As part of my Unsubstantiated Claims post I said
Reihan: Reihan Salam has written a bunch of stuff I have been meaning to respond to but haven’t. The only point I want to address because its real quick is that inflation does not erode savings. It only erodes cash and the value of long bonds taken out before the inflation set in. However, the Fed is buying long bonds and propping their value. The only thing that is eroded in this scenario is cash. I have had this conversation with a number people and Ron Paul keeps saying this, so I think it deserves attention. Before I can get to that Google Fisher Effect and read a bunch of the piecemeal explanations. Lots of them revolve around equations but the upshot is that inflation is priced into assets including bonds and savings accounts. Only bonds issued before the unexpected inflation and maturing long after are affected.
My sloppy writing makes it sound as if I am saying Reihan should read up on the Fisher effect. What I mean to say is that Reihan brought up the fact that people fear inflation eroding savings. These fears are common. I have had many a Facebook debate over them. Indeed, Ron Paul has repeatedly pointed to this has his main reason for fearing debasement of the currency.
I think, but am not certain that fear of eroded savings is the central driver behind populist anti-inflation sentiments. This needs to be addressed and in my experience convincing people that inflation is priced into financial assets takes a long time and lots of charts and graphs.
However, I did not mean to suggest that Reihan doesn’t get the Fisher effect himself.
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Friday ~ November 26th, 2010 at 1:45 am
This is How Inflation is Confusing « Modeled Behavior
[...] instead of “Unsubstantiated Claims” where he thought out loud. One of those thoughts landed on the Fisher effect. My sloppy writing makes it sound as if I am saying Reihan should read [...]
Friday ~ November 26th, 2010 at 3:41 am
TomGrey
Most people fear inflation because they have little or no savings, some low paying job with some hope for a little raise but would prefer no raise to having layoffs, especially if they’re the ones laid off, and … inflation causing prices to rise.
They are, rightly I think, afraid of lower real wages.
Since very many, if not most Americans were “saving” in their house payments, they’ve already lost a lot of their savings. Because inflation would inflate their home values, too, more of them should probably favor it.
Because Americans are overpaid, and gov’t workers grossly so, inflation and a slow reduction in real wages might be a softer landing than continued less-than-population growth and constant downsizing/ reorganizations in the peaceful, private sector.
(First timer here, your notes about Krugman & Manikew seem likely to be true. But, like so many economists who merely look at high marginal tax rates on the rich for their utilitarian effects, the desire to punish the rich for being successful seems to not enter your prose. Yet this is a historical reality in human behavior, and needs to be fought against.)