Brian Romanchuk — Inflation And Debt Burdens

Nathan Tankus recently published an article entitled "No, Inflation Doesn’t Erode the Burden of Debts" (h/t Tom Hickey at Mike Norman Economics). Nathan correctly diagnoses that mainstream economists (he cites Paul Krugman) routinely jump between the concepts of "inflation" and "CPI inflation" (Consumer Price Index), and that a rise in the level of the CPI does not help out borrowers. What matters is wage inflation. I have made the same complaint myself. However, the mainstream logic is not exactly incorrect, it is just based on an embedded assumption about the long term. This seems to be done for reasons of politics, or more accurately, attempting to hide politics from economics.

Bond Economics
Inflation And Debt Burdens
Brian Romanchuk

The takeway from Brian's post is that under goods price inflation, workers generally do not have the bargaining power to increase wages commensurately, nor do they have the bargaining power to do so when productivity rises. Thus the residual goes to firm profit, that is, owner's share.

This is clearly a political issue, which is why under capitalism, economics is highly politicized.

See Political Aspects of Full Employment by Michal Kalecki

This lies at the foundation of the current debate over accelerating income and wealth inequality.

What actually happens in the cycle is that asset values "appreciate" first, then prices begin rising selectively, e.g. energy, then the commercial and consumer price levels (PPI and CPI) begin to rise, while wages have not begun to keep pace, meaning that the real wage is falling, especially relative to necessities like housing, food, and energy. Finally, after some time wages begin to rise and the central bank steps in to counter inflation expectations. So seldom does the real wage catch up with price level, let alone increasing asset appreciation. Even if assets depreciate in a correction, they are the first to rebound.

So workers get the short end of the stick. But that's not the end of it, because most workers carry debt that is denominated nominally and does not change with changes in price level. So as the real wages declines, workers face a heavier debt burden since they have less left over after spending on necessities. That is, the monthly nut increases faster than income for workers.