Am I correct that the boon in question, boils down to being able to borrow money more cheaply? I seem to remember that the global financial crisis of 2008 took place under conditions of easy money for everyone...
It isn’t cheaper; it’s that the amount you can borrow is unaffected by inflation, because the mortgage rate is unaffected by inflation.
Clawback is a real thing: the value of unindexed principal shrinks; lenders need to get that back, and they tack it on the interest rate. Indexed principal doesn’t shrink.
I’m still studying this from various angles, and trying to get a sense of the issues. Some thoughts:
If the aim is to increase “prosperity”, and we aren’t talking about things that directly create net wealth, why focus on increasing borrowing power, rather than on direct redistribution of wealth?
The most emphatic arguments for creation of inflation-indexed accounting units, seem to apply in times of high inflation. Is there some extra ingredient to your own argument (you mention “the tax part” in another comment) that makes this urgently relevant even under current conditions?
There seem to be a large number of inflation-indexed financial instruments already in existence, and alongside a policy of inflation-indexing interest rates, in theory you could also do the same for wages, prices, and so on. Is there a reason why the existing financial instruments are not enough? Is there a reason to index home loans but not other cashflows?
I promise to patiently answer every question you have in the end, but I think it may help for orientation to state a big simple fact: faith in the propriety of traditional accounting is something of a type we all know about—it’s a superstition. People brought up in a superstition feel sure that it’s right. Irving Fisher almost said this, not quite clearly enough, calling it “money illusion.” All economists think they understand money illusion, but a blind spot lingers in finance. It’s particularly pernicious because modest inflation of say 4% can easily increase nominal interest rates by 100% - from 4 to 8. I would liken it to say asbestos insulation: inherited practice, damage recognized later.
re 3rd paragraph: yes it’s urgent now: the difference between 6.5% and 1.2% interest And it’s not just housing: utilities, business investment—anything that relies on long-term finance. (More than finance, too: the first indexing ever happened in 1707, because rules at Oxford written in 1440 were still in force & deprived students of fellowships if their income was more than 5 pounds per year; one of them begged for help from Bishop Fleetwood, and he wrote a book tracing value of money & showed that it had gone down by a factor of 6; Oxford changed the rule.) “Tax part” happens because clawback is taxed as lender income. Most economists aren’t aware of that; it was pointed out to me by Prof John Bossons—I worked with him apropos of an indexed mortgage proposal he co-wrote for Canadian Minister of Finance (1982 White Paper)
4th P: as mentioned, finance is particularly vulnerable because small changes in value become large changes in interest rates. No, home loans aren’t special.
It might help your case if you were able to state e.g. that if Canada (or the nation of your choice) had used inflation indexing for loans over a particular period, the amount of capital available for investment would have been x% larger and so economic growth would have been y% greater. Something like this would make your claim very concrete…
Am I correct that the boon in question, boils down to being able to borrow money more cheaply? I seem to remember that the global financial crisis of 2008 took place under conditions of easy money for everyone...
It isn’t cheaper; it’s that the amount you can borrow is unaffected by inflation, because the mortgage rate is unaffected by inflation.
Clawback is a real thing: the value of unindexed principal shrinks; lenders need to get that back, and they tack it on the interest rate. Indexed principal doesn’t shrink.
I’m still studying this from various angles, and trying to get a sense of the issues. Some thoughts:
If the aim is to increase “prosperity”, and we aren’t talking about things that directly create net wealth, why focus on increasing borrowing power, rather than on direct redistribution of wealth?
The most emphatic arguments for creation of inflation-indexed accounting units, seem to apply in times of high inflation. Is there some extra ingredient to your own argument (you mention “the tax part” in another comment) that makes this urgently relevant even under current conditions?
There seem to be a large number of inflation-indexed financial instruments already in existence, and alongside a policy of inflation-indexing interest rates, in theory you could also do the same for wages, prices, and so on. Is there a reason why the existing financial instruments are not enough? Is there a reason to index home loans but not other cashflows?
I promise to patiently answer every question you have in the end, but I think it may help for orientation to state a big simple fact: faith in the propriety of traditional accounting is something of a type we all know about—it’s a superstition. People brought up in a superstition feel sure that it’s right. Irving Fisher almost said this, not quite clearly enough, calling it “money illusion.” All economists think they understand money illusion, but a blind spot lingers in finance. It’s particularly pernicious because modest inflation of say 4% can easily increase nominal interest rates by 100% - from 4 to 8. I would liken it to say asbestos insulation: inherited practice, damage recognized later.
re 3rd paragraph: yes it’s urgent now: the difference between 6.5% and 1.2% interest And it’s not just housing: utilities, business investment—anything that relies on long-term finance. (More than finance, too: the first indexing ever happened in 1707, because rules at Oxford written in 1440 were still in force & deprived students of fellowships if their income was more than 5 pounds per year; one of them begged for help from Bishop Fleetwood, and he wrote a book tracing value of money & showed that it had gone down by a factor of 6; Oxford changed the rule.) “Tax part” happens because clawback is taxed as lender income. Most economists aren’t aware of that; it was pointed out to me by Prof John Bossons—I worked with him apropos of an indexed mortgage proposal he co-wrote for Canadian Minister of Finance (1982 White Paper)
4th P: as mentioned, finance is particularly vulnerable because small changes in value become large changes in interest rates. No, home loans aren’t special.
It might help your case if you were able to state e.g. that if Canada (or the nation of your choice) had used inflation indexing for loans over a particular period, the amount of capital available for investment would have been x% larger and so economic growth would have been y% greater. Something like this would make your claim very concrete…