currency sank because his family held US dollars, the peso holding rabble were wiped out.

    • Tiree says:

      The old lady probably has Social Security also. People who prepare properly for retirement, that is to go into it debt free with a home they can afford, Social Security is generally enough. The other investments are frosting on the cake for things like vacations and other extravagances that people have not historically associated with retirement.

      I don’t think it is right to sacrifice the future of working people to frost the cake of the retired.

      • Robert buttons says:

        Correct me if I’m wrong but it sounds like you are making the argument that one is only entitled to a certain lifestyle and anything above can be duly expropriated.

        • Tiree says:

          Oh no, I’m not saying anything even close to that.

          There is no entitlement to returns on investments. You seem to be claiming that people are entitled to guaranteed returns on investments. The desire to turn our financial and economic system into guaranteed returns is what caused its collapse in the first place.

          We are at opposite ends of the argument looking in for morality plays. The suggestion that inflation is an assault on old ladies is ludicrous, and I’m just trying to point out the inherent hypocrisy in this common claim. The implication in the claim is that old ladies will suffer some kind of inhumane circumstances if there is inflation.

          There are a lot of ways to undermine this argument, and we could talk about TIPS and the like. I’m just trying to keep it short and to the point.

          The people making these public arguments are not old ladies. They are generally wealthy investors.

      • PeonInChief says:

        Really? The average Social Security payment is $1200 a month. Show me where you could live on that, even without having a house payment or rent. If you own the house, you still have to pay property taxes, make repairs and so on. That’s how so many little old ladies ended up losing their houses in the foreclosure crisis–they had to refinance to get a new roof or make other expensive repairs.

        • Tiree says:

          Yes, really.

        • Tiree says:

          There are a lot of places a person can live on that. I shouldn’t have to answer this question. The people who really live on that kind of money know where to live on that kind of money. The people who live a much higher standard of living generally can’t imagine it, but it is not that hard if you don’t have high expectations.

          Even if SS provides close to poverty wages, many of the expenses of life are eliminated in retirement, such as living in places with lots of jobs, having a vehicle for transportation, etc…

          My grandparents lived just fine of SS. They were careful, they were worried, but they did ok.

          Of course, Medicare is a big part of the picture too.

      • wendy beck says:

        “Frost the cake of the retired”? For the many who have to rely on Social Security and savings (which after 2008 they’ve been afraid to put into the market), inflation would be a double whammy. For 6 years now, they’ve been getting virtually zero on their savings, losing a bit to inflation. If we have larger inflation without a concurrent and co-equal boost in bank deposit (CD) interest rates, this will be devastating.

        Most people are not savvy investors and work hard to save what they can.

        • Tiree says:

          So save. My point stands.

        • Tiree says:

          More specifically, savings interest almost always lags inflation regardless of how high the inflation. But returns on CDs also rise when inflation rises.

          I’m sure my comment seems thoughtless in the context of disinformation. Unfortunately, there are a lot of public figures trying to scare old people with disinformation.

          Put the money in TIPs if you’re worried about inflation.

          Social Security is inflation adjusted. It will pay for food, clothing and very modest housing. Nothing the Fed does is going to eliminate the precarious financial nature of retirement.

          Perhaps the SS administration could provide free financial advice to those approaching retirement.

          The disinformation generally comes from the kind of investor that wants to do away with Social Security. Now that is much worse than a double whammy, it would be fatal to a lot of the elderly.

    • jonas says:

      Does anyone really believe that “there is no inflation,” besides Stephen Moore at the Heritage Foundation?

      The “old lady on a fixed income” trope is only coherent if we’re talking about /unexpected/ inflation.

      Is there really a salient comparison of late-1990s Ecuador and early 2010s USA? (See “unexpected” reference above.)

  3. Larry Signor says:

    When we talk about inflation hurting the rich we misspeak. Inflation is too much money chasing too few goods. This would be a good thing for the labor market since wages would rise. Inflation helps to redistribute income and wealth from the top to the bottom, another good thing considering the wealth and income disparities of the last 30 years. Who knew that inflation was a socialist back door play?

