Historically, the largest debtors are governments followed by corporations, the rich, the middle class, and then the poor. You may be thinking of net worth as the poor and middle class are more likely to have negative net worth due to debt than the upper classes. However, this makes inflation even worse for the lower classes as the assets owned by the upper classes which offset their debt are rising in price due to inflation, further benefiting them. As well, the upper classes have greater access to investments that allow them to protect their wealth from inflation unlike the lower classes. In addition, the lower classes tend to have less bargaining power with which to keep their real wages from falling in an inflationary environment.

Inflation most definitely favors the upper classes relative to, if not at the expense of the lower classes.

People who wouldn't be debtors if the game weren't rigged to destroy their savings.

What savings?

Indeed.

If you have a mortgage, it is likely that your net worth is negative. In such a case, inflation greatly helps your networth.

Credit card debt, mortgages, student loans, payday loans... this is the reality of the lower and middle class. If you're making less than $45,000 / year, you're likely in debt in the US.

At which point, inflation helps greatly, by reducing the value of your debt. A (former) student who has $100,000 in debt isn't "losing money" to inflation... the student is instead "losing debt" to inflation.

My point was that it's not written in stone anywhere that the middle class is a debtors class. People didn't used to have credit cards and car loans. Some would have mortgages, but nowhere near what we have today, and it wasn't about investing in the "value" of the home, given that there is no such thing, besides it being a roof over your head.

This system in which the middle class is by default considered the debtor class is a result of decades of manipulation.

And the middle class is free to live without credit cards, mortgages, and student loans.

Its hard to call it "manipulation"... although I'd argue it is widespread ignorance that has caused this problem. It is clear to me that swaths of people do not understand the concept of debt until it is too late. There is clearly a problem in the education system.

Too many people are getting too much into debt. Not on someone else's choice, but on their own choice.

Right, you really expect someone to pay for an 80 - 150K degree all on their own without student loans? That's usually the catalyst there. Once you graduate college, then you need to start paying off that debt. You need to get a job, pronto, and that often means buying a car to drive there.

Nope. I expect less people to get an $80,000 degree. I got a degree in engineering at a State University for $30,000. I have friends who got cheaper degrees by going to community college for two years.

There is also the option of not getting a degree at all, one which is rarely discussed. It turns out that the US Job can't subsume all of the college-level jobs anyway. A degree in Library Science is surely hard stuff, but its relevance in the modern workforce is questionable.

I dare say, its better to just get a job out of High School and start climbing the corporate ladder at Target or Costco, than to waste 4 years of your life on a dead-end degree. (And no offense to "dead-end degrees" either. Lawyers for instance, are contracting. They're currently a dead-end degree, despite the extreme difficulty and prestige associated with the field. But it is surprisingly difficult to get a job now as a fresh Law Grad IIRC).

Nevertheless, those who are $100,000+ in debt benefit from inflation. There are plenty of people in this unfortunate situation and the country should do more to support them. (the counrty should have done more to prevent them from getting into that situation... but that is another story)

Would that former student not also be losing some of his/her ability to pay off said debt? In other words, if his/her salary is not increasing to match inflation, isn't it just a wash?

Which is why unions and a minimum wage attached to inflation are important.

How does (steady, predictable) inflation help you as a debtor? If the banks expect to lose, say, 3% to inflation, isn't the logical action to increase the nominal interest rate to maintain the same real rate?

I can understand why unexpected inflation would help debtors, but that's not what people argue for.

Logical, yes. But in practice, no. Interest rates have fallen while inflation has remained steady.

Consider that 20 years ago in 1994, the Mortgage rate was 9.17%, while today Mortgage rates are roughly 3.9%... it is clear that the market for interest rates is rather more complicated than you mention.

http://www.freddiemac.com/pmms/pmms30.htm

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Second, you're right. It really doesn't matter how high or low inflation is, if it is consistent... then it is something the market will easily take into account.

So a steady rate of inflation is perfectly fair to both sides. Which is why the Federal Reserve wants to peg inflation at 3%.

Well, of course inflation is not the only thing they take into account, so it's no wonder that rates don't match up to it, but that wasn't my point.

So a steady rate of inflation is perfectly fair to both sides.

But it wasn't claimed that it was fair, it was claimed that it was good for debtors, which is what I find hard to believe.

I would wager that having a mortgage is positively correlated with net worth, and that credit card debt, student loans and surely payday loans(!!) are negatively correlated with net worth.

