> Central banking is possibly the greatest human invention since sanitation.
The greatest human invention since sanitation is that a tiny elite can control the value of money (and money over time)?
Is that a joke? Are you joking?
Edit: Really...? Really? You know the devaluation of currency over time and the resulting increase in the cost of goods disproportionately affects the poor and middle class, as well as retirement savers who's interest rates can't keep up, right?
Damn right it's a feature. Otherwise there'd be no incentive to invest, people would just hoard assets instead of putting them to productive use. There's a reason countries abandoned the gold standard: deflation and bank runs are harder problems to manage than inflation.
But for whom are they problems? People who are trying to get by in life or rich people looking to get richer?
Regular people invest when investing makes sense, when the creation of a thing like a restaurant or a farm or what have you has significant value in and of itself. NOT because they value money, and the value of their money will decrease if they don't invest
Having the power to control inflation to force people to invest is tantamount to setting their mattresses on fire to get them out of bed in the morning so they'll go to work. People will get out of bed--and invest--when it's right for them, and they don't need people like you to goad them into it.
Deflation hurts anyone who has a mortgage or any other kind of debt. Theoretically it rewards savers, but if prices are falling then wages then to do so as well, consumption and production go into a downward spiral.
Anyone who thinks defaltion is a good idea is essentially thinking that their small cash pile will magically grow to be worth more without them doing anything, which seems enormously attractive because it's a) easy and b) there isn't any of that unpleasant risk that comes with investment, and which makes it so hard to decide what to invest in. So everyone who has money stuffs it under the metaphorical mattress, and people who don't have any can't get any because the supply of credit has vanished. Economic growth slows way down.
How do you distinguish the two in general? If over some period of time technological improvements reduce the cost of almost all goods (and also therefor the value of the human labor involved in the more traditional ways of producing the goods), what has happened is just drops in real cost, but it has also decreased people's income and probably created unemployment. If we calculate deflation using a basket of goods and don't print exponential amounts of money, it also caused deflation.
Purchasing power parity. You're conflating a drop in the factor of human labor with a drop in the vlaue of that labor, but they're not the same thing. For example it may take me only 1 hour to do in Excel what would take me 3 hours to do with pen and paper, but the value of an hour of my work has not dropped; it's probably risen due to the greater complexity of accounting tasks I can perform and my increased technical knowledge. I spend 3x less time on each client, but I can handle 3x more clients. My wafes ought to stay the same in real terms, or even rise depending on how well I can operate Excel. Your cost to get your books done may have fallen in real terms thanks to my doing it faster with Excel, but my hourly rate has not.
Under deflation, though, everyone has less money so I have to keep cutting my rate to stay competitive. Now even though I'm more productive I'm getting a lower return on my productivity. Arguably,this is a problem currently facing much of the labor force in the US.
It's terrible from the producer's point of view, which is why there are so few participants in the chip market. The thing is, technology is not the whole economy, and is far from being there for many years to come (ie Star Trek type replicators).
Any economic situation can be good for individuals who are positioned to take advantage of it, but in macro you need to consider the economy as a whole, through to food and extractive industries etc.
Deflation encourages hoarding, and results in inescapable debt slavery for anyone who doesn't have a surplus. Falling prices cause producers to exit the market, leading to shortages.
Your solution to the problem of inflation is the abolition of credit.
It should be noted that Bitcoin doesn't prevent fractional reserve banking; the currency is fairly irrelevant, as long as your depositors and regulations allow you to only keep a percentage of the deposits with immediate liquidity.
Heavens forbid a normal person ever be able to take out credit or anything. (Hint: Without fractional reserve banking credit would get VERY expensive).
Deflation rewards people with surplus income, which has little effect on those living paycheck-to-paycheck. The two bottom quintiles in the US do not have the ability to save; they won't magically start saving just because inflation goes away.
If inflation encourages those with surplus income to make riskier investments, and riskier investments benefit those living paycheck-to-paycheck (say by increasing demand for their labor) then inflation is to the benefit of those living paycheck to paycheck.
