Why inflation is a terrible tax

[El_Machinae]

Let's start with the first understanding, (light) inflation is better than deflation. It causes higher levels of investment, higher levels of employment, and higher productivity. We want (light) inflation, merely because it's better.

There's also a simple productivity bump that can be gained from printing dollars. If someone is unemployed, you can print dollars to get that person to do stuff. If the value of their production is actually higher than their wage, you get no inflation. To get inflation, you need printing past this level. The advantage of the government printing dollars to get stuff done is that governments have a series of investments they can target that would not be pursued by the open market.

Then there's the 'who benefits?' question. If we go with helicopter money (distributed in ways that favour more dollars going to the poor, which I think we've done terribly overall) then the new money favours those in debt. A person in debt can literally hand over the cash, and then free up all the future income they'd have spent servicing that debt. Phrased another way, unexpected inflation can hurt the debtor.

But we're targeting light inflation. This is a bit less harmful to debtors, because the person making the loan will just price in the expected inflation rate in order to get a positive (real) return rate. Inflation only helps the debtee if the inflation is unexpected, and not already built in.

There are lots of good reasons why a country would pursue an inflationary policy.

But now, why inflation is a terrible tax. It's as regressive as all heck. Here's a quick summary why people might disagree.

Inflation isn't regressive, because people at the bottom don't have significant cash savings. Unless you count price-anxiety as a cost. I suppose inflation reduces the minimum wage where it is set by legislative fiat. But progressive where there is rent control.

You have to look at where the the money is coming from that causes the inflation. Building infrastructure and maintaining bus lines and train lines and credits for rideshare means the cause of the inflation is in people getting paid to do those things. That's some bottom/middle up stuff. That puts upward pressure on wages, the sole source of wealth for anyone below the top. The supply-side of the inflation would be on the materials needed for those things, if we are already at capacity. But if we are not, then even more industries will see more employment (the gathering and processing of materials).

Please understand that general inflation is generally progressive, which is why the only parties supporting inflation as a policy have been progressive and populist parties.

Okay, the middle paragraph is a production-side statement. Where if we build useful things, it makes people's lives better. It's similar to my second paragraph. We want people building useful things.

I am talking about the tax. Where inflation reduces people's purchasing power sufficiently in order to divert resources to the task we want done. In a real market, I physically take apples from an apple farmer to give to a soldier to eat during the soldiering. What we do with currency changes this simple model. But a tax is literally limiting one person's access to resources with a concomitant increase for another person, because we consume most of the current production

Okay, let's now talk about inflation and its effect on different classes. First off, the comfortably rich. People who like inflation think the comfortably rich person is being damaged by inflation. Barely true. We have a targeted inflation rate. 2% inflation? I don't lend my money at less than 2% nominal, a higher (expected) inflation rate doesn't change the calculation. I buy bonds at 98 with the payout next year of 100. At the very worst, if I cannot find any (real) returns of at least zero, then I'm down 2% on my cash. And only on my cash, every asset I have bought is being subjected to the 2% inflationary forces. On the upside, the rich person is looking for (at least) greater than 0% real returns. So, vastly better than a deflationary policy.

Okay, but wait, the rich are taxed at 40% marginal on the nominal value. I made "$2" last year on my bond, and I am taxed $0.80. So, to get a 'real' return of (at least) zero, I need a nominal return of ($2 ÷ 60%) 3.33%. Unsurprisingly, a higher marginal tax means that the government gets more of my (real) earnings. The inflation ends up being a type of tax. My real wealth goes down, actually down, if I cannot find real returns.

The middle class will have liquid cash. So, any changes in prices will only be a temporary hiccup in the perceived saving rate. Sure, the actual dollars in their savings will be depreciated. They're taxed too. I'm going to estimate that their total portfolio of savings is weighted heavier in literal dollars than the rich person.

But now the lower class. Remember how we called inflation 2%? That's an aggregate, smoothed number. As far as the rich person is concerned, it's merely a number, a yield to achieve on an investment. As far as the middle class is concerned, it's merely a number.

