Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
FYI: Inflation could be a sweet double-whammy for the folks I call Solvent Seniors. Social Security benefits increase with inflation. For 2015 the increase was 1.7 percent. And if inflation is more than a feeble throb, interest rates may rise. Savers might actually earn a return on their money. Imagine that! Regards, Ted http://assetbuilder.com/scott_burns/the_inflation_cliffhanger
Right now, real interest rates are negative. Unless that changes, an uptick in inflation with a commensurate increase in nominal rates (i.e. keeping the real interest rate fixed) is a losing proposition for savers and SS recipients (unless all their SS income is tax-free).
That's because you're taxed on nominal rates, not real rates. So if nominal rates go up, you'll pay more in taxes while getting no higher real return.
To see this simply, consider going from 0% real return and 0% nominal return (i.e. 0% inflation) to 0% real return, 1% nominal return (1% inflation), and 25% taxes.
In the first case, you're holding your own. In the second case, your after tax take is 0.75%, but costs have gone up 1%, for a 0.25% loss in real value.
I don't know why Scott Burns is rooting for higher inflation (and correspondingly higher nominal rates). It's increased real rates that he should be hoping for.
Article is well written. But he manages to miss both elephants in the room with a single shot.
First - Inflation is NOT good for seniors, as it results in rising prices for goods, services, food, and, most significantly, medical care on which they are more dependent than the general population. I suppose a case might be made that seniors are somewhat more immune to rising costs than the general public due to their having a higher proportion of home ownership - but Burns hasn't made that point. And, I think it highly dubious.
Second - Inflation may prove to be good for seniors in one respect: Rising asset prices (especially equities) could bail out the ailing pension funds, both public and private, which are greatly underfunded. Put another way - inflation would benefit the indebted (the pension funds) who could repay their debts to their debt holders (retirees) in cheaper dollars. However, to the extent pension funds are also holding longer dated bonds, inflation could deal them a "double-whammy" (to borrow Burns' phraseology).
Interesting point about pension plans, but I'm afraid that inflating their way out of underfunding may not help retirees in any real sense.
Suppose a pension plan is 50% funded, and because of inflation, everything (including the pension portfolio) doubles in nominal terms. So now the pension plan is able to to pay 100% of the pensions, but as you noted, in cheaper dollars.
Instead of getting 50% of what they were promised, pensioners would get 100% of what they were promised, but those dollars would be worth only 50% as much. No difference in real (inflation adjusted) dollars.
(In reality, it's not clear to me what effects inflation would have on a pension fund portfolio. High interest rates are generally considered bad for stocks; on the other hand, a little bit more inflation might indicate that the economy is improving, demand is increasing, and businesses and their stocks are doing better.)
Well, inflation cannot be viewed or properly understood in isolation apart from the rest of US economic activities and their consequences:
Some of the reasoning, from three years ago (PK):
\\\ … would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy. \\\ How so? For one thing, large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery.
More recently:
\\\ inflation — at barely above 1 percent by the Fed’s favored measure — is dangerously low. \\\ Why is low inflation a problem? One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an overall lack of demand, falling inflation makes that problem worse. \\\ Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a main reason overall demand is too low. \\\ So why is inflation falling? The answer is the economy’s persistent weakness, which keeps workers from bargaining for higher wages and forces many businesses to cut prices. And if you think about it for a minute, you realize that this is a vicious circle, in which a weak economy leads to too-low inflation, which perpetuates the economy’s weakness.
msf's point is well taken. re: pensions it's a zero-sum game - except that there may be an advantage to buying time. As it stands now, pressures are mounting on both the public and private side to eliminate or curtail these pensions. (Witness Detroit.) And, the whole idea behind the airlines going bankrupt and than "restructuring" was essentially to strip employees of the pensions they had earned through years of service.
davidmoran's post reminds me of the long tradition in this country of infusing inflation (and the dangers/desireability of such) into public discourse. In William Jennings Bryon's day devaluing the currency, thru free coinage of silver, was seen by proponents as a way of rescuing the nation's highly indebted farmers. Bryan's' cause led to his dramatic "Cross of Gold" speech at the 1896 Democratic National Convention in Chicago.
