inflation shminflation
by Diego Leiva
Published: May 14, 2008
When media types looking to sell advertisement space turn their attention to the economy, they regularly pull one of three popular headlines to spike our interest and fear: the housing/credit crisis will leave America homeless, the increased inflation rate means our dollars are worthless and GDP growth is soon to be negative.
Though I don’t dispute that media organizations have the right to pursue profits during economic downturns, I do think a little perspective is needed to eliminate some of the gloom.
Take the interest rate on a 30-year mortgage, for example. It reveals the level of risk that a lender considers it will face over the long run. An increase in the interest rate means that banks are less certain in the market’s ability to pay back a loan. Consequently, lenders who put themselves on the hook for 30 years demand a higher rate of return. The same logic explains why an 800 credit score will get you the prime rate and a 550 credit score will get you absolutely nothing.
So what does that have to do with the rate of foreclosure in California? Honestly, nothing if you’re the guy losing his home. But in order to determine whether or not we should really be so dramatical about the economy, we need a historical perspective.
Today’s rate on a 30-year loan is 5.97%. In 1998, during an unprecidented economic boom, the rate was 7.13%. In 1978, during an unprecidented economic bust, the rate was 9.2%. In other words, if you’re sitting atop billions of lendable dollars and before you are three americans: version 1978, version 1998 and version 2008 - you would choose today’s American. It’s not even close.
But what about the rising cost of food and energy? Aren’t Americans being crushed by inflation? Well, yes and no. The current rate of inflation is 3.98%, which is a point higher than last years 2.98% and is .98% higher than the much-coveted rate of 3%. However, over the past 50 years, the rate of inflation has been 4.10%, which means the rate of inflation in America spends more time above 3% than below it. So while $4 per gallon of gas hurts like never before, anyone who lived through Carter’s adminstration will answer complaints about the rising costs of everything with something along the lines of “inflation shminflation.”
Last stop - the tumbling GDP. We are currently hanging on to non-recessionary status by a mere 0.6%, which is not at all encouraging considering America’s GDP grew by 2.2% in 2007 and the 50 year average is 3.31%. But lest the doom and gloomers think they have me on the ropes, I’ll remind you that it’s not called the “Business Expansion,” it’s called the “Business Cycle.” The economy expands and contracts all the time - just like my wasteline. On the bright side, the average recession lasts less than a year while expansionary periods go on for over 4 years. Now, I admit that we are currently experiencing a contraction, but as any good mother knows, contractions help produce babies. And if historical precidence is any good at predicting the future, then today’s contraction will give birth to next year’s expansion. Despite the fact that headlines everywhere want you to believe that our country is hanging over an unprecidented economic precipice, the fact is that we are in very familiar territory. As a matter of fact, we’ve been been in even worse binds before and somehow bounced back.
So go ahead and call me insensitive to the plight of the average American if you must. And while your at it, throw in “capitalist pig” or “tool of big business” for good measure. Just make sure that in your long list of creative adjectives you also include the following: historically accurate.
—
(email this article or post to social network)
—
(11)
May 18th, 2008 at 8:37 am
It’s a neat argument that does absolutely nothing for millions of Americans who are living the American Nightmare because of the credit crisis. What about them?