Are Consumer ETFs Ready To Cry Uncle?

Most folks experience anxiety about carrying any kind of debt load. Many of us do not even distinguish between the different types of debt that we owe.

Of course, some debts may be “better” than others. A subsidized Stafford loan from the Federal government allows a student to defer his/her principal and interest during college, pay back a low fixed rate of roughly 3.86% after school, as well as achieve a degree that increases one’s salary potential. Similarly, a first mortgage on a personal home serves up remarkable tax benefits, low fixed rates and the probability that the underlying property’s value will appreciate over time.

Other obligations fall into the “bad debt” category. High interest rate credit cards, payday loans and obligations on depreciating assets typically constitute undesirable debts.

In the same way that many folks view all debts as burdensome, most regard any kind of inflation as a bad thing. We can’t buy as much stuff with our money. Our dollars acquire fewer goods and services. So why on earth would the central bank of the United States (a.k.a. “the Fed”) ever want the citizenry to pay more and receive less in the inflation targeting of 2%?

You can find an explanation at one of the Fed’s web site pages, though the paragraph may leave you feeling a bit dissatisfied. It goes a little something like this: A modest erosion of the people’s purchasing power is consistent with overall price stability. In contrast, negligible inflation might lead to deflation, where people neither borrow nor spend; the economy struggles; companies perform poorly and, ultimately, lay off workers. It follows that collective minds at the Fed concur that a modest amount of inflation is better than none at all.

The problem in targeting an average annual inflation of 2%, however, is making an assumption that all inflation is created equal. All debt is not created equal, and neither is all inflation. It would be almost as silly to praise job growth in headline unemployment (6.3%), yet disregard the percentage of working-aged individuals in the labor force (i.e., 30-year low) and/or ignore the quality of the positions being added (e.g., part-time, low paying, etc.).