But at the working poor, it's not merely a number. It's not like prices smoothly rise. It's all fits and starts. Remember how unexpected inflation hurts the debtor? There's literally no greater debtor than the working poor. I work. I get paid in two weeks for that work because I'm owed that money. And then bank holds my cheque for a week, before they release my money to me. Same day cheque deposits? Okay, now I am only a debtors for two weeks. But I have literally lent everything. Even if I have savings, I am literally lending more than my savings, in most cases.

And it's all fits and starts. It's all surprises. If I have zero savings, then the $10 increase in a bus pass price means I forgo five burgers. Likely, literally forgo five burgers until my wage rises. Bread goes up 10%? Well, there goes my negotiated increase in savings. It matters, I am giving up something I had previously expected to purchase. All price increases are unexpected. Any changes in price hit at 100% pain levels. And Lord knows what happens if I need to borrow in order to handle an unexpected price increase.

And it's regressive all the way down. Businesses operating at close to the margin need to deal with unexpected price increases too.

Now, let's go to production-side thinking.

We have two burger flippers, a better-paid live-in house-keeper, and a person who's rich. Everyone can eat burgers, and all the burgers are eaten.

Now you want to initiate a new project with printed dollars. And you're printing enough to cause inflation.

To woo someone from flipping burgers, you pay that person slightly more to come build a bridge. What happens? Well, in the short term, we have fewer burger flippers and we have three people that are better-able to buy burgers than the remaining burger flipper. Any drop in supply will be borne by the weakest of the group. And supply is permanently reduced, keep in mind, we're at full employment. The increase in price that the builder will pay doesn't encourage new production be brought online. The price just goes up. The fact that a bridge will happen in the future doesn't change who's paying. The fact that the poor are best benefited by the bridge doesn't change who's paying. The increase in supply from the new project will (necessarily) come later than the decrease in current supply, since the project is an investment designed to produce returns. If the project instantly decreased net prices, it wouldn't cause inflation.

 

[Lexicus]

I don't find this to jive with my lived experiences, because I expect prices to rise. And inflation obviously hits savers harder than consumers and reduces the relative burden of debt. I don't think your analysis is quite right but I'll have to read your post a few more times to get after it.

 

[Hygro]

I like your point of wage delays being a form of loans. A change from 2% to 4% inflation would be what, a wage garnish of 0.04%? That sucks. On $10/hour salary thats like, $8/year.

OTOH a +2% inflation shock back in 2009 would have lowered effective interest rates enough to have saved ~4 million jobs. Or something like $150 billion lost economic product. Split evenly among all Americans that's ~$500 per person, or $2000 per household.

I too will have to marinate on this.

 

[El_Machinae]

To get the 0.04%, you're modelling that the salary is reseting every paycheque? That's similar to the number I get.

I don't find this to jive with my lived experiences, because I expect prices to rise. And inflation obviously hits savers harder than consumers and reduces the relative burden of debt. I don't think your analysis is quite right but I'll have to read your post a few more times to get after it.

Everything is different with a surprise inflation change. It only hits savers harder than consumers if we are ignoring whether people are working for their money or not. If you're working, then it matters whether your pay precedes the inflation or not. My major concern is whether it's damaging high income people compared to low-income people.

 

[Hygro]

OTOH if they're buying everything on credit card the effects on the card's interest rate cancels the effects on the wage delay.

Additionally, regarding the model of burger flippers. There's now an opening at the burger joint, and demand is high! The maid gets promoted to burger flipper.

To get the 0.04%, you're modelling that the salary is reseting every paycheque? That's similar to the number I get.

I'm modeling that the inflation is continuous over the year, and that's the amount of inflation to each paycheck (2 weeks) then I multiplied it back to a year. I dunno, it's not precise. It's a tiny number though.

 

[uppi]

But paychecks usually aren't pegged to inflation. If you are lucky, you get a wage increase every 6 months. If you're not, you might have to wait much longer. If your expenses would equal the income with little inflation, the bigger inflation would mean you would be either reducing your consumption or running a deficit until the next wage increase and if you are poor, running a deficit can be quite expensive.

That is assuming you get that wage increase. Employers might use inflation to depress real wages. Minimum wage laws usually aren't pegged to inflation either and raising minimum wage might take a few years to get through the political process, if it gets through it at all.

An additional problem of inflation are progressive tax schemes. If those are not updated quickly enough (unlikely to happen) and you make enough to barely clear exemptions, you would be paying additional taxes on your inflation-adjusted wage increase.

