And Then There’s Inflation

I don’t understand the big issues of economics, so perhaps this is a naive post. And a naive question, perhaps: Isn’t inflation the inevitable result of these policies? Doesn’t that discourage productivity? Besides enabling bad behavior, dissing good, abrogating contracts, and taking property (Kelo), how is the government ensuring a strong economy down the road? As someone who is regularly paying down a mortgage – hoping to pay it off in 5 rather than the original 30 years – I’ve been wondering if that, too, isn’t a chump’s act. Projected inflation is, of course, a good deal higher than the interest. Everyone seems agreed that dollars in, say, 2013, will be worth less than in 2009. Why, then, should we pay it off in 2009 dollars?

11 thoughts on “And Then There’s Inflation”

  1. The short answer is that you shouldn’t. However, another question might be: what other investment would give you a better return?

  2. I just refinanced at 4.5% and 30 years, both lowering my rate and extending my term almost 10 years. My personal inflation hedge.

  3. These are excellent questions. As I have aged I have been asking more questions in general of people. For whatever reason I am less afraid of asking them – usually there are those who want to know the same answers.

    The questions you ask, while simple, are tough. They involve a lot of personal choices, and there are a lot of variables involved.

    As for the mortgage, there is virtually no doubt that the government putting the presses in overdrive will increase inflation. In the short term we have a lot of deflation in certain markets. Commodities for instance.

    This leads to a choice. Personally, I want to pay my house off (as well as any other debt) as fast as I can. I have always been a “glass half empty” person though. My wife raises kids and I work. If I get disabled or lose my job for whatever reason it would be tough for her to get it all done by herself – so I do everything I can to knock down my debt load. Also this is something I have been taught by my humble upbringings. “Pay your bills” – I can still see and hear my folks repeating that mantra to me when I was young.

    When interest rates went down the last time (I think it was 5 years ago) I lowered my payment schedule on my house from a 30 year to a 15 year and held the same payment amount. This saves an IMMENSE amount of money. Until very recently I have never seen a rate that came close to my 15 year. If I can eventually get the same deal I will re-fi again, hopefully knocking off another 5 years or whatever off of the mortage and holding the same payment once again.

    But, as I said, these are personal choices. Some people are comfortable being in debt forever and just letting life insurance payments or whatever take care of the issues when they are gone. I just don’t want to rely on that if I don’t have to. I don’t think there is a right and wrong, I just look at things a little differently than Phwest above.

  4. Inflation is pretty well guaranteed at this point. If you have a fixed rate mortgage, you will be able to pay it off within a few years, maybe with the change from lunch. (Just kidding. I hope.) You should probably make the minimum possible payments at present. If you are on adjustable rate, it would probably make sense to get into a fixed-rate. Bear in mind that the government may automatically index all accounts and obligations if inflation really gets high — I believe the creditors were large contributors to the One’s campaign, and of course they own Biden. If bills of attainder and cramdown mortgage restructuings are legal, mandatory, retroactive indexing isn’t far behind. So there will really be no such thing as a fixed-rate mortgage.

    Bienvenidos en la República Populár y Democrática de Obamabanana.

  5. There may be an attempt to retroactively index mortgage rates to inflation, and maybe it will succeed. But it would create a lot of popular opposition, so I’m not sure it’s politically doable.

    But, in general, hola comrades!

  6. Jim Bennett – I understand that making minimum payments now is a viable strategy as the future dollars will be worth less with the coming inflation, but will they be worth that much less? For instance, if your payment today is $1,000, will that be $900 (relatively speaking) in a couple of years do you think? Of course, none of us have the crystal ball, but my example above is pretty severe inflation.

    My point is that I believe we will have inflation, but if you can knock down your debt quicker that would be a far better investment than principal/interest payments in the future. But I am no financier, maybe you could add a little to this interesting point.

  7. Dan:

    It all depends on two things, one is exactly what kind of inflation we can expect, how soon, and the other, whether, as I say, there will be some sort of mandatory retroactive indexing. (A currency revaluation with a set point in the past would serve the same purpose, too.) A three-to-one inflation over the next eight years would not be out of line with other inflationary periods, leaving your $1000 payment costing $333, assuming your were on fixed payments. Variable payments is a different matter.

    My point is that we may have to stop using past American experience as a guideline of what to expect, and start looking at Latin America. I remember an Argentine in the mid-90s taling about what a liberation price stability was, and how his mother would still ask him “give me a million, I need to buy some cigarettes.”

  8. Jim’s right—if you have a good fixed rate, just pay what you have to; if you’re in an adjustable, get out of it, fixed rate mortgages are cheap right now (30-yr fixed, just over 5%).

    Of course, if the economic contraction sharpens due to East Europe defaults (because they can’t roll over their debt in the face of US govt borrowing sucking all the capital away from everyone else) that drags down the European and then US banks, and/or if carbon cap-and-trade is approved, and you lose your job… then all bets are off, eh?

    It says a lot that the Chinese, with about $1T in dollar assets, are nonetheless prepared to talk out loud about leaving the dollar as a reserve currency… and the EU refused Geithner’s appeal that they do more “stimulus.”

    Our govt seems dead set on trashing the dollar, which in the short run will make debt (theirs and yours) seem less burdensome, but in the long run (after Obama’s program is passed and in place) will make the US one of the wrold’s economic weak sisters.

    One wonders how Volcker stands it, watching all his hard work at the Fed 1979-1986 being reversed.

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