President Biden criticized news coverage of the U.S. economy as he faces growing backlash from voters over his handling of inflation. In brief remarks Saturday before boarding the presidential heli…
This is important to the modern economy because so much of our financial system is predicated on this principle.
For example, in the US, 30 year fixed rate mortgages are wildly popular, in no small part due to this idea. When one takes out one of these loans, the payments earlier in the loan might be rough. Over the years, due in part to inflation, personal income (generally) increases, but loan payments don’t. This makes it easier to pay down the loan over time. By the end of the 30 year loan period, typically the mortgage payment is a much smaller proportion of income. Conversely, if the economy experiences deflation, then it gets harder over time to pay off the loan.
Now expand this principle to institutional loans, government securities, etc and you’ll likely see why it is imperative to policymakers to avoid deflation.
That’s all true. But out doesn’t really become a problem for people unless wages deflate too. Which in this example we would be avoiding. And one of the ways to keep deflation mild would be for the government to keep making those loan payments as only it can.
Keep in mind we have the inverse problem right now. Inflation keeps increasing that starting cost and no matter how much many people save, they can’t get on that mortgage. They get 10 percent saved and then find out it’s actually 5 percent. Then they get the new ten percent saved and find out it’s 8 percent. By the time they actually get 10 percent saved they’re looking at paying a mortgage well into retirement unless they save more.
Closing the wage and inflation gap is healthier in the long run and we know it can be done without catastrophe. The way we’re currently headed is going to leave the base of our economic pyramid starving and in the streets. Which isn’t good for anyone.
Totally agree with the points you’re making. Policymakers don’t do nearly enough to support the economic base of the country. In the long run, that does have dire consequences.
Regarding housing prices, I think you already know this, but wanted to clarify that those are less of an inflation problem and more of a supply / demand problem. New housing supply collapsed after the 08 crisis and has been slow to recover since. Some have argued that once more of the boomers die off it will open up more supply, but I’m not fully convinced.
Unfortunately, I don’t see any quick fixes for the housing problems we’re facing. We need to advocate locally against NIMBYs and more broadly for programs to enhance access to housing, public transit, etc. We have lots of big problems but IMO public discourse gets bogged down arguing about semantics.
We’re in the middle of Boomers dying. (I need to visit my parents more) They’re 1946 to 1964. On demographic charts the die off period is quite evident around 60-80 years old. Which is the age group they’re in now.
We aren’t getting those houses because investment companies are buying them at +20 percent value sight unseen, and a bunch of other baby boomers did reverse mortgages to pay for their medical bills.
Which is all tied into the massive redistribution of wealth from the working class to the wealthy over the last 50 years.
Yeah, IMO, the biggest thing to remember about inflation is that interest rates (the cost of borrowing) factors a certain level of inflation into the calculation. If you haven’t taken an interest in finance, this piece isn’t always obvious.
This is important to the modern economy because so much of our financial system is predicated on this principle.
For example, in the US, 30 year fixed rate mortgages are wildly popular, in no small part due to this idea. When one takes out one of these loans, the payments earlier in the loan might be rough. Over the years, due in part to inflation, personal income (generally) increases, but loan payments don’t. This makes it easier to pay down the loan over time. By the end of the 30 year loan period, typically the mortgage payment is a much smaller proportion of income. Conversely, if the economy experiences deflation, then it gets harder over time to pay off the loan.
Now expand this principle to institutional loans, government securities, etc and you’ll likely see why it is imperative to policymakers to avoid deflation.
That’s all true. But out doesn’t really become a problem for people unless wages deflate too. Which in this example we would be avoiding. And one of the ways to keep deflation mild would be for the government to keep making those loan payments as only it can.
Keep in mind we have the inverse problem right now. Inflation keeps increasing that starting cost and no matter how much many people save, they can’t get on that mortgage. They get 10 percent saved and then find out it’s actually 5 percent. Then they get the new ten percent saved and find out it’s 8 percent. By the time they actually get 10 percent saved they’re looking at paying a mortgage well into retirement unless they save more.
Closing the wage and inflation gap is healthier in the long run and we know it can be done without catastrophe. The way we’re currently headed is going to leave the base of our economic pyramid starving and in the streets. Which isn’t good for anyone.
Totally agree with the points you’re making. Policymakers don’t do nearly enough to support the economic base of the country. In the long run, that does have dire consequences.
Regarding housing prices, I think you already know this, but wanted to clarify that those are less of an inflation problem and more of a supply / demand problem. New housing supply collapsed after the 08 crisis and has been slow to recover since. Some have argued that once more of the boomers die off it will open up more supply, but I’m not fully convinced.
Unfortunately, I don’t see any quick fixes for the housing problems we’re facing. We need to advocate locally against NIMBYs and more broadly for programs to enhance access to housing, public transit, etc. We have lots of big problems but IMO public discourse gets bogged down arguing about semantics.
We’re in the middle of Boomers dying. (I need to visit my parents more) They’re 1946 to 1964. On demographic charts the die off period is quite evident around 60-80 years old. Which is the age group they’re in now.
We aren’t getting those houses because investment companies are buying them at +20 percent value sight unseen, and a bunch of other baby boomers did reverse mortgages to pay for their medical bills.
Which is all tied into the massive redistribution of wealth from the working class to the wealthy over the last 50 years.