On the other hand, the upper-middle-class to wealthy do benefit from deflation, since they have excess income. If inflation doesn't benefit the less well off, then perhaps there is little reason to punish the wealthy with inflation. Those that would save more in a deflationary economy are already saving though.
Yes, because the "Centralized Bank" in 1929 caused the bank runs.
Oh wait, centralized banking didn't exist back then? Fractional Reserve Systems didn't happen back then? And yet you have a decade of the greatest bank-runs of US History?
And ever since the fractional reserve system was invented, there hasn't been a national-scale bank run in the US for nearly 100 years?
You might want to check your dates. From wikipedia[1]:
"The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907."
Living paycheck to paycheck is not the converse of saving.
When I save money, I invest it in productive enterprise. Thus, I have less in my checking account. You could even consider (gasp) that I'm living pay check to pay check!
Without a central regulatory authority, what would prevent any private bank from lending out all its deposits? Nothing. And in fact fractional reserve banking predates the modern central banks by hundreds of years, and is one of the economic risks that central banks exist to manage.
It's not, but what: the financial market provides a mechanism for people to choose between asset classes with varying risks and rates of return. Bond issuers offer notes that pay out at a premium to the interest rate over a fixed period, stocks are issued with the possibility of a dividend or appreciation in value.
Didn't you notice what happened during the recent financial crisis? Capital markets dried up, credit was unavailable to many small and mid-size businesses, and many of them shut down for lack of cash flow during a period of limited demand, rather than any fundamental flaw in their business organization.
One could argue that the fundamental flaw in their business organization was a reliance on credit in order to survive. It's a different way of thinking about the world to be sure, but that doesn't mean it's wrong.
Ultimately I don't really like living in a society that has so little slack in it. I'd prefer (not that anyone gives a shit what I prefer) one where most businesses have large equities built into them rather than debts. A business which owns outright the building it occupies is more likely to weather a storm than one which rents or is still paying a mortgage on. That's because it can afford to accept lower yields (not paying an extra $X per month in rent-equivalent to the owners/investors/etc) in the short term for the benefit of still being around.
Slack isn't efficient on any time scale that economists or MBAs care about but over 50 years I think it's quite a good idea. I'd rather own a business which lasts 50 years even if 10 of those 50 years don't pay the kinds of returns I'd like than one which makes better returns for 12 years and then folds.
The thing is that many businesses are cyclical by necessity - agriculture being the most obvious example, but cycles of various kinds pervade business just as they natural systems like wildlife populations and so forth.
If most businesses had large equities rather than debts, you'd have a significant opportunity cost. It's not a matter of what MBAs care about (often not what economists care about), but one of what could have been achieved with money that was otherwise sitting idle. The approach you describe often leads to zombie companies that are not actually productive but are able to cannibalize their own assets while making it difficult for more efficient producers to enter the market.
Maybe or maybe not. It depends on what you're trying to optimize for. One man's opportunity cost is another man's ability to weather a funding crisis that eliminates his competitors and provides him with a large opportunity once the business cycle is back on the upswing.
Equity means having control over your destiny, debt means the bankers decide your fate. Choose accordingly.
With words like "invest" and "hoard", you're using language that short-circuits critical thinking. Surely, for example, you agree that not all investments are good? But "invest" has an undeniable positive connotation, so in order not to prejudge the outcome let's replace "invest" with "spend". Then, instead of the inflammatory word "hoard", let's use the word "save".
With this neutral terminology, we're now ready for some actual thought. We can recast the claim as follows: currency dilution is good because it encourages spending and discourages saving. There's no doubt about the factual claim—dilution does indeed encourage spending and discourage saving). But why is saving bad and spending good? This is an ethical judgment that depends on your particular set of values, but it is undeniable that currency dilution transfers purchasing power from savers to spenders. In particular, it's mathematically equivalent to combining a perfectly hard currency with forced confiscation (from savers) and transfer (to spenders), i.e., organized theft. Thus, from an ethical point of view, there is a strong reason not to give dilution the benefit of the doubt.