 

[Hygro]

Yeah I see where I erred in setting up my equation. Probably closer to $200. My first unedited version of my reply said $800, because I didn't include the % lol

The first paycheck, 80 hours at $10/hour with expected inflation at 2% so that's part of the wage negotiation effectively, assuming no payrol, nor later rebates or other interferences, is $800 for 2 weeks. That times 0.04% is nothing, like 32¢. But the final paycheck is the 2% unexpected increase inflation is not insignificant at $16. I dunno what the curve looks like, it's not linear, but it was, it's like, $200. Probably less cuz it's exponential. Yeah, let's pretend $200.

That's bad, it's 1% of wages for the year. This is offset, unequally, by and fixed interest loans or rental payments etc. Not a terrible tax compared to taxes, especially if it comes from the government maintaining a more aggressive full employment policy.

We had ~4% inflation during the greatest wage growth period in American history. It was then the lowest quintile doubled their real income (aka nominal income growth minus inflation). The upward pressure on wages when there isn't a reserve labor force unemployed and bidding wages down in all likelihood offsets any costs of running a doubled inflation target.

When I say offsets and in all likelihood, what I mean is, most likely BLOWS IT OUT THE WATER.

 

[El_Machinae]

Additionally, regarding the model of burger flippers. There's now an opening at the burger joint, and demand is high! The maid gets promoted to burger flipper.

No, the maid is working for the rich person. Did you think the burger flippers had a maid? The maid has already been wooed away from flipping burgers into serving the rich person.

The rich person loses no access to anything. It's the wage earner at the bottom who loses purchasing power. If the maid was wooable for less, why is the burger flipper being hired?

OTOH if they're buying everything on credit card the effects on the card's interest rate cancels the effects on the wage delay.

Oh, absolutely. A bump in inflation will terrifically affect credit card debt

Okay, two models, stupid simple: Pay increase ($100) precedes cost increase ($100) for a year. Or cost increase precedes pay increase for a year. Both parties started with $50 in debt (@20%) on a 12 month payment plan ($4.63 paid in each month).

Person A pays off debt, and has $50. And then over the course of the year saves an additional $55.56. And this person's life is literally less stressful. Costs increase. $5.56 saved. He's the bridge builder. The owner of the original debt has $50 (paid back immediately), and the builder has $5.56. If you want to look at it another way, give $100 and liberate $105.56. Which then is given to person B.

Person B sees their costs go up, and now has $150 in credit card debt. Keeps borrowing every month in order to maintain quality of life. At the end of the year of paying $4.63 per month, this person now owes $121.97. Gets the bonus and pays $100 of debt. Instead of being debt free, only owes $21.97. The debt owner gets $50 (paid during year) and $100 (paid off at the end of the year). The debt owner now has $150 plus holds debt paper of $21.97.

You need 30x more people in A than in B to prevent the rich from getting richer. You can't do that by wooing people from productivity that mainly services the working poor (i.e., burger flippers).

You drastically need to tax the wealth in at the top as well, because wealth trickled upwards. Instead of A and B being debt free and the debt holder getting $20 in interest, he's gotten way more.

 

[Hehehe]

I guess I'd need to think about this some more, but a few thoughts:

Okay, let's now talk about inflation and its effect on different classes. First off, the comfortably rich. People who like inflation think the comfortably rich person is being damaged by inflation. Barely true. We have a targeted inflation rate. 2% inflation? I don't lend my money at less than 2% nominal, a higher (expected) inflation rate doesn't change the calculation. I buy bonds at 98 with the payout next year of 100. At the very worst, if I cannot find any (real) returns of at least zero, then I'm down 2% on my cash. And only on my cash, every asset I have bought is being subjected to the 2% inflationary forces. On the upside, the rich person is looking for (at least) greater than 0% real returns. So, vastly better than a deflationary policy.

I don't think this matter is a quite as simple as you make it out to be. Lenders don't always get to define the prices at which they lend the money, the market decides that. You can offer loans at rates that net you 2% real returns, or even 0% real returns, but that doesn't mean that someone will necessarily take that deal if they can get a better one elsewhere. So as a lender your option might be to lend at a loss, or don't lend and lose even more in real terms.

