Reposting Paragraphs About Inflation

by Reihan Salam


Just noticed a post at Modeled Behavior titled “Unsubstantiated Claims“:

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.

Perhaps the post is referring to my remarks about Argentina?

The leaders of this populist revival, the Kirchner family, have been criticized for their authoritarian style, for rewarding cronies with lucrative government contracts, for seizing private retirement funds, and for sparking double-digit inflation that has helped erode the wealth of many of Argentina’s households.

Note that I said “many” of Argentina’s households. I did not refer to the impact of inflation on the aggregate level of wealth.

Here is Heer and Suessmuth:

The effect of a permanent change of inflation on the distribution of wealth is analyzed in a general equilibrium OLG model that is calibrated with regard to the characteristics of the US economy. Poor agents accumulate savings predominantly in the form of money, while rich agents participate in the stock market and accumulate equity. Surprisingly, an increase of inflation results in a lower stock market participation rate; in addition, the distribution of wealth becomes more unequal, even though the quantitative effect is economically negligible. Furthermore, we show that the welfare costs of anticipated inflation are considerably lower than in Imrohoroglu (1992).

First, I should stress that the Heer-Suessmuth model might not apply to a real-world economy, but this seems like a decent starting point. It could be that Argentina is a country in which the poor do not accumulate savings primarily in cash, but rather the poor are sophisticated financial consumers who invest in equities, etc. My sense is that this is not the case, and that “stuffing cash under the mattress” is fairly common in Argentina as it is across much of the developing world.

The post could be referring to my take on “hard-money populism.” Here I was explicitly making a political point:

Could it be that retirees, a nontrivial part of Sarah Palin’s fan base and the broader right-of-center political revival we’ve seen since the 2008 presidential election, are receptive to the hard-money message by virtue of relying heavily on retirement savings? Does this merit consideration, given that the age composition of the conservative movement has changed considerably since the Reagan years, as Ruy Teixeira has observed on many occasions? A constituency that is older is presumably more attuned to the threat — real or imagined, I should stress — of rampant inflation. Moreover, a constituency that lived through the high inflation years of the 1970s might have a different take on the issue for voters in my age cohort.

Please note the highlighted portion. The question is whether one can imagine retirees fearing inflation without cynical manipulation of some kind. And I think the answer is yes. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.