I try to explain inflation’s real cost.
I think of inflation as causing the following problems: it rewards the most alert and aggressive economic actors, and it punishes people who are passive and habitual; it interacts with the tax system to reduce productive investment; and it makes planning for the future difficult, particularly when it comes to buying a home.
Arnold outlines the serious costs to inflation beyond the sensationalized costs that the media reports, and notes that they cause “long-term economic damage.” It might be added that they also badly damage the social fabric by differentially rewarding behaviors that are undertaken to cope with the inflation. An friend from Argentina where they have experienced bouts of high inflation told me that this caused a complete turnover of people in upper class clubs, and not for the better.
I think you’re missing the redistributionary effects of inflation. When ‘new money’ is created some have better access than others.
At this moment real estate prices and stock market indices are high and increasing despite the economic damage of COVID, which seems nonsensical. I would take this as a strong signal of who is capturing the gains of monetary dilution.
+1
A few observations.
(1) Sometimes the Passive Patsies are low productivity, even falling productivity people. Inflation allows those people to be left behind, and rewards to go to those who have rising productivity. The heart of the issue is downward stickiness of nominal wages. Cutting the nominal wages of the low productivity is hard.
(2) As for mortgages, we needed price level adjustment mortgages (PLAM) a long time ago. A real mortgage rate is set. The mortgage payment is determined. And the monthly payment in nominal terms rises every month. If wages are indexed, the ratio of monthly payment to wages holds steady, instead of being high at first and then falling over time as now.
(3) Very comprehensive portfolio diversification should take care of redistribution effects from inflation. In a big index fund, the redistribution is internal to the index.
(4) The US continues to fail to have a capital income tax system which is neutral with respect to inflation.
(1) TIL what a central bank is for – tricking stupid people into accepting pay cuts! How noble. But I’m sure we could find a clever way of doing this without destabilizing the macroeconomy. Maybe paying the productive people more?
(3) The people who really lose by inflation don’t have portfolios lol.
Sometimes the Passive Patsies are low productivity, even falling productivity people.
In the main today, such seem well cared for. Those in hospitals and prisons are indexed above and beyond inflation. I’ve worked with a few in the Dept. of Interior; scary how little they do and how well compensated.
Meanwhile, many of the Passive Patsies are truly productive, such as those in agriculture; logging; and fishing. They have few mechanisms for indexing against inflation and just get mercilessly culled.
I love your writing on inflation– clear and illuminating
If you want to strike a major blow against inflation as measured….eliminate property zoning.
Side note: for decades, some have said that we overstate inflation in the US due to extraordinary technological advances, and that real wages and compensation were actually rising.