Who Wins from Inflation?

“No one wins from Inflation.”    “We must slay the Dragon of Inflation.”  “Inflation hurts everyone.”

Call me skeptical, but I am starting to question statements that start with “everyone” and “no one”.    Let me take a couple of recent examples.    “No one could have seen it coming” was invoked by the early George W Bush administration about the events by al Queda on September 11, 2001, when we later learn that they were warned specifically about this with a major intelligence briefing just a month before.   They hid the major reporting by their department and the briefings from the previous administration and claimed: “No one could see it coming.”    This turns out to be a lie.

Another claim of “No one could have foreseen this” came from the banks when the mortgage bubble popped.    With the failures starting in mid-2007 and leading to a full-out financial crisis in 2008, there were cries of “no one could see it coming.”    Well, this turns out to not be true.    The biggest investment bank, Goldman Sachs, not only saw it coming, but sold its toxic assets to its customers (not disclosing that they were betting against them), and made sure when the bubble burst they not only did not suffer, but they greatly profited.    There were those that saw it coming.    “No one could see it coming” was a lie.

Lets turn to inflation.   The term that I see is “no one benefits from inflation.”   This should set off alarm bells in the same way as “no one could see it coming” but as best I can find it does not, at least not in main-stream public discussion.

But there are winners  when there is inflation:   Debtors win.   More specifically, those with fixed-interest debt win.    If your net worth is negative, in other words, you own more than you own, and the debt is at a fixed interest rate, say now at 4.5%, and then inflation goes up to 12% as it did in the 1980’s for a number of years, then it is a good deal for you.    Granted there are rocky paths and there not everyone’s wages go up, but on the whole prices and wages increase during inflation.  After a few years your cost to replay the debt decreases relative to wages and after several years the debt burdent is largely washed away.   Paying the interest and principle on the loan is then relatively easy as wages increase.

This is what happened with my parents.    They mortgaged themselves to the hilt in the 1960’s with a 6% mortgage, then inflation came back up, and the price of the house went from $65,000 to many hundreds of thousands.   Paying the mortgage became easier, and better yet, they sold the house to make hundreds of thousands of dollars.   My father told me that he made more money on the houses he lived in than the pension he got for from his fortune 500 company.

So inflation does help people, it helps debtors.     And there are many debtors.    If inflation came back now, then everyone with a mortgage would be helped with that debt, at least those with fixed-rate mortgages.    This is most of America.

Why is this not proclaimed?   Well, because there are some losers:   creditors.    So creditors would like there not to be inflation because it would devalue their asset: a loan portfolio.      But who are the creditors now?   There are banks, but more on this in a minute.   There are also individuals: those with fixed savings.   Many of these are those that made money off of real estate when the last round of inflation came through.    So this arguing against inflation comes across as knowing hypocrisy from this segment.

A major creditor would be the banks that made many of the loans in this country: mortgage banks.   But it turns out that those banks now sell over 90% of those loans to a couple of tax-payer backed banks:  Fannie Mae and Freddie Mac.    These special banks, it turns out, now own most of the mortgages in the United States, so they stand the most to lose from an increase in inflation.    But since they are owned by the taxpayers, and most taxpayers have mortgage debt, and since taxpayers vote for those that control Fannie and Freddie…  Wouldn’t it be in American’s best interest to increase inflation therefore lower their debt burden?  Since the private banks  passed off the inflation downside to the taxpaper by passing on credit risk, the banks would not be against this.

So why has it not happened?   Well, when it does, I am sure there will be a major cry:  “No one could have seen it coming.”



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