Seventh, inflation redistributes wealth from asset owners (the wealthy) to borrowers: that is almost invariably socially progressive.

That inflation over the decades sure reduced Gerald Grosvenor’s wealth, didn’t it?

And do note that borrowers only benefit if interest rates are, in real terms, negative. And we might not all fall for that trick again….

15 thoughts on “It does?”

  1. And again, he confuses money and wealth.

    House price inflation benefits the…. err… owner of the asset (the house), whether it’s a back-to-back hovel, or a comely pile.

  2. Bloke in North Dorset


    And do note that borrowers only benefit if interest rates are, in real terms, negative. And we might not all fall for that trick again….”

    Yep, we baby boomers who saw it first time round will make those tantrum demos the left keep throwing look like a teddy bear’s picnic if they try that trick again just as we are retiring.

  3. ‘By the use of “seventh”, I am assuming it is The Man Himself?’

    Ha ha. He does have runaway fingers and a stay-at-home brain.

  4. Yeah, the socially progressive ruin of the middle class in Weimar Germany certainly went well, and led to an era of sweetness and light.

  5. I think I am missing something important from an earlier point. However I am not going to give Ritchie and additional hits to find out for sure.

    Wouldn’t the only time inflation would help the borrower is if the interest rate they are paying is lower than the inflation rate?

  6. @ Liberal Yank
    Good spot.
    What we have seen in the past is that *increases* in inflation help the borrower who took out a loan in the past because the interest rate he/she is paying is less than the current inflation rate so his/her real debt is shrinking.
    However there are some instances that the mere existence of inflation helps the borrower – if interest payments are tax-deductible and there is not tax payable on the reduction in real value of the repayment relative to the original loan; when the loan is effectively interest-free in the form of delayed payment to suppliers – most supermarkets sell the goods and bank the cash before paying their suppliers so in high- or hyper-inflationary times they’re laughing.
    There is also the tendency for savers to take what interest rate they can get so in the late 70s real returns were negative (as they have been since 2008).

  7. john77,

    So not the only time but it is safe to say inflation is only good for a subset of borrowers.

  8. Surely Gerald was nearly broke when he died, he only had an income stream from a trust fund, if he had any personal wealth over the threshold he would have paid IHT.

  9. A lot depends on whether your earnings keep pace with inflation. If they don’t, the outcome is probably not going to be socially progressive.

  10. This is the insanity of symmetric inflation targeting. Tightening monetary policy to curb excess leverage and excess demand makes sense, the inverse does not. Monetary Policy everywhere is explicitly targeting inflation, as if it is a good thing and yet again we are being driven, management consultant style by ‘targets’. In effect they are saying that they need to cut interest rates to stimulate borrowing and thus create excess demand and higher prices. Unfortunately as Japan has shown, in a world that wants to reduce leverage this will not happen (especially as another set of busy bodies are explicitly preventing investors from taking the very ‘risks’ that the central bank are trying to encourage them to do! Meanwhile, by reducing the return on savings you are instead increasing savings and reducing consumption. Even worse, by forcing pension funds into deficit and requiring companies to take more liquidity out of the real economy to ‘top up’ their pension funds QE slows the economy down rather than stimulates it. The only people that want inflation are governments who wish to inflate away their debts and they are destroying economies in a failed attempt to get it.

  11. Yes Mark T the BoE seems to be playing a pretty crappy game giving insufficient weight to the fact that reducing rates stiffs pension schemes, other savings plus those parts of the finance industry relying on taking a spread and in addition leaves virtually no leeway to reduce rates if really needed.

  12. Bib

    Carney has had his hands tied by Osborne refusing to cut taxes or give any kind of fiscal boost. If the government is trying to tighten fiscal policy in a recession, then the Bank has to try monetary policy as a stimulus. Except it is obvious that monetary stimulus doesn’t really work. It’s all a bit weird

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