Is inflation really bad for most people?

[progree]

26. Simulation: The mortgage holders and other fixed rate debt holders benefit in the short run,

Last edited Thu Jan 13, 2022, 12:30 AM - Edit history (1)

but not in the long run, unless incomes actually keep up with inflation which in the 70's and 80's they didn't.

Looking at real (meaning inflation-adjusted) wages of production and non-supervisory workers, they peaked in 1973, just as inflation was heating up. http://data.bls.gov/timeseries/CES0500000032

"64% of Americans have mortgages and millions more with other loans."

Not sure where that statistic comes from -- I own a home and haven't had a mortgage for years. For a couple decades before that, it was rather small compared to my income.

Some of these have adjustable rate mortgages as their main mortgage. And then there are home equity loans. Google search says most home equity lines of credit (HELOC) are variable rate.

Then there is the black home ownership rate: 44%
https://fred.stlouisfed.org/series/BOAAAHORUSQ156N

And a certain percent of them have adjustable rate mortgages, some have insignificant mortgages, some have large adjustable rate home equity loans. And credit card debt whose interest rates will soar.

It's not a demographic we can afford to blow off, particularly considering the woeful polling on Hispanics lately (who, in 2020 had a 48-49% home ownership rate).

And we don't want to blow off the demographic that greatly outvotes the others and will be disproportionately hurt - seniors and near-seniors. Who will see their fixed income investments, annuities, and pensions erode in purchasing power. Equities too given the flat performance (very negative on an inflation adjusted basis) in the 1968-1982 high inflation period.

Anyway if income doesn't keep up with prices, eventually the benefit of the reduced mortgage as percent of income in the high inflation scenario becomes less and less of a help, while the fact that other expenses are rising faster than income begin to dominate and become larger than the cumulative benefit in the early years of mortgage burden reduction. As I found in my Excel spreadsheet simulations, when I set income inflation rate to less than the price inflation rate.

And while, temporarily, people with significant old fixed-rate debt will benefit, what about new people coming along that can't afford the skyrocketing mortgages and get into that first home?

There are some who think all this is a big wealth transfer from the wealthy bankers to the middle class homeowners. No, the market in interest rates moves so that interest rates on loans generally exceed the inflation rate. That's an issue for new entrants into the housing market, getting student loans, you name it.

Politically this is going to be an extremely hard sell. Inflation wasn't popular in the 1970's and 1980's and it isn't now. That disproportionately white current homeowners will benefit for awhile is a great way to lose pretty much everybody.

I'm also concerned that once the inflation-genie is out of the bottle, it is very hard to control, short of crashing the economy like Paul Volcker (a Carter appointee) did.

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"I doubt very many people who should have 40% have much invested that way." (meaning in fixed income assets like bonds or bond funds).

I don't doubt it myself.

Target date funds are very popular in 401k's where they follow those asset allocation formulas.

The U.S. equity market is $53.4 Trillion 12/31/21 https://siblisresearch.com/data/us-stock-market-value/

"As of 2021, the size of the bond market (total debt outstanding) is estimated to be at ... $46 trillion for the US market, according to Securities Industry and Financial Markets Association (SIFMA). https://en.wikipedia.org/wiki/Bond_market

So they are pretty close to the same size.

And beyond bonds, there are other fixed income investments like CD's, savings accounts, annuities, that people have.