Reducing inflation is the administration's number one economic priority. If inflation does decline, the benefits will not be distributed equally. Some groups will get rich while others may be devastated financially.
The winners from declining inflation will be precisely those who have been hurt the most to date. Rising inflation has decimated the real value of those who save and invest, but declining inflation will give them a double bonus.
For example, an investor who buys high-quality bond today at a current yield of more than 9 percent will find that yield very attractive if inflation declines because yields of that level are very near their record over the last two centuries. The second bonus from declining inflation is that bond prices generally rise as inflation declines', so the investor could look forward to a capital gain as well as a near-record current yield.
The same is true for investors in the stock market. For the last inflationary decade, the stock market has been volatile but it is no higher now than in 1965. A decline in inflation would lower the yield on bonds which compete with stocks for investors' funds. It also would improve the quality of corporate earnings because companies no longer would have to use reported earnings to replace inventories and factories at much higher prices than they paid for them. A permanent decline in inflation is the single best hope for the nation's beleaguered stockholders and could be the cause of the first real bull market in half a generation.
Stable prices also favor men and women who build the nation's productive assets over those who merely speculate on already existing assets. Many of our brightest and most ambitious young men and women have been drawn into the game of speculating on which assets (e.g., homes, gold, diamonds) will go up faster than the inflation rate.
In an economy with stable prices, the best way for a talented man or woman to become rich is to find new ways to produce more goods and services rather than to speculate about where prices will go up next. The productive builders of society thrive best under stable prices.
Productive corporations thrive best under stable prices, too. Inflation favors those companies with the market power to raise prices on goods and services they already produce.Stable prices favor companies that produce more goods and services each year. The company that produces more unit volume each year makes a greater contribution to economic growth than one that is merely good at raising prices.
Capital-intensive companies also benefit from declining inflation. One reason for the financial difficulties of railroads and steel companies is that they must replace their railcars and steel furnaces at far higher prices than they paid initially. Stable prices would allow these capital-intensive companies to replace worn-out assets by using only their depreciation allowances rather than diverting reported profits just to keep the basic business going.
If declining inflation has its winners, then it also has its losers. Some groups will be hurt financially and possibly bankrupted by stable prices.
For more than a year, many good apartment houses in California have been sold at such high prices that the income from rentals cannot cover operating expenses and mortgage payments. Buyers are willing to make up this deficit because they hope inflation will enable them to raise rents and later to sell their buildings at an even higher price.
If the anticipated inflation does not materialize, however, the buyers will not be able to do either. Instead they will find themselves stuck with a perpetual negative cash flow, and that is a prescription for personal bankruptcy. The bank or savings and loan that made the mortgage also stands to lose money if the buyer's equity was insufficient.
Many young couples today are sacrificing their savings to make down payments on high-priced homes which they hope will go even higher. They also are paying 10 percent or more on mortgages because they hope to repay in cheaper dollars. If the anticipated inflation does not come, however, these couples will find their hopes of making a profit dashed and will find their incomes strained to pay a mortgage at a high rate of interest. The losers in this game of musical chairs are the ones who buy the last high-priced homes with high-priced mortgages when the music of inflation stops.
Many corporations stand to be hurt by declining inflation in the same way. Some companies are buying assets like timber lands or factories at high prices that provide low current returns because they believe inflation will drive the prices and returns up.
If prices stabilize, the dollars will not become cheaper, and those companies will find themselves in the uncomfortable position of paying a near-record rate of interest on long-term debt.
Declining inflation will hurt anyone who has made a financial bet that inflation will continue.