Of course, there are kind of workarounds, such as investing in real estate and practices such as rent-seeking. This is a complicated matter, and real estate investment and rent-seeking are separate issues in and of themselves. In any case, my point is, the rich aren't necessarily safe from inflation

But at the working poor, it's not merely a number. It's not like prices smoothly rise. It's all fits and starts. Remember how unexpected inflation hurts the debtor? There's literally no greater debtor than the working poor. I work. I get paid in two weeks for that work because I'm owed that money. And then bank holds my cheque for a week, before they release my money to me. Same day cheque deposits? Okay, now I am only a debtors for two weeks. But I have literally lent everything. Even if I have savings, I am literally lending more than my savings, in most cases.

First of all, I'm not sure that the bolded part is true. You're not owed that money until your contract says it's due, and even so, there are questions about the exact amount of this "loan", and how it compares to whatever other loans poor people may or may not have taken.

But a much more important point is this: these price increases do not really matter that much if the wages keep up with the increases. If they don't, then as I see it, it becomes more of an issue with income distribution rather than inflation. The free market may be the best system we have, but it has a lot of flaws, although that is a separate discussion in and of itself.

And supply is permanently reduced, keep in mind, we're at full employment.

How does this follow? Doesn't supply increase, since everybody is producing useful things? Production may be diverted from burgers to bridges, but are you arguing that it disproportionately hurts the poor?

EDIT: On second thought, maybe I shouldn't have come off quite as critical as I did. It is true that income inequality has been on the rise. At least lately, I'm not sure how far this trend goes. Correlation does not prove causality, and there could be a whole myriad of reasons for the income inequality (anything from market cycles to Piketty's concentration of wealth). Still, perhaps it would be helpful to look at long term trends, comparing inflation rate to other factors, such as income inequality or economic growth.

 

[El_Machinae]

I don't think this matter is a quite as simple as you make it out to be. Lenders don't always get to define the prices at which they lend the money, the market decides that. You can offer loans at rates that net you 2% real returns, or even 0% real returns, but that doesn't mean that someone will necessarily take that deal if they can get a better one elsewhere. So as a lender your option might be to lend at a loss, or don't lend and lose even more in real terms.

Granted. The money can be loaned a (real) loss. But the very worst scenario is that the cash depreciates by 2%. The rich don't have to take any of the inflation damage nearly as much as everyone else does to their savings, since they have a greater number of options available. Even marginal tax rates cannot get this below 2%, since you're taxing on the nominal profits.

Of course, there are kind of workarounds, such as investing in real estate and practices such as rent-seeking. This is a complicated matter, and real estate investment and rent-seeking are separate issues in and of themselves. In any case, my point is, the rich aren't necessarily safe from inflation

Oh, not 'safe'. A regressive tax still damages the rich. They just suffer proportionally less.

First of all, I'm not sure that the bolded part is true. You're not owed that money until your contract says it's due, and even so, there are questions about the exact amount of this "loan", and how it compares to whatever other loans poor people may or may not have taken.

Oh, it's a loan. Just because a loan is contained in a contract doesn't mean it's a loan. Or else we'd say that nothing is a loan. But unless there's a barter that occurs in real time, nearly every transaction involves a loan.

But a much more important point is this: these price increases do not really matter that much if the wages keep up with the increases

Absolutely. But if you're poor, you need a nigh-instant correction of wages to prices in order for it to not hurt. And it hurts most when you're poor. That's because unexpected inflation is painful to those who hold the debt, and when you're poor every price jump appears random.

How does this follow? Doesn't supply increase, since everybody is producing useful things? Production may be diverted from burgers to bridges, but are you arguing that it disproportionately hurts the poor?

No, the bridge is not useful until it comes online. Until the bridge comes online (and we re-adjust our utility functions for everyone), the poorest worker in that entire scenario is the most brutally impacted. No one else loses relative purchasing power.

I'm not saying is a useless tool. It gets stuff done. I am just saying that is massively more regressive than people realize.

Look at how wealth flown upwards with the last 30 years of dropping interest rates. In our fiat system, nearly all new money either flows in at the top or maybe the upper middle. This is because we don't tax the rich enough, and any (and all) disruptions cause wealth to flow upwards.