Regarding the so-called "gold standard", the historical evidence is not nearly as clear-cut as you've been led to believe. Though flawed in many ways, What Has Government Done to Our Money? by Murray Rothbard is a good place to start: http://mises.org/money.asp
I picked my terms carefully. Investment and spending are absolutely not the same; investments can certainly go bad (although even bad investments generate some economic activity), just as spending can be misappropriated. But the main difference is that while you may get some utility from spending, you do not anticipate any kind of future return.
As for saving and hoarding, those are not the same either. If someone saves they typically do so via a savings account or a CD at an institution engaged in fractional lending but (within the US and within limits) a government backstop to prevent loss of savings. Hoarding is putting your money under the mattress where it's absolutely not doing anything.
The fact that your argument requires redefining basic economic terms should be a clue that there is something terribly wrong with your priors.
I looked into it, and you're right; I was sloppy in my terminology, and will be more careful in the future. I appreciate the correction.
In this light, let's consider four activities: spending, investing, saving, and hoarding. Currency dilution encourages the first two and discourages the second two. It also systematically transfers purchasing power from savers/hoarders to spenders/investors. Can you build a case that the benefit from dilution outweighs the costs? Dilution certainly encourages "economic activity" (for certain values of "activity"), which you seem to regard as axiomatically good. What is your justification for this?
>>It is in fact a major bug that you effectively lose just by holding.
Not taking sides here, but I think it could be argued that devaluation is good because it encourages economic activity (i.e. spending) instead of mindless hoarding.
I mean, money is supposed to be a medium of transfer, not an investment/saving mechanism. We don't want people hoarding cash in a bank account. We want them to invest that cash in actual assets that can then be developed.
>Not taking sides here, but I think it could be argued that devaluation is good because it encourages economic activity (i.e. spending) instead of mindless hoarding.
So would threatening to execute anyone who spends less than n% of their take-home pay, but people don't advocate that, do they?
Before you object to the comparison, I know: "That's different: the costs would vastly exceed the benefits!"
Right, but there would be costs! There are costs any time you force people to spend (commit to purchases) earlier than they would like to -- whether you do it by inflation or the sword.
One cannot simply say, "well, economic activity [that we measure] went up, so that must have been a good idea!" But anytime someone brings up the "encourages economic activity" argument for inflation, they rarely offer any way to model the cost of moving up purchases like this, nor do they even realize it's necessary to do so!
(Edited to avoid excessive attribution of the argument.)
Inflation is a tax on assets held as dollars. That tends to make it highly progressive as savings tends to increase faster than income once you pass a certain inflection point.
The government already taxes other things (both to generate income and to alter behavior), so looking at inflation that way makes it easier IMO to make sound policy decisions rather than comparing it to executions.
Yes, you can replay another standard argument for inflation. It's still not enough: the question is how to model the cost of making people spend sooner than they otherwise would, so you can compare to the benefit thereof. Mentioning executions was just to show what happens when you ignore costs and only talk about policy benefits.
For those "taxes of other things", you still need to model its social cost to know whether it outweighs the benefit. You can't just dismiss the point as "this isn't execution".
Edit: Important thing to note: in most discussion of taxation, the theme is "how to avoid the deadweight loss", i.e. how to write the tax in a way where it just transfers money without inducing changes in behavior. Advocating inflation as a behavior-changing tax is a sharp deviation from this, requiring a very different justification and model than traditional taxation.
> in most discussion of taxation, the theme is "how to avoid the deadweight loss"
This is certainly not true for e.g excise taxes. Inflation as a tax on dollars-held is similary intended to alter behavior by encouraging those with wealth to take riskier investments (alternatively stated, to discourage long-term holding dollars, similarly to how excise taxes are intended to discourage consumption of particular goods).
I think you mean Pigovian, not excise, taxes, and you'd still need a way to model the relative benefits vs costs of hoarding. With e.g. carbon taxes, one can estimate the harms of global warming (rising sea levels, lost biodiversity) and find the social cost of an emission, then levy a tax so that people only do those carbon emissions whose welfare gain exceeds the environment-driven welfare loss (which exist, despite the rhetoric from the fiercest advocates).