I would hope so.

But with the number of "underwater" homes, subprime mortgages, and so forth that were handed out through the early 2000s, it is clear to me that mortgage holders probably have negative net worth, especially if they were lower or middle class families.

People were buying homes they couldn't afford. In these cases, inflating their debt away is only a benefit.

Looking at various real estate indices over the years, it looks to me like we've recovered through much of the crash, and the FTSE NAREIT price value was higher in 2006 than now, but not in any other year.

Combining that with the fact that many mortgage holders would have bought before 2003, suggests to me that the overwhelming majority of mortgage holders are not underwater, which takes nothing away from the pain of those who are, but numerically, they are a minority. Perhaps half of all mortgages relate to purchases (original purchase date, not most recent finance date) prior to 2003, and I'd wager that well more than half (probably 75+%) of purchases since then have mortgages that are not underwater.

Sure, mortgage holders from lower class families are more likely to have a negative net worth. But that's almost the definition of lower class, not because they're a mortgage holder. Lower class families with last names starting with "S" are also more likely to have negative net worth than average families; has nothing to do with their name...

Totally agree that inflation is the friend of a fixed coupon debtor. I'd be hard pressed to decide to pay off my house even if I had the free cash to do so. It will be much cheaper to pay it off with massively devalued 2024 and 2034 dollars.

Only about 13% of mortgages are underwater[1], so it's definitely not true that mortgage holders probably have a negative net worth. It's a common situation, but far from being the situation a majority of mortgage holders are in.

[1] http://www.forbes.com/sites/erincarlyle/2013/12/17/6-4-milli...

Unless banks are able to think ahead far enough to factor inflation into the loan rates.

i guess the word you meant was "deflation".

Nope, deflation hurts people who owe money by increasing the value of the debt they owe. Under deflation, nominal wages go down, and since debt (especially the principle) is nominal, that means the debt-income ratio rises, making the debt harder to pay off.

No - he means inflation. It erodes the value of the balance that is owed making it easier to pay off

But the banks know there will be inflation, and therefore they can price that in at the moment the contract is signed, raising the nominal rate to counterbalance inflation, no?

Under normal circumstances - I don't think Banks directly price for inflation unless it's a financial instrument specifically linked to a certain measure of inflation.

I worked in a bank for a few years - doing credit risk in both consumer (cards, personal loans, etc) and investment banking (bonds). When it comes to consumer loans, like cards, mortgages, personal, etc, the basic formula is the cost of funds plus a margin that reflects the risk (i.e. card loans more risky than mortgages).

Cost of funds relates to how much it costs for the bank to obtain those funds - its an aggregate of various wholesale market rates, the composition of its deposit base, and a bunch of other things.

Inflation risk is something I never had to factor - but it could have just been because I wasn't working in a time with a major inflationary shock

The cost of funds figure (whether LIBOR, prime or other base rate) IS the reflection of the cost of expected inflation.

Actually it's related to a theoretical "zero-risk" investment. Mortgages come with some risk, therefore they need to be priced above the returns for a zero-risk investment. In an inflationary economy, the theoretical "zero-risk" investment is typically something better than just holding the cash, but it can be smaller than inflation (meaning there is no way to gain money without accepting some amount of risk), or it can be larger than inflation. It has varied over time in a way that does not match up with inflation, which disproves your statement.

Side note:

In a deflationary economy, then "zero-risk" would be just holding on to the cash. Of course, that's still not risk-free since you might have been wrong about the economy being deflationary.

I genuinely can't tell if you understand what I said or not. (It isn't my finest work, but if you read my reply in the context of the post to which I was replying, it will make more sense.)

I'm well aware that there's a risk-spread over the base rate for mortgages. My point was that the GP said he worked in a bank pricing credit and never had to figure anything to do with inflation; he only had to deal with a cost of funds figure and therefore banks don't price inflation into credit products.

My point was that cost of funds figure WAS the inflation figure.

Now, if you're arguing that there isn't 100.000% correlation between the various cost of funds rates and the various measures of inflation, I'll agree, but posit that the correlation is high, just not perfect.

I think the correlation is very weak. We've had very high cost of funds in times of low-inflation. All the bankers care about is if they can make more money lending it out as a mortgage than they can putting it somewhere else (after factoring in risk). If there is no low-risk inflation hedge, then they could very well lend out money at rates below inflation (after factoring in their risks), since that could still be a higher return than any available lower-risk investment.

No. Inflation.