It's really insidious how we give the wealthiest access to the cheap interest rates first. A business that wasn't viable with a 5% loan but is viable with a 3% loan merely gets transfered to the richer person. Not as a function of bankruptcies creating efficiencies, but merely because one person is allowed to make lower nominal profits than the other.

 

[Hehehe]

Granted. The money can be loaned a (real) loss. But the very worst scenario is that the cash depreciates by 2%. The rich don't have to take any of the inflation damage nearly as much as everyone else does to their savings, since they have a greater number of options available. Even marginal tax rates cannot get this below 2%, since you're taxing on the nominal profits.

Oh, not 'safe'. A regressive tax still damages the rich. They just suffer proportionally less.

But herein lies the rub. Aren't rich people the ones who have the most savings? Therefore, aren't they also the ones who suffer the most from inflation? I guess it is true that they could simply invest a good portion of their money, but whether or not this is profitable depends on the market. As I understand it, right now the market is in a situation where there don't seem to be that many good investments, and at least pension funds are complaining about the low yields.

Oh, it's a loan. Just because a loan is contained in a contract doesn't mean it's a loan. Or else we'd say that nothing is a loan. But unless there's a barter that occurs in real time, nearly every transaction involves a loan.

Ok, let's say I accept this logic. Wouldn't mortgages etc. offset this loan? I would imagine that the poor have taken out more loans than they have given out, and that is even if I were to accept your logic here.

Absolutely. But if you're poor, you need a nigh-instant correction of wages to prices in order for it to not hurt. And it hurts most when you're poor. That's because unexpected inflation is painful to those who hold the debt, and when you're poor every price jump appears random.

They'd need either an instant correction of wages, or more preferably, savings. Of course, I understand that it is difficult to save money, especially in this situation given the cost of housing. But I guess that brings us back to my original point: wouldn't the root problem here be economic inequality rather than inflation?

Also, just to be clear, what is your proposed solution? High inflation or no inflation?

No, the bridge is not useful until it comes online. Until the bridge comes online (and we re-adjust our utility functions for everyone), the poorest worker in that entire scenario is the most brutally impacted. No one else loses relative purchasing power.

Again, I'm not quite sure I would agree with this. In the grand scheme of things, when summing all economic transactions in a given country, that bridge is a small blip compared to the total wealth of the nation. I mean maybe if were to cost something like 10% of GDP and take 10 years, I can see this delayed wealth having a significant impact, but right now I just don't see it. And if the country is building many bridges, I imagine that they will be at least somewhat spaced out.

But more importantly, doesn't everybody lose purchasing power? The rich can still afford their burgers, sure, but they're losing PP all the same (unless of course their income grows even faster, but again, wouldn't this be a problem of economic inequality rather than inflation?). Meanwhile, the employers who make those burgers now have to compete for workforce, which means that it puts an upward pressure on wages, especially at the lower end. So wouldn't it be the poorest who actually gain the most?

Look at how wealth flown upwards with the last 30 years of dropping interest rates. In our fiat system, nearly all new money either flows in at the top or maybe the upper middle. This is because we don't tax the rich enough, and any (and all) disruptions cause wealth to flow upwards.

It's really insidious how we give the wealthiest access to the cheap interest rates first. A business that wasn't viable with a 5% loan but is viable with a 3% loan merely gets transfered to the richer person. Not as a function of bankruptcies creating efficiencies, but merely because one person is allowed to make lower nominal profits than the other.

I realize that the current system has some problems, but I'm not sure that inflation is what causes them. I took a look at US inflation and income inequality, and it's not immediately clear to me that there is a pattern here. But perhaps you can either point out the pattern, or suggest some other variables that would need to be looked at. As for as the problems of the current system go, I think that economic cycles are a bigger problem. The economy has always worked in cycles, and while there is some disagreement as to what causes these cycles, the cyclical nature of the economy seems undeniable. For a short summary of the economic debt cycles, I would recommend this video. Ray Dalio's model wraps almost everything I know about economics into a neat little bow (there are, of course, other proposed reasons for the economic cycles, from Piketty's theory about the concentration of wealth to Marxist labor theories)

 

[El_Machinae]

But herein lies the rub. Aren't rich people the ones who have the most savings? Therefore, aren't they also the ones who suffer the most from inflation? I guess it is true that they could simply invest a good portion of their money, but whether or not this is profitable depends on the market. As I understand it, right now the market is in a situation where there don't seem to be that many good investments, and at least pension funds are complaining about the low yields.

