Inflation? We’re drinking up grandma’s house!

How disruptive is the 5.2 percent inflation that the Netherlands experienced in November? Or, the 5.9 percent inflation that was in the Netherlands according to the European definition? It could always be worse: the United States has 6.2 percent inflation. Hungary came in on Wednesday at 7 percent. And the Turks, thank you President Erdogan, are already above 21 percent.

And then, of course, there is the great historical example of Germany, in the early 1920s. There are many anecdotes about hyperinflation. Order two cups of coffee for 5,000 marks each, only to be billed for 14,000 marks after drinking because prices have continued to rise in the meantime. The family that sold everything to emigrate to the US, only to find out in the port of Hamburg that it is no longer enough for the crossing and not even for the way back home. Or the great German hit of 1922, a cheerful fatalistic song, with the chorus:

Wir versaufen unsrer Oma ihr klein Häuschen,

ihr small house, ihr small house,

Wir versaufen unser Oma ihr klein Häuschen,

Und die erste und die Zweite Mortgage.

We drink up grandma’s house, on which we first took out a hefty mortgage. It can still be heard, squeaking and creaking, on YouTube. There is a good chance that the Dutch knew it, because German popular music was just as dominant here at the time as it is American today.

The mortgage passage in particular is quite instructive. Because, indeed, the mortgage burden is no longer a problem, precisely under high inflation. cheers! Purchasing power may completely evaporate, but so does a debt.

It points to the winners and losers of the 5.2 percent inflation that we now have in the Netherlands. Because even if inflation returns to a percent or two next year, the effect will already be there. Workers may gain a few percent in income, but will almost certainly have to deal with negative real income developments: wage growth is lower than inflation. People on benefits are, for the time being, almost at a standstill, so the loss of purchasing power is greater there. The lion’s share of retirees don’t get an inflation adjustment at all (to keep in German).

Savers are the loser: the value of their euros is being eroded by inflation, the interest rate is already zero (or soon even negative above one hundred thousand euros), and then there is the wealth tax on top of that. Seniors have the right to complain. They are urged, prudently, to go for an income stream (interest), because stocks can fall in value – just when you need money. And so they have to watch as savings evaporate and equities continue to do well against the rocks: anyone who thinks they can afford the risks now turns to the stock exchanges.

Inflation, meanwhile, erodes debt. From households, from companies, from the state. Especially since interest rates are still kept extremely low. The real mortgage interest rate (adjusted for inflation) is now about 3.5 percent negative. The last episode in which this occurred on a structural basis was in the late 1970s, when a housing bubble arose that was probably even bigger than it is today. Borrowing to invest with is actually a very rational choice under these circumstances. No wonder everyone is running to the Damrak. Now that rarely goes well for very long. And, mind you, one month of 5.2 percent inflation means little. But the message is: careful behavior is punished, risks are excessively rewarded. Hey, a volcano! Let’s go dancing.

Maarten Schinkel writes about economics and financial markets.

Inflation? We’re drinking up grandma’s house!
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