Though they may not use the term (inflation), many of today's harshest Fed critics (Ike Senator Rand Paul) appear to be embracing a counter-Bryan viewpoint regarding "easy money" and its effects on the economy and society. --- Excerpt: "If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold." http://historymatters.gmu.edu/d/5354/
(Sorry for the earlier inaccuracy which I have corrected. It wasn't additional paper currency Bryon was advocating as I stated earlier, but rather the free coinage of silver at a set ratio to gold. Thanks for your forebearce.)
Comments
That's because you're taxed on nominal rates, not real rates. So if nominal rates go up, you'll pay more in taxes while getting no higher real return.
To see this simply, consider going from 0% real return and 0% nominal return (i.e. 0% inflation) to 0% real return, 1% nominal return (1% inflation), and 25% taxes.
In the first case, you're holding your own. In the second case, your after tax take is 0.75%, but costs have gone up 1%, for a 0.25% loss in real value.
I don't know why Scott Burns is rooting for higher inflation (and correspondingly higher nominal rates). It's increased real rates that he should be hoping for.
First - Inflation is NOT good for seniors, as it results in rising prices for goods, services, food, and, most significantly, medical care on which they are more dependent than the general population. I suppose a case might be made that seniors are somewhat more immune to rising costs than the general public due to their having a higher proportion of home ownership - but Burns hasn't made that point. And, I think it highly dubious.
Second - Inflation may prove to be good for seniors in one respect: Rising asset prices (especially equities) could bail out the ailing pension funds, both public and private, which are greatly underfunded. Put another way - inflation would benefit the indebted (the pension funds) who could repay their debts to their debt holders (retirees) in cheaper dollars. However, to the extent pension funds are also holding longer dated bonds, inflation could deal them a "double-whammy" (to borrow Burns' phraseology).
Suppose a pension plan is 50% funded, and because of inflation, everything (including the pension portfolio) doubles in nominal terms. So now the pension plan is able to to pay 100% of the pensions, but as you noted, in cheaper dollars.
Instead of getting 50% of what they were promised, pensioners would get 100% of what they were promised, but those dollars would be worth only 50% as much. No difference in real (inflation adjusted) dollars.
(In reality, it's not clear to me what effects inflation would have on a pension fund portfolio. High interest rates are generally considered bad for stocks; on the other hand, a little bit more inflation might indicate that the economy is improving, demand is increasing, and businesses and their stocks are doing better.)
Some of the reasoning, from three years ago (PK):
\\\ … would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy.
\\\ How so? For one thing, large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery.
More recently:
\\\ inflation — at barely above 1 percent by the Fed’s favored measure — is dangerously low.
\\\ Why is low inflation a problem? One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an overall lack of demand, falling inflation makes that problem worse.
\\\ Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a main reason overall demand is too low.
\\\ So why is inflation falling? The answer is the economy’s persistent weakness, which keeps workers from bargaining for higher wages and forces many businesses to cut prices. And if you think about it for a minute, you realize that this is a vicious circle, in which a weak economy leads to too-low inflation, which perpetuates the economy’s weakness.
davidmoran's post reminds me of the long tradition in this country of infusing inflation (and the dangers/desireability of such) into public discourse. In William Jennings Bryon's day devaluing the currency, thru free coinage of silver, was seen by proponents as a way of rescuing the nation's highly indebted farmers. Bryan's' cause led to his dramatic "Cross of Gold" speech at the 1896 Democratic National Convention in Chicago.
Though they may not use the term (inflation), many of today's harshest Fed critics (Ike Senator Rand Paul) appear to be embracing a counter-Bryan viewpoint regarding "easy money" and its effects on the economy and society.
---
Excerpt: "If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold."
http://historymatters.gmu.edu/d/5354/
(Sorry for the earlier inaccuracy which I have corrected. It wasn't additional paper currency Bryon was advocating as I stated earlier, but rather the free coinage of silver at a set ratio to gold. Thanks for your forebearce.)