Yes, the rich have savings. Massive savings. But inflation isn't a tax on savings, it's a tax on cash. I am just guessing here, because my post is about the regressive nature of inflation, but I am going to outright say that the rich have a lower amount of their savings in cash than nearly anyone else. The only exception I can think of are people with no money in the bank, but a pension that's inflation-protected. Or someone who's a little bit into their mortgage repayment already. When I look around, I see lower middle-class people keeping a hedge in their bank account. But the truly poor have almost no appreciating assets, merely depreciating ones. A few hundred bucks in the bank plus their furniture and car.

Ok, let's say I accept this logic. Wouldn't mortgages etc. offset this loan? I would imagine that the poor have taken out more loans than they have given out, and that is even if I were to accept your logic here.

Mortgages?!? You mean rent. And car payments. But no. You're looking at total debt/income, and saying that many owe more than they're loaning out over the course of the week. And sure. But every single dollar that they are taking in has already been spoken for.

You cannot prepay your rent and gain a financial benefit. So, a pay raise barely helps there. Car payments? Sure, but at 1% return. Student loans? Maybe 8%? Credit card is absolutely a great choice, obviously. 19% plus can be done nearly immediately and is why I used the credit card example in my numbers. But that's about it. Meanwhile, any bump in costs is going onto a credit card, or on deferred maintenance, or as a large (relative) pull on the savings. And remember the marginal utility of money, where the price increase is vastly more painful the poorer you are.

Also, just to be clear, what is your proposed solution? High inflation or no inflation?

Neither. Higher taxes. Now, I like low inflation. I think it brings many (many!) social benefits compared to the counterfactual. But I also think it's a terrible tax. If you want something done in a country, you'll want an inflationary policy merely so that your economy is stronger. But if you want something done that requires additional investment, paying for it with inflation is a terrible idea.

But more importantly, doesn't everybody lose purchasing power? The rich can still afford their burgers, sure, but they're losing PP all the same (unless of course their income grows even faster, but again, wouldn't this be a problem of economic inequality rather than inflation?). Meanwhile, the employers who make those burgers now have to compete for workforce, which means that it puts an upward pressure on wages, especially at the lower end. So wouldn't it be the poorest who actually gain the most?

Yes, everyone loses purchasing power. But the poorest worker loses the most (relative) purchasing power. And yes, in many ways inflation-through-spending helps a different segment of the poorest. The bridge-builder is quite happy to have gotten a better job.

But it's like the minimum wage, where it's a benefit gained through terrifically regressive means. It's better to recognize that it is. It's a tool in the toolkit, but that's politics and not economics.

 

[Cutlass]

Unemployment is a terrible tax. So terrible that if it could be eliminated at 10 times the amount of inflation, that would be a cost so trivial as to not have any point at all in measuring it.

But at the working poor, it's not merely a number. It's not like prices smoothly rise. It's all fits and starts. Remember how unexpected inflation hurts the debtor?

No. Nonononononono. Unexpected inflation hurts the creditor. It's a gift from the gods for the debtor.

Anti-inflationary government policies hurt the debtors.

Yes, the rich have savings. Massive savings. But inflation isn't a tax on savings, it's a tax on cash. I am just guessing here, because my post is about the regressive nature of inflation, but I am going to outright say that the rich have a lower amount of their savings in cash than nearly anyone else. The only exception I can think of are people with no money in the bank, but a pension that's inflation-protected. Or someone who's a little bit into their mortgage repayment already. When I look around, I see lower middle-class people keeping a hedge in their bank account. But the truly poor have almost no appreciating assets, merely depreciating ones. A few hundred bucks in the bank plus their furniture and car.

Inflation is actually a tax on savers. You can call it a tax on cash. Who has cash? Savers. Who does not have cash? Debtors. So inflation taxes creditors, but does not tax debtors.

Anti-inflationary policy is a tax on labor. It is a direct transfer from labor to owners.

What I think that you are missing in all this is that working people trade their labor for dollars. The policies used to combat inflation mean that working people have to trade more labor to get the same dollars. At the same time, the policies used to combat inflation directly and indirectly take money away from working people and give it to owning people. Anti-inflation policies are a subsidy to the rich. This is why they spend so much time and effort and money lobbying for anti-inflationary policies.

