From: king@cogsci.ucsd.EDU (Jonathan King)
Newsgroups: alt.politics.clinton,alt.politics.bush,alt.politics.elections
Subject: the wages of inflation
Summary: thank God for that 17% CD that helped send me to college
Date: 15 Sep 92 08:05:47 GMT
Organization: University of California, San Diego

john@anasazi.com writes:
[somebody else whose attribution is missing, writes:]
>]The low interest rates are not helpful to everyone.  They hurt
>]people (like Grandma, who makes us all apple pie?) who rely on
>]their savings and interest on that savings for their incomes.
>
>Gee, I supposed Grandma was happy with the high interest rates of
>the late Carter era? At the time, the inflation rate was so high
>that all of her assets were eroding at a high rate. 

Well, except for indexed income sources like Social Security and some
annuities.  But if Grandma did roll some of her assets into long term
CDs in the late 70s, she didn't do as poorly as you suggest.

As an example, one of the big things that guaranteed I would finish
college was a pretty sizeable long-term CD my Mom bought with some of
Dad's life insurance money that she rolled over in 1979, I believe.
That sucker paid 17%.  It *was* kind of a tread-water thing for a
couple of years, but then...yow.

So while asset erosion sucks, it wasn't all erosion, all the time.
But these days, if you've been living off the interest on your 8% CDs
but can only roll over at somewhere between 3% to 5%, you have to dip
into principal yourself, strangely enough.

>At the same time, those high inflation rates drove investment money 
>away from productive investments and into either high rate money 
>instruments or highly leveraged real estate investment.

Highly leveraged real estate?  I'm afraid you have the wrong decade
unless you're talking about just plain mortgages, which *were* a major
bummer at the time.  But today's relatively tiny mortgage rates aren't
exactly getting the housing market humming either; it ain't just the
rates that matter, as the Fed has been finding out recently.

And how is a "high rate money instrument" unproductive?  *Somebody* is
getting that money on the other end.

>Anyone planning on living on interest has to realize that high 
>interest rates are accompanied (in today's topsy turvy world) 
>with high inflation, which reduces the real interest rate. 

True enough.  But many people depending on interest income have a much
different expense breakdown than you or I.  For starters, they are
possibly more likely to own their own homes, which reduces housing
costs quite a bit.  And they usually aren't raising kids or putting
them through college, which is also quite expensive.  Medical costs
are also partially cushioned for the elderly as well.  Social Security
is usually not a comfortable living by itself, but it is indexed.  So
for some people, high inflation rates are rather less relevant than
low interest rates.  If it matters to you.

>Real interest has a way of remaining relatively constant, as long as 
>the economy is growing.

Well, sort of.  Unless the Fed does something weird...

>Right now, we are in a recession, so of course the interest rate is
>low (less demand for money). 

Actually, we are *not* technically in a recession right now unless a
new one is beginning in this quarter (just faintly possible).  There
is also some question as to whether money demand is low or supply is
low or both.  Bizarrely enough, the money supply was going *down*
recently.  This is just not your typical post-recession economy, and
an attempt to pigeon-hole it as such may be unwise.

>The Carter years were characterized
>as "stagflation" - which means a slow economy but paradoxically
>high interest rates (due to the inflation rate and inflationary
>expectations).

But what about real interest rates. :-)  And you also neglect a *major*
cause of the high interest rates back then: the Fed wanted them that
way to combat inflation, slowness be damned.  Some people argue that
this is what eventually did the trick.

>Right now, interest rates are too low for the rate of inflation, but
>be assured that it is temporary (you can tell that by looking at the
>long term rates, which are still high). When the economy starts growing
>again (barring a Clinton win with abusive environmental and tax policies),
>Grandma's interest earnings will improve.

Maybe.  But with all the loose money, a real growth spurt could also
cause inflation to re-ignite.  Or short term rates could stay low
while long term rates fall and the economy doesn't grow quickly.
BTW--I don't understand the Clinton dig here; couldn't something bad
happen on Bush's watch, too?  Nah, couldn't happen. :-)

Anyway, given a choice between real growth and no growth, I'd probably
take the real growth even if it did involve a little inflation.  God,
I'd take almost any growth at all at this point...

jking


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