Borrowers Can Effectively Benefit From Inflation
We will have an inflation update on Friday, when the November Consumer Price Index is released. If we see high inflation again, you will hear groans about the cost of gasoline, groceries and used cars. After all, no one likes the price increase.
Well, hardly anyone. Inflation has a bright side for some people in this economy. Namely, the borrowers.
These days, it’s hard to imagine a presidential candidate chasing this message: âVote for me, and you’ll have more inflation. “
But in 1896, that is exactly what William Jennings Bryan did. “You will not lean this crown of thorns on the forehead of work.” You will not crucify humanity on a golden cross â, he declared in his famousâ Golden Cross âspeech.
Bryan wanted to untie the dollar from gold to drive up prices. At the time, the United States was experiencing significant deflation, which upended a particularly important voting bloc: farmers with mortgages.
âIn fact, borrowers were now getting the short end of the stick. Because they are paying off their debt with dollars that are more valuable than when they borrowed, âsaid Lee Ohanian, professor of economics at the University of California, Los Angeles.
Even though he lost the election, Bryan’s logic still stands today. Say five years ago you got a mortgage for $ 300,000 to buy a house at a fixed interest rate. Because your lender couldn’t predict the COVID-induced inflation, these monthly payments are worth less to the bank.
âSo it ends up being a transfer of wealth from lenders to borrowers,â Ohanian said.
People with auto loans and large companies that issue longer-term bonds also benefit from inflation, said Dean Baker of the Center for Economic and Policy Research. Just like the federal government.
âSo if we have 5% inflation, the interest rate on the public debt, the 10-year debt, is now 1.4%. [The] the government is getting a really good deal, âBaker said.
How good inflation is for a borrower will depend on what other things he is spending his money on – and whether he can get his boss to give him a raise to keep pace.