A conversation about inflation

[Exsubmariner]

So I was recently sitting and speaking for a few hours about economics with one of my friends and childhood teachers. The case of a mortgage came up and he went off explaining about how, because of inflation, holding a mortgage was beneficial to the borrower.

You see, when the borrower first gets the loan, it may be a $1200 a month payment. Now, this is a fixed rate, 30 year loan in our example. Let us say that the borrower brings home, after taxes, $3000 a month. Now assuming a rate of 4% of inflation, and assuming that the borrowers pay rate stays constant in the face of inflation, than that means that in 15 years, the borrowers take home pay will have increased by a factor of 1.8 (using the compound interest formula) to $5402 a month. All the while, the mortgage payment remains constant at $1200. What's more, the owner can take the extra $, which are inflated from the original value of the loan amount and pay them into prinicple, thereby paying off the loan sooner.

There are a lot of other factors to consider. However, I think that a very strong case can be made that inflation benefits the borrower, i.e. the consumer. The opponents of the FED will constantly talk about inflation being a "tax," but overlook the fact that it actually is a tax in favor of a borrower, who is spending money. They often say that the tax is against the lender and investor.

Does the investor represent a market or does the consumer represent a market? In a market, does the investor create the market or does the consumer? How would a market function that constantly concentrated money in the hands of investors and not consumers? I think there would be a shortage of consumers.

There seems to be a contradiction in the logic against arguments railing against an inflationary monetary policy. Something that I often hear in conjunction with such arguements is that it is a bad thing to concentrate wealth into the hands of a minority. No inflation, they say, is essential for keeping the value of money in the hands of the many. It seems, however, that the effects of inflation being of benefit to the borrower in fact serve to prevent the accumulation of capital to the hands of the few, creating more consumers and therefore more market.

[MrMon]

I'm sure the usual gang will chime in, but you're basically correct. Hard money/no inflation is great if you have money, it sucks if you don't, as credit markets pretty much dry up. Ours is a credit based economy.

The arguments went on all during the late 19th century, as I've pointed out in other threads, and were pretty much decided in favor of the soft money faction. The hard money faction does have a point, the value of money does decline over time, but the consequences of hard money are pretty harsh as well, and the world has decided that the downside of soft money is the lesser evil.

[Zygote]

[ QUOTE ]
I'm sure the usual gang will chime in, but you're basically correct. Hard money/no inflation is great if you have money, it sucks if you don't, as credit markets pretty much dry up. Ours is a credit based economy.

[/ QUOTE ]

There are limited resources in the world. How do your "credit based economies" account for this?

Also "credit based economies" are only useful so far as they have credit. Therefore, if they practice what you preach there will eventually be a huge spike in interest rates, as the country consumes more than they have, and lenders become aware and demanding.

[ QUOTE ]

..and were pretty much decided in favor of the soft money faction. The hard money faction does have a point, the value of money does decline over time, but the consequences of hard money are pretty harsh as well, and the world has decided that the downside of soft money is the lesser evil.

[/ QUOTE ]

Care to make a stronger point for a statement deserving as much?

[MrMon]

[ QUOTE ]
[ QUOTE ]
I'm sure the usual gang will chime in, but you're basically correct. Hard money/no inflation is great if you have money, it sucks if you don't, as credit markets pretty much dry up. Ours is a credit based economy.

[/ QUOTE ]

There are limited resources in the world. How do your "credit based economies" account for this?

Also "credit based economies" are only useful so far as they have credit. Therefore, if they practice what you preach there will eventually be a huge spike in interest rates, as the country consumes more than they have, and lenders become aware and demanding.

[ QUOTE ]

..and were pretty much decided in favor of the soft money faction. The hard money faction does have a point, the value of money does decline over time, but the consequences of hard money are pretty harsh as well, and the world has decided that the downside of soft money is the lesser evil.

[/ QUOTE ]

Care to make a stronger point for a statement deserving as much?

[/ QUOTE ]

The fact that every economy in the world operates on a fiat money system. If hard currency is such a good idea, why does no one use it anymore and also kick the rest of the world in the butt with their stellar economic performance?

[Exsubmariner]

The winner, by a knockout!

[owsley]

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The fact that every economy in the world operates on a fiat money system. If hard currency is such a good idea, why does no one use it anymore and also kick the rest of the world in the butt with their stellar economic performance?

[/ QUOTE ]

Pretty much every government has chosen a fiat money system because it allows them to tax their population more without them realizing it (among other things). It is bad for the overall economy but good for the people who run the government. The people who run the government make the obvious decision in their own self interest, while the people who get hurt have no idea WTF fiat even means. Brand of cars? Italian soccer team? New sports drink?

