Is There An Inflation Lobby?

(Cross-posted from CreditSlips)

Here’s one that is way above my pay grade but this has never stopped me before. I write about the inflation lobby, if there is one.

Anybody out there old enough to remember when Adlai Stevenson was president? Okay, how about Jimmy Carter? Remember the great kidney stone of a year, 1980, when the inflation rate veered toward 14 percent per year? Not exactly Germany 1923, but enough to –inflict a lot of pain: “people on fixed incomes,” we were told, and it was true—if inflation went to 14 percent while your monthly social security check stayed just the same, you just had a 14-percent pay cut. It was throw an awful lot of small (and some big) businesses under the bus: try keeping up with a your monthly revolving when your (floating) rate goes up by a factor of, say, three.

But where you stand depends on where you sit. If you are not on a fixed income—if your paycheck goes up—and if your debt is fixed—then congratulations, bucky, you just got yourself a big chunk of relief. From your point of view, the more inflation the better.

In the 70s and 80s, we saw the inflation lobby hard at work—no, strike that, not hard at work, but sitting on the furnace eating chocolates while the pensioners and others did the work. In particular, I’m thinking of all the people who bought their homes on 30-year fixed mortgages in, say, 1967, just in time to enjoy the jolts and disruptions of the next two decades.

Clearly, there are political implications here. If we truly have a nation full of people with fixed-rate debt (and floating incomes), then there is no incentive to control inflation. Quite the contrary: you want all the inflation you can. Ironically, this is true even if the subjects don’t see it that way themselves: way I remember it, some of the loudest grousing about inflation came from people who were its biggest beneficiaries.

This is the point where you would expect me to write about how the inflation is coming back again, with the inflation lobby in tow. In truth, I believe the first part of that proposition. I’m one of those who believes that we are behaving like Donald Duck in the cartoon, suspended in mid-air, having run off the diving board and not yet having noticed that he’s ready for a fall. But what about the inflation lobby? Recall what I said before: “if your debt is fixed.” Back then, the mainstay of the loan market was the fixed-rate loan. Consumer installment loans were fixed-rate. So also credit card debt (if you had any). And the system thrived on the 20-year (or 30-year) fixed rate real estate loan.

You can see where I am going with this one. I’m not smart enough or well informed enough to say anything conclusive about the loan market today. But I do know that a lot of our debt is floating-rate. Translated, that means we have shifted the risk of rate fluctuation from lenders (where it lay in the 70s/80s, and since time immemorial) to borrowers. If I’m right, then inflation may be far more painful for the mass of borrowers next time than it was last. Indeed, this may be one reason why there hasn’t been as much worry about the risk of inflation as you might expect—it may be that the people most like to suffer from it belong to a class that has no memory of any such pain. Keep this in mind as you try to figure out what will happen when payday comes on all the borrowing and spending of the last few years.