Guest Column: Learning To Love Inflation

As an economics student, I am about to commit a treasonous act. I am going to defend inflation. Inflation is my pal. A little inflation will pay for my car. A little more may help reduce my friend's education debt. Why? Because unexpected inflation is the friend of all debtors. Inflation makes my parents' mortgage payments of $500 a month on a four-bedroom house -- a small fortune in 1972 -- seem dirt cheap today. And who reading this newspaper (with the possible exception of a few exceedingly conservative professors) isn't neck deep in debt. Inflation (for those who avoided Econ 2) is simply the devaluation of money. Nothing fancy, just that a dollar buys less every year. The dollar has been decreasing in value since George Washington was president. On the surface, inflation seems bad. What now costs $100 to buy will cost $105 next year. And on the surface, inflation is bad. But that is true only if salaries don't increase at the same rate. For example, if Mom and Dad increase your allowance by five percent as well, the five percent inflation becomes harmless. Likewise, if Andersen Consulting raises your salary by five percent, the whole situation is a wash. You will still be able to buy the same amount of Rolling Rock. So why do I care? And why should you? Because many of us will soon be deep in debt thanks to the loans we've taken out to finance our Ivy League educations. Inflation presents an easy way out. Allow me to offer an example of how. I will soon be buying a car from Lee Iacocca. Lee says that I can buy his $12,000 Eagle sports car by taking out a loan at 6.9 percent interest over five years. That means I will have to pay Lee about $276 each month until the end of the payback term. I can barely afford that after paying for insurance. Now suppose we elect Tom Harkin president of the United States. And Tom starts cranking up the government printing presses to pay for all of Reagan's left-over debt and his New Deal-style programs. Inflation soars to 10 percent. I still have to pay Lee $276 each month. But, after five years of inflation that $276 is worth only $163 in today's money. If my salary just keeps up with inflation, I make a killing. My friend with a wagon load of college loans presents a more dramatic example of the virtues of inflation. At an interest rate of 12 percent, her $50,000 worth of loans can be paid off in (just?) ten years with payments of $717.35 each month. That's a whole lot of money for someone just out of school. But if inflation jumps up to 10 percent, after 10 years her payments will seem like only $250 in today's money. That little bit of inflation makes a big difference. The moral of the story is that loans are paid off the same amount each month in nominal, or current dollars, despite how much that money has devalued. The farmers back in my home state, Nebraska, understood this long before Milton Friedman became famous. Farmers have historically had huge debts on their land. The turn of the century Populist political platform advocated soft money (i.e. high inflation). They hoped that inflation would decrease the value of their farm loans, making them easier to pay off. Still skeptical? Not surprising, politicians teach everyone to fear inflation. These groups are not the innocent sufferers they appear to be, however. Many people we may, at first, place in the fixed-income group, such as those on Social Security, have cost of living adjustments included in their payments. As for savers -- if there are any around -- they could find creative ways, like Junk Bonds, to adapt (and anyway, stock market investments will probably keep up with inflation). But I don't care a whole lot about lenders. I'm a borrower. I have no objection if inflation redistributes some income from Mellon Bank to me. So as a student deep in debt, I would tell Washington to crank up the inflation. Wages will adjust, but loan payments will remain the same. Today's students can become like yesterday's populists. Paradoxically, inflation can become our ally in the battle against increasing educational costs. Some might claim that I over-simplify the economics by ignoring the reality of interest rates adjusting to expected inflation (over 10 years? I could refinance), but from where I sit inflation looks pretty good. Maybe I will see things differently when I am rich Republican, but for now I can use all the help I can get. Josh Engel is a senior Economics major from Omaha, Nebraska.

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