[pvn]

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[ QUOTE ]
The fact that every economy in the world operates on a fiat money system. If hard currency is such a good idea, why does no one use it anymore and also kick the rest of the world in the butt with their stellar economic performance?

[/ QUOTE ]

Pretty much every government has chosen a fiat money system because it allows them to tax their population more without them realizing it (among other things). It is bad for the overall economy but good for the people who run the government. The people who run the government make the obvious decision in their own self interest, while the people who get hurt have no idea WTF fiat even means. Brand of cars? Italian soccer team? New sports drink?

[/ QUOTE ]

The winner by a knockout!

Also, to the OP, yes, of course inflation is beneficail to those holding debt and those owning non-cash assets (real estate, especially).

If you think inflation helps you when buying a house, think how much it helps if you're buying, say, a Fortune 500 company.

The monied elites recieve the overwhelming portion of the benefits of inflation. At the expense of the poor masses, who hold a much, much higher percentage of their net worth in cash.

You broke the code, but only read half the message.

[MrMon]

[ QUOTE ]
[ QUOTE ]
The fact that every economy in the world operates on a fiat money system. If hard currency is such a good idea, why does no one use it anymore and also kick the rest of the world in the butt with their stellar economic performance?

[/ QUOTE ]

Pretty much every government has chosen a fiat money system because it allows them to tax their population more without them realizing it (among other things). It is bad for the overall economy but good for the people who run the government. The people who run the government make the obvious decision in their own self interest, while the people who get hurt have no idea WTF fiat even means. Brand of cars? Italian soccer team? New sports drink?

[/ QUOTE ]

People nowadays may not be familiar with the term, but back when the hard/soft money debates were going on, the average citizen understood it very well, it was part of every presidential election. One of the most famous speeches in American political history is William Jennings Bryan's "Cross of Gold" speech to the 1896 Democratic National Convention, a speech he gave on the lecture circuit for year's afterward it was so famous.

Stop thinking of the government as a conspiracy and give the voters of the time some credit. They knew the issues and knew exactly what they were asking for. It wasn't the bankers who demanded soft money, it was the people.

[VarlosZ]

[ QUOTE ]
[ QUOTE ]
The fact that every economy in the world operates on a fiat money system. If hard currency is such a good idea, why does no one use it anymore and also kick the rest of the world in the butt with their stellar economic performance?

[/ QUOTE ]

Pretty much every government has chosen a fiat money system because it allows them to tax their population more without them realizing it (among other things). It is bad for the overall economy but good for the people who run the government. The people who run the government make the obvious decision in their own self interest, while the people who get hurt have no idea WTF fiat even means. Brand of cars? Italian soccer team? New sports drink?

[/ QUOTE ]

Of course, but you're forgetting the most important reason. By enriching themselves as you describe, the people who run the government have been able to corner the market on mustache wax, which, as we all know, is the essential commodity for mustache-twirling über-villains.


Seriously, though, why is it that "the people who run the government" are conceived of as both brilliant long-term Machiavellian schemers who successfully maintain a strict code of secrecy about their ingenious conspiracies, and as bumbling semi-baboons who can't run the day-to-day affairs of the state any more efficiently than a drunken Kazakh bear?

I have lots of respect for many AC/Libertarian positions, but I get the feeling that some of you guys are actually railing against the boogeyman.

[Zygote]

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[ QUOTE ]
I'm sure the usual gang will chime in, but you're basically correct. Hard money/no inflation is great if you have money, it sucks if you don't, as credit markets pretty much dry up. Ours is a credit based economy.

[/ QUOTE ]

There are limited resources in the world. How do your "credit based economies" account for this?

Also "credit based economies" are only useful so far as they have credit. Therefore, if they practice what you preach there will eventually be a huge spike in interest rates, as the country consumes more than they have, and lenders become aware and demanding.

[ QUOTE ]

..and were pretty much decided in favor of the soft money faction. The hard money faction does have a point, the value of money does decline over time, but the consequences of hard money are pretty harsh as well, and the world has decided that the downside of soft money is the lesser evil.

[/ QUOTE ]

Care to make a stronger point for a statement deserving as much?

[/ QUOTE ]

The fact that every economy in the world operates on a fiat money system. If hard currency is such a good idea, why does no one use it anymore and also kick the rest of the world in the butt with their stellar economic performance?

[/ QUOTE ]


because government isnt a business where the people at the helm of the errors suffer the consequences. Why should US politicians, fed, banking community or wallstreet care?

More so why should they care when this is the most beneficial tool they have ever seen with regards to feeding their self interest.

Further modern fiat systems havent been around that long. Many examples of them or varieties of the same showing devastating economic results throughout history do exist. None of them have been sustained for an extended period in fact. Do some research.

Commanding heights of the economy are always important for governments to always control or at least heavily influence btw.