Help me explain something about inflation here

Discussion in 'Economics' started by SomeYoungGuy, Dec 15, 2009.

  1. Let me talk macro down to micro for the sake of arguement for a second so I can talk to my crazy in-laws this holiday season.

    Let's say you buy a house, 30 year fixed mortgage, $1000 a month payment, and you bring home $2000 a month at a good steady job with COLA adjustments that keep pace with inflation. You spend the whole remainder of your paycheck after the mortgage on food, entertainment, and whatnot.

    Now if the gov't engineers a nice steady 10% inflation per year, you are going to come out great in the end.

    Of that $2000 you make per month in the first year, $1000 goes to the house payment and the other $1000 goes to the rest of your expenses.

    The 2nd year, you get a 10% raise to $2200. Your house payment doesn't go up because you were smart and got a fixed mortgage, so you are left with $1200 after you send that check. Now the rest of everything went up 10% (or $100), to $1100. You buy all the same stuff and have $100 left at the end of the month, to spend or save.

    Now we can infer a few things:

    Real estate (or anything else with actual intrinsic value) is an excellent investment.

    It's a great way for the gov't to raise taxes without raising taxes. Your rising paycheck will continue to bump you into a higher tax bracket. You're not just paying 10% more in tax because your income went up 10%. You're paying 11% more because of the progressive income tax rates in the US.

    With the same scenario, it becomes easier for the gov't to pay off it's long term obligations (to China, et al.) with these cheaper, inflated dollars.

    My big question is, what is China going to do about it?
  2. Illum


    Sure your debt will be worth less, but don't expect raises so quickly.
  3. Now I have a question. Why would you care?
  4. Mav88


    That's a mighty big if. I would not call it engineering - it's more like a hail mary.
  5. Your first assertion is incorrect. It's nothing to do with real estate. Being in debt (obv as long as it's nominal/fixed rate) is an excellent investment in inflationary times.

    Nothing for the moment... IMHO, they need the US more than the US needs them and I think they realize that.
  6. Aside from your other obvious errors, like completely ignoring the operating costs of owning property, why do you automatically assume 10% rise in wages? The pattern has been the opposite.
  7. ammo


    u asking ,means u dont understand, few do since they (uncle sam)won't divulge any truths, so the whole conversation would be snippets of facts and a ton of B.S......sit back and play with the little tykes, enjoy em why you can, you'll be back to the grind soon enough
  8. I accounted for the rise in property owning costs in the non-mortgage spending that went up 10% (keeping pace with inflation): that pipe that burst this year cost your $500 to fix and next year the plumber will charge you 10% more, or $550.

    And I guess I should have said MY wage will keep pace with inflation. I don't care so much about the unwashed masses. I am very employable; smart, hard working, good attitude, quick learner. I fully expect to be able to earn twice the national average in any economy for as long as I wish.

    What are the other errors? They obviously aren't obvious to me.
  9. Mav88


    ...but you said this was for convincing your unwashed in-laws, so why would they care that brilliant little you will never have money problems?
  10. Until unemployment is back below 4-5% don't expect raises to keep pace with inflation. Until your neighbor quits going further in debt to maintain a life he never could afford don't expect raises to keep pace with inflation. Until employers again believe "I'm lucky to have my employees" don't expect raises to keep pace with inflation. "You're lucky to have a job, sorry the benefits stink" is the new mantra for the next several years I'm afraid. Don't forget what China, India, and South America are doing to our cost of foods, resources, and other items. The U.S. middle-class/working-class is being reduced to the lowest common global denominator.

    Other than that, it's all good. :eek:
    #10     Dec 15, 2009