Patrick Collinson, the Guardian\’s personal finance editor, seems not to have grasped a point or two about the subject:

It\’s a mystery how a new generation of highly-indebted young adults have been conned into believing low inflation is in their interest. It\’s not. Static prices are in the interests of pensioners on fixed incomes, not young earners. Home-owning pensioners have benefited most from the huge, unearned rise in property values.

It\’s not a fashionable thing to say, but Britain now probably has too many asset-rich old people. A dose of inflation will, at least, go some way to restoring the balance between the generations.

Given the low savings rate it\’s a bit of a stretch to say that we\’ve got too many asset rich people of any age or generation.

However, that\’s not quite my point.

But there is a silver lining to rising prices. One of the uncomfortable truths about inflation is that it is a way in which money is taken from old people and given to young people. If you are 25, with a credit card, student loan and your first (bumper) mortgage, then pray for inflation. It will wipe out the real burden of your debts. Yes, there\’s the short-term pain of rising prices and the economic downturn that goes with it. But if you stay in a job and receive inflation-matching pay rises, then you\’re quids-in.

This certainly has been true, yes. Those with high debts in the 70s certainly made out as their debt burden was inflated away. However, that\’s not to say that the same thing would happen again in the future.

The point is, what happens to interest rates while this inflation is going on? If they adjust fully to the expect inflation of the future (which, with an independent Bank of England setting the base rate, not politicians looking to the next by-election, we might expect them to at least get closer to) whatever you gain in the erosion of the capital value of your debt you lose in the interest payments that you have to make. And given that the assumption is that these youngsters are up to their eyeballs in debt already, that rise in interest payments is far more likely to bankrupt them, as the limitation will be between their incomes and their outgoings.

If we look at those oldsters too, then there\’s two different groups there. Those on fixed incomes do indeed get screwed by inflation. Those who are asset rich (almost any other asset than an annuity or fixed pension) actually do quite well out of inflation….assets are known to rise in value during inflationary times as well as the prices for other things.

On the assumption, therefore, that the interest rate regime has indeed been sorted out (which, with the BoE and the much freer long term debt markets that we now have we are at least part of the way to having done) The actual effect of a burst of inflation will be to bankrupt the youngsters with the debts, impoverish those on fixed incomes and further enrich, at least comparatively, the asset rich old.

So, how did this bloke get a job as the personal finance editor?

7 thoughts on “Erm, No.”

  1. “…Britain now probably has too many asset-rich old people.”

    So, what’s the optimum number of ‘asset-rich old people’ that Britain should have?

  2. In what possible way could asset rich old people be a problem?

    Does he think they all stuff gold down the sofa, and hoard pot noodles, thereby creating food inflation?

  3. Well as usual I think you’ve jumped to rather the opposite concluson too quickly. No-one really knows, do they?

    Here you were suggesting it wouldl have much the effect Collinson says:

    https://www.timworstall.com/2008/03/31/my-thoughts-exactly/

    Tim adds: You rather missed this bit “alongside negative real interest rates” and today I’m suggesting that interest rates wouldn’t be negative.

  4. Collinson is broadly speaking correct.

    The variable you missed is that in times of high inflation/interest rates, the house price-to-earnings ratio is very low. So the mortgage might be crippling for the first two or three years and after that, you are laughing.

  5. Yezbut the government student loan is largely irrelevant, being low-interest and written off if you’re low income.

    The debts that actually matter are bank and credit card debts – and as Matthew says, it’s not at all obvious what’ll happen to these.

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