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Extra!
5 reasons you should love inflation
It's been quite a party, but if interest rates continue to stay low, the economy will continue to suffer. Here's how higher rates and inflation could help everyone from retirees to homeowners and Corporate America.
By Scott Burns
May I recruit you, dear reader?
Your job is to be a block captain in a new grass roots movement. I call it Americans for Higher Interest Rates and Rising Inflation. Your only duty is to make certain all your neighbors appear at the largest stadium in the region to link arms, make a human wave, and chant."Higher rates, higher rates,
That's the only thing we'll celebrate.
Higher rates, higher rates,
That's the solution and a better fate." While higher interest rates and rising inflation may be thought an unlikely tool to foster economic health and recovery, our leaders seem to have forgotten that we can't be a nation of debtors without also being a nation of savers and lenders. Interest rates are now so low, further reduction will help debtors little. But they harm lenders and savers greatly. And, believe it or not, a lot of creditors -- people who have saved anything -- are hurting.
Let me count the ways ...
Skeptical? Think lower interest rates will solve anything?
Then consider my list of the top five ways higher interest rates and higher inflation will improve the economy:
No. 1: Retirees. Our fastest-growing population group can no longer count on safe, simple savings to provide retirement income. With money market accounts earning virtually (or literally) nothing, and five-year CDs earning an average of only 2.38%, retirees who were generous spenders only a few years ago are now cutting back on their spending. Worse, they are being forced to liquidate assets, putting further pressure on price levels. Higher interest rates will restore them as consumers and get them out of the yard-sale business.
No. 2: Near-retirees. Younger workers can avoid dealing with the implications of low interest rates. But workers who are 50 or older are following in the retirees' lead. They are obliged to reduce their spending, save more and think about getting rid of things that were must-haves only three years ago. The combination is a heavy foot on the economy's neck. Higher interest rates will restore near-retirees as consumers today and will enable them to continue as consumers when they retire.
No. 3: Corporate pension plans. Most media stories about the $300 billion underfunding of corporate pension plans have focused on the damage done by the three-year bear market for equities. In fact, declining interest rates have done at least as much damage. Declining rates raise the cost of paying retired employees a lifetime income -- the liability side of pensions. At a conference on pensions at the Wharton School last year, one Department of Labor official said an interest rate increase of 2 percentage points would make most pension plans fully funded -- because it would lower the cost of their pension obligations.
If low interest rates continue, many corporations will be required to make large cash contributions to their pension plans. Some, like General Motors (GM, news, msgs), already have. This will reduce its profits. That, in turn, will reduce its stock price. Basically, low interest rates are putting us into a descending spiral.
No. 4 State pension plans. Ditto. State governments are confronted with the same issue. Low interest rates increase the cost of fulfilling employee pension commitments even as state governments face gigantic revenue shortfalls. They'll cope by raising fees and taxes -- and reducing employees. That's bad economic news.
No. 5: Homeowners. This is the surprise beneficiary. While homebuyers might be inconvenienced by higher interest rates and inflation, 68% of all households -- a record -- already own their homes. They would likely rejoice at higher interest rates and rising inflation. Their low-rate mortgages would become treasured possessions. They'd continue to watch their houses appreciate through inflation.
Do the remaining 32%, who might be "shut out" of the housing market by higher rates, drive the economy? I don't think so. The drivers are the 68% who already own their homes.
Would higher interest rates and rising inflation eventually have a negative effect on homeowners?
Probably not. Housing prices soared in the inflationary 1970s. Home-mortgage rates soared along with home prices. But people kept buying. In the recession of the early '80s, a private economist named Alan Greenspan pointed out that consumer spending remained strong in spite of economic weakness.
Why? Homeowners could refinance and access their equity -- just as they have in the last three years of declining interest rates. It isn't interest rates, high or low, that create the spending power. It's higher home values for homeowners. Inflation creates new homeowner equity daily.
Honk if you love higher interest rates and inflation.
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