Does inflation really help lower debt?

I've read many of you here say that inflation helps lower debt levels.

Well, that is both true, and not true. Those of you on this forum seem to be using it in a sense in which it is not true.

The idea behind inflation helping to lower debt is that, if you make money less valuable, it becomes easier to pay down debts. It is the money that inflates, but the past debt amount does not.
It basically provides a boon to borrowers and screws lenders. Not that hard to understand.

So some people seem to think it's a good idea then to have some inflation, because they think, it will help borrowers deal with their debts.

Well, that's true in a sense, but it's kind of a one-time thing. Let me explain.

If I make an agreement with you, you sell me something and I agree to give you $100 tomorrow, that is sort of like a basic debt. Now, suppose an emergency happens, and it suddenly becomes very hard to pay you that $100 I owe you tomorrow. I say I'm only going to give you $90 instead. I have just saved myself $10.
But that's only a one-time thing. You know that I screwed you over, so I may never be able to buy anything from you again. But you are a practical person. Next time I want to buy something from you for $100 and pay you back tomorrow, you think back how I screwed you out of 10% of what I owed you last time. If it happened once, it's very reasonable to assume it will happen again. So this time you add on an extra $11 to the price so that if I cheat you out of 10% again, you'll still get the $100.
( 90% of 111.11 is 100 )

It's the same thing with inflation. If inflation happens, and lenders are expecting inflation in the future, they will add that in to the interest rates they charge. If they were going to lend at a 5% interest rate, but they expect 4% inflation, they're going to charge an interest rate of 9%.

That's why inflation is sort of a one-time tool. If you use inflation when it is not expected, you can make it easier to deal with debts. But after that, it is going to be more difficult for new people getting into debt.
There will be higher interest rates, and many of these rates will remain high regardless of whether there is actually going to be inflation, like there was in the past.
It helps borrowers in the short-term, but in the long-term it hurts borrowers.

And there are some types of present borrowers who it will not really help, because these are borrowers who keep rolling over their debt. That means they are planning on periodically taking out new loans to pay off their old loans, when they come due. Sometimes not even from them same lender. There are many practical reasons businesses can have for doing this. That is also how the national debts of most governments work.
When you have to take out a new loan to pay back the previous loan, the interest rates are going to be higher.

I'm just pointing out that inflation is not a sustainable long-term solution to helping to relieve debt levels in an economy.

 

Sure, they could do this, go hog wild and lower interest rates to -5%...
Pay off all the debt and so on. The problem is all the other problems it creates.

 

Well, I was specifically talking about using inflation to pay help pay down loans, in this thread. Manipulating interest rates to help pay down loans would be another discussion for another thread.

Also, just to point out, there usually is an inverse relationship between interest rates and inflation. It's hard to lower interest rates and create inflation at the same time. When a Central Bank tries to do so, it can only maintain such a state of being for so long.

 

In a debt money system like ours, inflation generally increases debt but makes it easier to repay.

 

I think the only one who benefits from inflation is the federal government while it's paying off the national debt. Or so I've heard. I'm under the impression that deflation is terrible for the federal government because the national debt costs more to pay down with a stronger dollar, because the face value of that debt doesn't change.

 

Maybe you completely did not bother to read the thread or understand it.

It doesn't seem like you were able to grasp what I was saying.

Yes, inflation could help pay down the debt now, in the present, but what about the future? It's going to send interest rates up.
Since the US keeps rolling over it's debt, it's not really going to be helpful.

I mean, it might make it 5% easier to pay down the debt this year, but when that Treasury note eventually becomes due and needs to be renewed, it will cost the government 5% more next year. Because nobody is going to be stupid enough to lend you money at a low interest rate like they did before, when they know there's going to be inflation.

This should be common sense, for anyone who bothers to think it out.

 

Wouldn't those two effects tend to come close to exactly cancelling each other out?

 

Yes. The more important effect is the stimulus to spending.

 

I question whether you can create stimulus when you're really taking purchasing power out of one part of the economy and moving it into another.

I also question whether you can really create stimulus that will have a long-term positive effect by borrowing money.


I don't know, I was able to find this old thread about that topic:
Is more debt worth Keynesian policy?

 

Try questioning whether you can create stimulus when you're taking purchasing power out of the future and putting it into the present.

 

But the wealth doesn't come from nowhere.

Unless you're talking about borrowing money from some other successful country that doesn't need the stimulus.

If you borrow wealth from some people in your economy, that is going to be wealth that gets borrowed by government rather than wealth that gets directly spent. Isn't that true?

 

So?

What are you talking about? There's no need to borrow any money.

No, and even if it were it would be irrelevant.

 

What are you talking about? I thought we were talking about borrowing money.


your statement:

 

I thought we were talking about inflation.

I meant through inflation: making future money worth less than present money.

 

Okay, so that's what you were talking about.
Let me see if I can take your original comment and understand it in that context now.