When someone proposes n% inflation as a way of "taxing" hoarding, what's the corresponding model? What's the "rising sea level" there?
In cases of a ~100% "inflation tax" (aka hyperinflation), we see the harms clearly: people have to spend money almost the second they get it. They have to move up purchases and otherwise arrange their lives in ways that are extremely welfare harming, and which probably outweigh the benefits of the greater economic activity it induces.
(Contrary to a lot of talk on hyperinflation, I don't see the chief problem as being volatility; even with stable, predictable hyperinflation you have the problem of losing the main benefit of money, which is that you don't have to know what you'll ultimately be buying in order to produce something for sale.)
So likewise, to justify a Pigovian argument for inflation, you would likewise need a model, or otherwise gauge the magnitude, of the "costs of making people move up purchases [when they'd rather save and decide later]" -- the costs that become extreme in the case of hyperinflation. And yet virtually everyone enamored of the "we need to encourage economic activity" argument for activity has nothing in the way of this. Hence my frustration with it.
(The analog of hyperinflation in carbon taxes would be a ban, or absurdly high tax, on burning of fossil fuels, and has the corresponding welfare harm that the avoided fuel usage -- or costs in evading the ban -- far exceed the welfare harm of the emissions themselves.)
If you talk about small amounts of inflation, then the amount of inflation from the time I get my paycheck, to the time I can convert it to other assets is negligable. I don't need to purchase anything with it.
I haven't seen any evidence that convinces me that modest inflation causes people to spend money sooner (If you have any I would be very interested to see it).
I think that easy access to credit definitely affects people's spending behavior, but I don't have a lot of data to back that up.
But you were just saying (or relaying the point that) the inflation tax is good because it changes people's behavior in the way of spending sooner. If "there's no evidence that modest inflation causes people to spend money sooner", then it fails by the very metric you suggested.
You can't have it both ways: either inflation (of a certain rate) is good because it makes people spend sooner, or it doesn't change behavior.
Edit: or there's some other way in which you operationalize the goal of "increased economic activity" that's orthogonal to "spending earnings sooner than you otherwise would".
Perhaps because I am using my terms loosely. My apologies.
By spending I intended "purchasing depreciating (or disposable) assets"
Purchasing equities as an inflation hedge is not what I meant. Inflation does encourage riskier investments, as merely holding currency is insufficient to maintain capital.
I agree that it's an open question whether or not that's a good thing: some would argue that encouraging riskier investments encourages malinvestments which becomes a net negative; others argue that the increased activity caused by risky investments outweighs the damage done by malinvestments; I've even run into many who claim that even malinvestments are good, since moving money around is good no matter the reason.
If that last point of view is true, I'm giving up on economics, but the first two both seem reasonable to me.
Depreciating vs investment assets is orthogonal; both lose value more slowly than money in a hyperinflationary situation.
And yes, there are trade offs, one of which is the malinvestments from spurring people to hold non cash. My point was that this, plus the individual welfare loss of the hoarder from having to commit to purchase sooner, must be weighed against the purported benefits of (what you got people to do via) inflation -- and (as I said at the beginning) that most people who make that argument for inflation (even economists) don't offer a way of modeling those relative benefits.
It's like arguing for an apple subsidy on the basis that apples are good, without even thinking about the costs of such a subsidy (ie diversion from non-apple production).
With phrases like "economic activity" and "mindless hoarding", you're using language that short-circuits critical thinking. You're on the right track, though, with your parenthetical note, so let's start by replacing "economic activity" with "spending". Then, instead of using the inflammatory phrase "mindless hoarding", let's use the word "saving".
With this neutral terminology, we're now ready for some actual thought. We can recast the claim as follows: devaluation is good because it encourages spending and discourages saving. There's no doubt about the factual claim—devaluation does indeed encourage spending and discourage saving. But why is saving bad and spending good? This is an ethical judgment that depends on your particular set of values, but it is undeniable that devaluation (currency dilution) transfers purchasing power from savers to spenders. In particular, it's mathematically equivalent to combining a perfectly hard currency with forced confiscation (from savers) and transfer (to spenders), i.e., organized theft. Thus, from an ethical point of view, there is a strong reason not to give devaluation the benefit of the doubt.
