Financial Meltdown

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The thing I’m most interested in exploring is the idea that inflation is good. In my December article, I described this as the fourth stage of the inflation story.

  • Stage 1: There won’t be inflation.

  • Stage 2: There is no inflation.

  • Stage 3: Inflation is transitory.

  • Stage 4: Inflation is good.

If you think inflation is good, you are almost certainly sitting at, or very near, the apex of privilege in our society. Either that or you’re in for a rude awakening. Let me elaborate.

I’m going to skip discussing the causes of inflation and merely look at the effect: rising prices. Who is it in society that most benefits from an environment of consistently rising prices? Stated another way: Who is privileged by an inflationary environment, at least to start with?

Well, people who own things that go up in value benefit from rising prices. I bought a brand new car three years ago. It’s paid off and I have 28,000 miles on it. My car-buying plan has long been to buy new and then drive it until it can’t be driven anymore (my last vehicle had over 300,000 miles). I was in the dealer the other day getting it serviced and discovered my car is now worth more in dollars than I paid for it. I’m wealthier (in dollar terms) because I own a car. That’s crazy, but that’s inflation.

That’s just a car and it’s a modest amount, but someone who owns a house, a factory, an oil well, a piece of stock, or any number of things where the value is priced in dollars is seeing their wealth increase relative to what they once paid for things. Now before people shout, “but your dollar now buys less,” sure, but I needed to have a car either way. So long as my stock portfolio, house, and the like go up faster than inflation, I’m doing well.

Likewise, people who have a lot of debt tend to benefit from inflation, especially where that debt is at a fixed rate over a long duration. I own a home and I’ve watched my house price rise—in Zillow terms—from $220,000 to $335,000 over just the past year. Even if I give a substantial amount of that appreciation back in a correction, my mortgage looks better now than ever. And, in dollar terms, I’m a lot wealthier just for owning a home. Since my mortgage is subsidized by the federal government, I’m locked in with low interest rates over a long duration and now can enjoy this advantage as long as inflation runs hot.

People whose skills and services are in high demand have pricing power and can use that favored position to stay ahead of inflation (at least for a while). Again, using myself as an example, I’m a civil engineer with an urban planning degree and many years of experience. Even if I were not working for Strong Towns, I’d have a lot of demand for my services. My wife is a journalist and, likewise, is pretty sought after (she’s really amazing), so she can easily switch jobs if a better opportunity arises (for any loyal MPR listeners, she has no plans to do so). As a married couple in the peak demand years of our careers, we have a lot of options and opportunities to leverage our position to stay ahead of inflation. That applies to many—maybe most—professionals between the ages of 30 and 55 (my wife and I are both 48).

The profile, then, of someone who benefits from modest levels of inflation is a professional-class person or family with high fixed-rate debts and ownership in things that will go up in price faster, hopefully faster than inflation erodes their relative value. If that’s you—and what we know about our audience suggests it likely is—then, congratulations. You are among the most privileged in our society and should be slightly better off in at least the early stages of an inflationary economic environment.

It’s a little silly to talk about who will suffer most in an inflationary cycle since the level of suffering really depends on how severe the inflation is and how long it persists. Those in privileged positions can quickly find themselves behind the curve. Inflation is an accelerating cultural phenomenon, one the comfortable should fear more than they do, a waterfall we fish near the edge of at our peril. 

I’ve heard it said that deflation destroys economies, but inflation destroys societies. I believe that to be true.

Consider especially the broad and expanding group that suffers under inflation, a group I am arguing has already suffered under decades of the mild inflation embraced by most modern economists. That list includes people who do not own things that go up in value; renters, people without a retirement portfolio or future inheritance, people who don’t own businesses or make real estate investments. This group has limited upside benefit from inflation, few things they can leverage to stay ahead of the crush of lost purchasing power.

The list of sufferers also include those whose debts are largely in variable rate accounts. That includes people with large amounts of credit card debts and people who regularly access payday loans (or off-book loans, if you understand my meaning). These people already struggle with high interest rates (and threats of broken limbs); accelerating inflation increases their already suffocating risk of getting buried and, ultimately, limits their options for making ends meet. 

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