Inflation III

 

War

War, huh, good God
What is it good for
Absolutely nothing, listen to me!

Inflation, huh, good God, What is it good for?

Persistent long-term inflation has been accepted as a fact of life.  But persistent long-term inflation is NOT a fact of life and accepting it does have consequences

Long-term inflation is NOT the inflation from the previous year.  In 1979, when I took out a 30-year mortgage to buy a house, the year-to-year inflation was 11.3% and the fixed interest rate of the mortgage reflected this.  By 1986 the annual inflation had dropped to 1.9% and I paid the costs to refinance my mortgage at the lower, fixed rate which was then being offered.  I could have refinanced to an Adjustable-Rate Mortgage, but then my monthly payments would not be fixed, but could increase if the Prime Rate offered by the Federal Reserve Bank also increased.  If the Prime Rate was high enough, then my monthly mortgage payment could exceed my monthly budget and I could lose my home.  My condolences to everyone who lost their home to subprime mortgages in the late 2000s and early 2010s.

Lenders have tried to offer financial products, such as Balloon or Adjustable-Rate Mortgages, such that they are repaid in the dollars when the loan originated.  The problem is that what is the maximum payment that the borrower can afford when interest rates are low, or before the balloon payment is due, may not be affordable in the future.

There is a similar problem when monetary amounts are written into  the law.  A $7.25 per hour Minimum Wage might have been reasonable in 2009, but it is not so reasonable in 2022.  That is why so many statutory values now have Cost Of Living Adjustments (e.g. Social Security, Tax Brackets, etc.)  But there are still remain many statutory values that are only still appropriate if long term inflation is closer to 0%.

High long-term inflation rates, that are mistakenly considered to be the annual inflation rate,  benefit lenders, not intentionally but it does.  It benefits those who pay fines or amounts specified in law.  It does not benefit borrowers or the society that has agreed to the payments specified by law.  Reducing long term inflation and paying less attention to annual inflation would benefit everyone.