Originally Posted by free4now
Theoretically this would come out in the wash for someone living off their assets; as inflation increased the portfolio and cost of living would both go up by about the same.
I'm not so sure. Vanguard's bond index, for example, has yield of only 3.3% and an average maturity of 6.6 years. If inflation increases permanently to the 5-6% range, you've got a long time of negative real returns before your portfolio turns over completely to reflect the new interest rate environment. And I'm not sure how you recoup those initial losses. Sure, the new bonds you're rolling in to pay a higher nominal
rate, but unless the real yield has increased enough to compensate for the purchasing power losses you took on the initial portfolio its difficult for me to see how you aren't harmed in real terms. (Incidentally, the Vanguard article Bonds and Rates: The reality behind the numbers
purportedly demonstrating how a rising interest rate environment benefits bondholders only considers nominal returns.)
Same thing with equities. The S&P currently has an earnings yield of about 5%, which is way too low if inflation expectations are going to be in the same ballpark or higher. That means your stock earnings multiple should come down. HaHa posted a chart in another thread showing how poorly the S&P fared during our last bout of inflation. That was a lot more extreme than what is envisioned here, but it does go to show that equities aren't a sure-fire inflation hedge.
And with respect to workers, Krugman's point is that in periods of moderately low inflation workers underestimate inflation's impact and therefore don't demand enough wage increases to compensate. He's specifically urging a higher inflation rate as a way to bring down real wages. The supposed trade-off is higher employment . . . more people working for less money. But if you're someone who has a job, the idea is to try to trick you into a wage cut.