  4. smith says:

    I’m not seeing any data to back up anyone’s claims about how inflation helps or hurts various segments of society. Could someone please do this?
    I did see Krugman make an ill considered argument in one blog some time ago about how rich people were hurting due to the low interest policy of the Fed. His analysis neglected to include the counteracting benefits of the low interest, or the fact conservatives actually wanted preemptive rate hikes only to ensure rates were kept low.
    What is totally missing from debate is debt. If you owe money at fixed interest rates, inflation is good. If your house mortgage is underwater (20% of all mortgages), inflation is good. If you are a banker who lends money at fixed interest rates, inflation is bad. If you are anyone in the bloated financial sector (8% of the economy) or an investor in such, inflation is bad. If you are paying back student loans at a fixed interest rate, inflation is good. Historically, it wasn’t difficult to figure out who wanted tight money, who benefited and why. Roosevelt took us off the gold standard.
    It is not that rich people fear unemployment less. It is as commenters pointed out that less unemployment creates wage demands.
    Finally, the debate is not about inflation at all. Conservatives and Republicans want Democrats and the economy to fail. If the inflation argument helps do that, then why wouldn’t they use it. Democrats and liberals don’t like inflation either. Those who concede higher inflation is necessary are delusional in not addressing true problems of wage distribution, labor markets, monopolistic pricing, and everything else that tilts the economy in favor of big business and the wealthy.

    • Smith says:

      In light of the clarifying comment below about what we talk about when we talk about inflation, the statements above should be interpreted to mean:
      inflation helps borrowers at fixed rates and hurts lenders at fixed rates
      is actually conveying the obvious
      increasing inflation helps borrowers at fixed rates and hurts lenders at fixed rates

      There is still a separate issue of what the best stable inflation rate should be, and I would contend Krugman’s advocacy of a higher inflation rate, with little regard for how it is induced and how it is controlled, is self-defeating, not well thought out, and wrong. Some higher inflation driven only by wage increases broadly enjoyed by complete labor market and a drop in profits is to be tolerated, especially during a recovery. Crazy ways to increase investment with higher inflation is not a good idea. Making sure inflationary wage pressure comes not from just a few sectors, and cuts into profits, are not minor points. Witness the lack of support for teachers, viewed as getting something no one else does, and protest against higher personal taxes to for any increase.

  5. John Daschbach says:

    The claim that inflation erodes assets is not backed by either data or rational thinking. While the efficient market hypothesis is clearly not completely true asset values for real assets tend to correlate well with inflation. Assets which decrease in value are money and fixed rate bond type assets.

    The basic mathematics of economics are invariant under any functional form of inflation which is solely a function of time (all other functional parameters are fixed). The presence of currency which many people think of as a store of value rather than a medium of exchange makes this problematic, especially if the functional form is deflationary. But with no currency, all the rest of economics works independent of a fixed functional form in time for inflation/deflation (for deflation your savings account pays a negative interest rate, your bonds return principle scaled lower by deflation, …)

    it is not the rate of inflation that impacts fixed interest bearing assets, like bonds, but the 2nd derivative of inflation. Bonds and similar are always priced to reflect inflation expectations so changes in the inflation rate are the issue, not the inflation rate.

    In the real world of human irrationality inflation and deflation are issues, but how they impact different groups is variable. Many in the upper-middle to upper classes did well in the high-inflation period of the 70’s and early 80’s, and many in the same group are doing well in the low-inflation period of the past decade. Given this, and the invariance of economics under any inflation scheme with a 2nd derivative of zero, makes it clear that it is not inflation that is an issue, it is changes in inflation that matter.

  6. PJR says:

    It used to be common knowledge, at least among the poor, that “unemployment hurts the poor, inflation hurts the rich” as a general rule. However, inflation became a big concern to middle class voters, especially upper middle class voters, during the 1970s–less because savings were eroded than because tax brackets weren’t indexed to inflation and Congress allowed serious middle class bracket creep. For example, the marginal rate was over 40 percent for income over $98,000 in 1980, down from $189,000 in 1970 (rounded 2013 dollars, married/joint filing status). Similarly, for the 30+ percent bracket, comparable figures were $68,500 in 1980, down from $118,000 in 1970. For the 20+ percent bracket, it dropped to $33,000 from $47,000. (During his first term, Reagan partially addressed this creep but the numbers remained lower than they were in 1970 and some middle class tax deductions were weakened/removed.)

    • smith says:

      I would contend that middle class voters were much less concerned with bracket creep than rising prices. When prices jumped 7% to 12% per year/ the effect was much greater than increased marginal tax rates. The reason for that was few people’s wages ever kept ahead of increasing inflation rates. Add to that the inflation sensitive sector of the economy that relied on interest rates, meaning housing and auto, and you find people facing higher prices, especially for the most important purchases, cars and homes. The few labor sectors (heavily unionized) able to bargain for wage increases commensurate with inflation levels, soon got blamed for contributing to the country’s economic woes and possessing an unfair advantage. The game Republicans and rich people play is to cut taxes on the middle class and especially lowest incomes to disguise the fact tax cuts disproportionately benefit the rich. (they get more of the revenue and need less government services, and thrive in an unregulated environment)