 

[El_Machinae]

Sorry. Creditor. I knew that. Wrong word.

 

[Zkribbler]

Borrower borrows $1,000. Pay back is 11 payments of $100 [or $1,100 total].
Inflation kicks in. Each dollar becomes easier to earn & each payment gets easier to make.
Therefore,
Inflation is good for debtors, such as most Americans and America itself.
Inflation is bad for creditors, such as the 1% and China.

 

[Mise]

The debtor/creditor mix-up kind of messed me up a bit. Is this a fair summary of your argument?:

1) inflation hurts creditors
2) salaried workers get paid in arrears and negotiate wages in arrears
3) therefore, salaried workers are creditors
4) therefore, inflation hurts salaried workers

The counter-argument (and standard argument) is that the lowest paid are almost always the biggest debtors, who benefit from inflation. If we accept that a low wage worker is paid in arrears, but must cover their own living expenses during that period, then they must take out a loan equal to their expenses for that period. The argument then seems to rest on whether salaried workers are net debtors or net creditors, when considering (fully) El Mac's argument about being paid in arrears.

 

[El_Machinae]

Thank you for getting through my error. I've been working on this for a while, and I literally had a brain fart.

I keep emphasizing that inflation is a tax on cash more than a tax on savings. Unexpected inflation hurts those that are holding debt, but the majority of the rich are not merely holding debt, they also own. Like, own everything. There are an incredible number of ways to protect yourself against inflation if you're wealthy. So that 2% Trickle is only trickling out of a certain, tiny segments of the portfolio.

Meanwhile, the poor persons savings are almost entirely in cash, and price increases are obviously regressive at the till. Most ways to pay down debt are low yield. Most forms of emergency debt are really high yield.

But I am also talking actual pain. The pain of finding out that a person's check cannot cover their living expenses. Because of price increases. Or that something you are saving for has become Out Of Reach again.

I am not talking about helicopter money, which would help shift wealth downwards along with a short-term bump in spending. I'm talking about using inflation as a tax, when it's being used as a system of production. It may work, it may work really well, but it's still terrible.

 

[Hygro]

No one uses inflation as a tax. The line itself is used by economists to excite lecture-attendees with the fungibility of economic categories. The most anyone uses inflation is as a backdoor reduction of interest rates which is the opposite move as a tax. This is done by trying to change inflation by changing inflation expectations, as the Fed has no direct method of causing inflation.

What's terrible about inflation is that it stresses people out a lot. It's mentally... taxing

 

[Cutlass]

The thing is that to a poor person, any savings that they might have are entirely unimportant next to their income. And, in fact, the very, even the moderately, poor simply don't have any savings to speak of. More to the point, the poor are normally net debtors. And an unexpected inflation makes them much better off. When talking about inflation you have to consider the counterfactual: What would it take for government policy in order to not have inflation? And what it takes for government policy to not have inflation is pretty much the worst things that you can do to poor people.

When inflation is expected no one really loses, for it is priced into the system. It is the unexpected changes that matter. Unexpected inflation makes debtors better off, and creditors worse off. Unexpected deflation makes debtors worse off, and creditors better off. The creditor class lobbies for less inflation, for a sudden decrease in inflation is a pure transfer from debtor to creditor.

Given how much debt we have now, a serious bout of inflation would be a very good thing for us. The debt was added senselessly, and overwhelmingly is a transfer from poor to rich. Lets erode it away.

 

[El_Machinae]

No one uses inflation as a tax. The line itself is used by economists to excite lecture-attendees with the fungibility of economic categories. The most anyone uses inflation is as a backdoor reduction of interest rates which is the opposite move as a tax. This is done by trying to change inflation by changing inflation expectations, as the Fed has no direct method of causing inflation.

What's terrible about inflation is that it stresses people out a lot. It's mentally... taxing

There's no doubt that it's stressful, and I actually mean that. It's something that intrinsically bothers people. but that's one of those areas where the benefits outweigh the harms. The people just cannot understand the counterfactual.

I call it a tax when it is being proposed as a wealth transfer mechanism, or a mechanism of increased production.