Inflation and the Rich: A Rebuttal

In today’s blog post, we’ll be completely dismantling an asinine article published this week by Allison Morrow and Anneken Tappe for CNN Business. The article, titled “Why inflation can actually be good for everyday Americans and bad for rich people,” attempts to make the case that inflation is actually a “good thing” for wage earners and middle-class Americans and hurtful to “rich people.” At best, it’s looking at the economy through rose-colored glasses. At worst, it’s a dangerous propaganda piece covering for an administration currently struggling with the inflation demon.

This counterpunch to an article might turn out to be a new format. Coincidentally, I was halfway through a blog post on protecting one’s self from inflation when Morrow’s article was published two days ago. I had to stop and comment on possibly the dumbest article I’ve ever seen put out by the mainstream media.

Without further ado, let’s dive in.

Claim: Wages are going up, “empowering workers”

inflation can actually be a good thing for many working-class Americans, especially those with fixed-rate debt like a 30-year mortgage. That’s because wages are going up, which not only empowers workers but also gives them more money to pay down debt. 

The article is correct in that wages are indeed going up. However, real earnings, or wage increases versus inflation, is negative. The U.S. Bureau of Labor Statistics (BLS) reported that real earnings in October 2021 decreased half a percent, a result of “an increase of 0.4 percent in average hourly earnings combined with an increase of 0.9 percent in the Consumer Price Index for All Urban Consumers.”

This means that although wages increased…inflation increased more, resulting in a net loss of purchasing power. Put another way, wages aren’t keeping pace with inflation on average. How can one be empowered to pay down debt when they’re losing the race against the price of everyday items? (The CPI doesn’t even include energy prices, but I digress…)

In fact, real wages have been negative since April.

On November 10, CNBC published an article titled “Inflation has taken away all the wage gains for workers and then some.” It, too, reference the BLS October statistics. It went even further:

“For now, inflation is going to continue to run above very solid wage growth,” said Joseph LaVorgna, chief economist for the Americas at Natixis and former chief economist for the National Economic Council during the Trump administration. “This is why when you look at consumer confidence, it’s really taking a beating. Households do not like the inflation story, and rightly so.”

Response: Workers are not empowered. Wages are losing against inflation.

Claim: Inflation gives homeowners a ‘discount’

Meanwhile, wages are rising along with prices, essentially shrinking the real value of that debt. The same inflation benefit applies to anyone paying off federal student loans, which also have a fixed interest rate. As your income increases, you’re essentially getting a discount on what you have to repay.

The article discusses how working class Americans get a ‘discount’ on their mortgage, as inflation drives up the price of their home, but the fixed-rate mortgage payments and interest rate remain stagnant. If your home increases from $150,000 to $200,000 due to inflation but your mortgage is only for the $150,000 — you made out.

Except not really. Yes, your financial balance sheet is improved by the home value increasing and the debt-to-equity ratio tipping in your favor, but costs associate with the home climb with inflation. Your utility bills like electricity and water will increase. As inflation drives up the costs for local governments and school systems, your property taxes will also increase. Most people pay their local and school taxes out of their monthly mortgage payment, which will rise in conjunction. Expect homeowners insurance to rise accordingly, feeding into an increased monthly payment.

And then there’s the cost of home repairs. Lumber prices alone are up 124% since August 2021. Inflation on materials could wipe out any minuscule gains made against your mortgage payment.

Do you know who doesn’t suffer against increases to their property taxes and utilities? The rich. The same group CNN’s article claims will be hurt by inflation. Why is this? Many wealthy people own rental properties. In a rental property, you can raise rent to keep up with inflation. Utilities and property taxes are business deductions, so the more they increase the more the property owner can write off against the cash flow generated.

Response: The debt-to-equity ratio on paper looks better due to inflation, but homeowners will ultimately suffer more. Ironically, the group CNN claims will be hurt by inflation is actually protected against it with owning rental properties.

Claim: The rich will be hurt by their bond holdings

“Who are the ones that are going to be hurt by holding a lot of 10-year bonds or even 30-year bonds? That tends to be higher-income households, says Smetters. “So they’re going to lose with higher inflation.”

The lone argument for why inflation “hurts rich people” — stated boldly in the article headline — is that “households with more than $1 million who typically invest in both equities and debt” will be crushed by inflation because of their government bond holdings.

You don’t become rich by investing in stupid things. Or better yet, you don’t stay rich by holding dumb investments. Bonds are a terrible investment in inflationary periods. They are fixed instruments, like the fixed mortgages mentioned above. Worse over, the interest rates paid by bonds like U.S. Treasuries generally offer negative real rates against inflation. The article fails to identify or even give an example of these $1 million households that are holding bonds.

Do you know who holds lots of U.S. Treasury bonds? Pension funds and employee retirement plans like 401k and IRAs. An outmoded method to invest for retirement has long been to buy equities (stocks) while young and slowly transition to bonds over time as you near retirement age. This is because stocks can be volatile and you don’t want to face a market crash the same year you planned to retire. By moving to fixed assets like bonds, they don’t really move up or down and they pay interest — good for generating cash after you’ve retired.

You may have heard of Target Date Funds. These are financial vehicles offered by all the retirement plans and company-sponsored 401ks. It essentially does the above mentioned retirement migration from stocks to bonds for you (for heavy fees, of course). So when you go to finally retire at age 65, your portfolio is jam-packed with U.S. Treasuries that are losing value against inflation and paying you monthly interest below the CPI.

Morrow’s CNN article even admitted as much further down: “And anyone living on a fixed income, such as retirees, who aren’t benefiting from wage increases that people in the labor force are seeing, are feeling extra pain as prices go up.”

Response: The bond holders that will be severely hurt by inflation are the wage earners and working class that busted their hump for 40 years only to see their retirement accounts shrink against inflation. And these are the people who retire and must live off these accounts they spent 40 years prepping. Many pension plans are also forced to hold U.S. Treasuries as they’re deemed ‘safe’ investments and non-volatile.

The rich can sell off their bad holdings and buy something else. Or the gains made in other assets like real estate, stocks, (or even tangibles like artwork), far out gain losses to treasury bonds.

In conclusion, this CNN article is a mess. Inflation is never a ‘good’ thing. It’s morally unjust, eating away at stored productivity and savings. It consumes the lower class, pushing prices up beyond the reach for many things. There is nothing good about inflation to the working class. There is a reason inflation is called a “stealth tax.”

I’ll end my rebuttal with George Gobel’s famous words: “If inflation continues to soar, you’re going to have to work like a dog just to live like one.”

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s