Hmm, I still don't really understand what you are trying to say. I mean, I sort of understand, but I can't see your point.

You did understand my point to you, yes? That using inflation to pay down debts will just result in higher interest rates in the future, and then the inflation won't really work anymore. Because lenders are going to try to prevent you from screwing them.

I think you need to be a lot more specific what you're trying to imply. Otherwise I can often imagine other possibilities of what I think you might be implying.

I mean, is your implication that we should screw lenders now, and then we can always just deal with the repercussions later in the future? Because getting the stimulus now is more important than the costs in the future?

Yeah, see, I can't even begin to address your ideas without being sure what you're talking about.

 

Yes, that is a downside, and why inflation tends to have positive feedback, and increase until it is hurting more than it is helping.

I'm not making a judgment on that, just pointing out that if people think their money will buy less in the future, they will be more likely to spend it now.

 

I think that's actually not logical; or rather to be more precise, you are misapplying the logic of that, since you've missed a subtle but important distinction.
I think you are only looking at one side of this. You are looking at spenders. But what about businesses selling things? If a business thinks the money will buy less in the future, they will be less likely to sell? Isn't that true. And so prices will go up to compensate.
At that price increase should, theoretically, tend to exactly cancel out the increased propensity of consumers to spend.
So, in the end, consumers will not be more overall likely to spend.

Furthermore, isn't it at all possible that if there is inflation consumers might feel they have to save more money, to make up for the loss of the purchasing power of the money they have right now?

The wealthy, meanwhile, are going to put a larger ratio of their savings into assets which will be insulated from inflation. So, in a sense, the increase in spending is going to be coming from the less wealthy people. Do you really think that's such a good economic policy? Make poorer working class people live paycheck to paycheck.

 

Obviously prices go up in inflation. Inflation is hard on businesses because they have to strike a balance between losing purchasing power on the revenue they get from sales and just losing sales because they increased prices too fast.

But in practice, it doesn't. That's where the balancing act comes in.

All historical data prove you wrong. Single-digit inflation is stimulative, period.

No. They would have to be stupid to think that.

I'm not saying it's a good policy. Just better than deflation. Poorer working people tend to be debtors, so inflation makes it easier for them to pay their debts.

 

Why wouldn't it tend to exactly balance out? You are making no sense.

Can you provide some sort of explanation?

Why would that be stupid?

It seems you have no real argument here.

And it will make it harder for them to pay their debts later, once they have to borrow after lenders have jacked up their interest rates.

Ripping off lenders so that poor borrowers will benefit is not exactly ethical or sound policy.

 

Because the economy is too complex and people can't exactly compensate for other factors.

Because they just increase their losses.

Assuming the inflation rate doesn't keep ahead of the interest rate.

But it's better than the reverse, which deflation would do.

 

Realize that, in some sense, you're basically talking about the government ripping people off and hoping they do not get the better of them, realizing what's going on.

This seems like another magical attempt at pulling money out of thin air.

If lenders have any reason to believe there could be inflation, if there's been inflation in the past, they will raise the interest rates they charge. They will do that to try to compensate for the future inflation which they predict or are trying to anticipate.
For the sake of simplicity, let's just suppose the rate of inflation is entirely steady and gradual, the same rate every year for a long time.
Then it's OBVIOUS that inflation will not be able to benefit borrowers.
Isn't that correct?

 

Right. It's always the temptation to have little more inflation than expected.

 

First, before I even delve into this topic, let me ask you two very important questions.

1) Can we agree that inflation is defined in the simplest terms as: "a rise in the general price level)"?

2) If yes, tell me what the cause of inflation is. If no, please explain.

Can

Can you show us anything that shows a link between the level of debt and interest rates? I suspect not.

I don't think you really understand US government debt and why other nations are willing to let the US "borrow" money. I use "scare quotes" because the term borrow in this context does not mean what most of the population thinks it means.

Let me ask you this. China, the single largest holder of US treasuries and dollar reserves combined at approx $3 trillion.

Did you ever stop to ask yourself, how so many US dollars have found their way to China? The Government of China alone holds over a trillion US dollars. How did the government of China come to hold so many US dollars?

Lastly, what is that China "lends" the US government?

Consider those questions carefully.

 

US dollars are not wealth. US dollars are, as we generally use them, a claim on wealth. It's a little more complicated than that, so I admit that's an oversimplification. We can expand on this later if this conversation goes anywhere. Real wealth is the real things that people need and want. This does not make money useless or invaluable, to the contrary, money has value, but it's value is always linked to real wealth.

 

This is a very good point. If we constantly inflate, lenders will catch on and demand higher interest rates. But it is a good tool for dealing with a crisis. However, we should keep our finances rock solid in normal circumstances. That means a balanced budget when there is no recession. This was the point I was making when Trump was doing those trillion dollar deficits when the economy is good. We should only be borrowing when we really need to.