And yet, so far as I can tell, devaluation is always given the benefit of the doubt by the mainstream. Doesn't that seem odd?
>>We can recast the claim as follows: devaluation is good because it encourages spending and discourages saving.
No, you can't. In fact, it is interesting that you blamed me for attempting to short-circuit critical thinking, and then turned around and suggested something so asinine as this.
The reason it is asinine is because not all forms of saving are equal. A grandma stashing cash under the mattress does not help anyone else but the grandma, which is why it makes sense to discourage it using devaluation mechanics built into the economy. But if she invested that cash into a value-generating asset (e.g. a company, a piece of real estate, a public project, etc.), both her and the asset developer/owner would benefit: it would be possible to develop and maintain the asset, and she would reap greater returns. And just so we're clear, it's not like we're forcing grandma to take insane risks. Government bonds have historically been incredibly safe. So devaluation exists as a mechanic to say to grandma, "instead of mindlessly hoarding your money under the mattress, buy bonds with it. As a result, we (the government) will be able to fund public projects and you will be shielded from devaluation."
It is difficult to argue that this configuration is less optimal than one in which money never loses value.
You may not agree with their analyses, but at least they can serve as a counter-narrative to the mainstream views you evidently support.
By the way, your comment can be improved by removing everything before "not all forms..." In that case, it would simply make a cogent point (though one with which I still take exception). As it stands, your comment comes across as petty and unrefined. Stay classy—it's nicer, and it's also more likely to persuade.
"Ultimately though, if money were represented directly by time or something I think that would be far more ideal as it would be guaranteed to be stable."
I'm not sure what that means. Jokes about relativity aside, time doing what? If you mean individual's labor (which has been tried a few times, see http://en.wikipedia.org/wiki/Ithaca_Hours), then that seems unlikely to even be fungible, much less stable.
It's still early days of allowing independent (i.e. apolitical) monetary policy committees from controlling money supply/interest rates, but we are and have been in a unprecedented period of relatively low inflation for the past couple of decades. This is despite the greatest financial crash since the great depression.
I'd say there is good grounds for saying this is a great human invention - although probably not on a par with sanitation.
No the system isn't perfect - it is structurally flawed like all other systems - but it has worked well and the negative side-effects can be managed
> This is despite the greatest financial crash since the great depression.
Inflation isn't necessarily a problem when you have a depression or recession (unless inflation is the cause of the pain). During the Great Depression we experienced deflation, IIRC, as the money supply contracted (a shrinking number of dollars chasing a more-slowly shrinking number of goods). So while I'm not saying you're right or wrong, the absence of inflation during an economic crisis really isn't evidence of anything in particular.
The rate of inflation is how modern central banks are graded on their performance. In countries like the UK or New Zealand, it is the primary benchmark and the main metric that is targeted. The story is a bit different in the US where the Fed is mandated to watch over prices AND output + employment.
Although its not the same as economic output - having stable prices is important to support growth or a recovery. Deflation prolongs a depression - this was the major motivator for quantitative easing in the last financial crash.
I should correct myself - I should have said "low + positive + stable" inflation and not just "low inflation"
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.
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?
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.
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%.
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.
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.
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.
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
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.
I've given up on being disillusioned with these kind of things anymore. It takes too much time and energy. You know what's an awesome substitute for it? Climbing a tree.
nate, don't even try. they've been bought and paid for by the creature of jekyll island. just look at how well they're doing. they say they are educated, have great intellect, are smart, bring the human race forward with whatever startup they're working for.
greed, illusion and disinformatuon has sucked their common sense. one can't win against zombies.
The greatest human invention since sanitation is that a tiny elite can control the value of money (and money over time)?
Is that a joke? Are you joking?
Edit: Really...? Really? You know the devaluation of currency over time and the resulting increase in the cost of goods disproportionately affects the poor and middle class, as well as retirement savers who's interest rates can't keep up, right?
Is that also a feature?