I keep hearing that people in debt win when inflation goes up but the problem is you only win if you have assets that already appreciate in value or access to large amounts of capital to purchase assets that are inflation resistant. Simple example Tim is a manager at Lowe's Tim makes $66,000, each year. Tim spends most of that money on the necessities of life, a car payment a house payment if he is lucky, a rent if he is not, Tim spends some on groceries and basic living things to support his family. Inflation goes up 10%, Tim's boss fights for Tim and works hard and Tim gets a 7% raise which is unheard of because usually raises are capped at 5% so Tim is very happy. In the meantime his purchasing power has actually decreased.
Contrast this with Larry, Larry is very rich, Larry owns stocks in multiple companies, Larry also owns many assets and has enough capital to move it into other places to protect it against inflation. Inflation goes up 10% Larry's stocks, real estate and other ventures go up 12% because people are trying to find places to park their cash to avoid losing it to inflation.
In the end Larry ends up with substantially more money because he could take advantage of the inflation, and also because of his wealth had access to credit to take advantage of the low interest rates, meanwhile Tim has blown out his savings because his car's transmission gave out and he didn't have the money to buy a new one, and now is riding at the edge of his income because everything went up in price but Tim didn't want to end up enslaved to credit card debt just to continue living and the banks won't give you loans for "hey I need to buy groceries", so he got screwed by it all in the meantime the money and purchasing power Tim lost went to Larry.
So someone help me understand where my understanding is wrong, because yes I agree in a world of airless friction-less vacuums inhabited by spherical cows the inflation is good for debtors but in the world of the real it doesn't seem that way.
Its mostly just "economics 101" stuff; how it plays out in reality is different, and your analysis isn't wrong.
Inflation is good for debtors if wage keeps pace with inflation. That's it.
Taken to the extreme: Imagine I make $100k in 2030. I take out a 1 year loan for $10k @ 5% (10% my income). Inflation is at 50%, but my wages keep up. 2031: I make $150k. I pay back the loan: $10.5k (7% my income). The loan is worth less as a percentage of my income, because of inflation and wages keeping up.
Generally speaking, wages do keep rough pace with broad CPI inflation, if the inflation is slow, predicted, and a product of monetary policy. The issue in today's climate is multifold, but: first, there are critical sectors of consumer goods which are substantially out-inflating even the elevated CPI averages (housing/rent & microchips are the biggest). Second, most CPI-calculated goods are inflating not due to monetary policy, but due to supply-shock, which is harder to mitigate with wage increases because, well, in short, companies can't make money to give workers raises if they can't sell stuff.
No economics is "economics 101" stuff. Economics 101 is a gross over simplification to get students accustomed to basic concepts. There's a reason economics is called the dismal science.
You've got a system where everything is connected to everything else. There is no way you're going know if it's good for you or not. I have a house with a mortgage so inflation is good. If I can keep my job and demand higher wages. But if inflation is high it will put pressure on the fed to bring it down raising interest rates. Higher interest rates mean buyers won't quality for as high of a mortgage and the price of my house goes down. Unless they can also get higher wages to offset inflation. But then the county notices that their coming up short on tax revenue because of inflation and reassess my taxes. But I need a new roof and that just got more expensive. But my 401k is doing great etc, etc.
All of these things are in balance and you have no idea which ones are elastic and which ones aren't. It's like trying to balance a 10,000 leg stool. You can maybe make some gross generalities and even then you're often going to be wrong depending on where you own your home, what businesses are location close to there. What you have your 401k invested in.
Look up the average house price in your area in 2000. Now imagine you were 20 years into a 30 year mortgage. That's a pretty nice house payment, eh? Realistically, it would be even lower because you would have been a fool not to refinance as interest rates plummeted.
This is one way that people with debt "win" due to inflation.
Yeah, rich people benefit more. But that's always been the case. In a deflationary situation, rich people can take dividends from their investments, rather than selling at a discount. While that might be less than they'd normally get, it's much nicer than how wage workers have to work in fear of losing their jobs and having their income go to $0.
You’re mixing several plot lines. Let’s use an extreme example. You owe $100 and make $1 per day with daily living expenses of $1. Tomorrow the government screws up and the $1 bill is replaced by a $1,000,000 dollar bill. Even if you still break even, your $100 debt is now a complete non issue.
It’s not even a cup of coffee, whereas before it was a significant burden. This is true even if your real wages go down, though that’s a problem in its own.
the good for debtors argument fails to realize its only good for your realized debt. its very bad for all future debt ie: young people, poor, people who want to start businesses
Contrast this with Larry, Larry is very rich, Larry owns stocks in multiple companies, Larry also owns many assets and has enough capital to move it into other places to protect it against inflation. Inflation goes up 10% Larry's stocks, real estate and other ventures go up 12% because people are trying to find places to park their cash to avoid losing it to inflation.
In the end Larry ends up with substantially more money because he could take advantage of the inflation, and also because of his wealth had access to credit to take advantage of the low interest rates, meanwhile Tim has blown out his savings because his car's transmission gave out and he didn't have the money to buy a new one, and now is riding at the edge of his income because everything went up in price but Tim didn't want to end up enslaved to credit card debt just to continue living and the banks won't give you loans for "hey I need to buy groceries", so he got screwed by it all in the meantime the money and purchasing power Tim lost went to Larry.
So someone help me understand where my understanding is wrong, because yes I agree in a world of airless friction-less vacuums inhabited by spherical cows the inflation is good for debtors but in the world of the real it doesn't seem that way.