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Why should debt be forgiven via inflation? Also, this causes interest rates to go up as lenders will expect another surprise inflation.

AnthonyMouse 10y ago
> Why should debt be forgiven via inflation? Because the debt was induced by harmful interest rate subsidies that bring about a highly undesirable wealth transfer from government (i.e. all taxpayers) to banks, distort markets like housing and education by inflating their prices relative to the rest of the economy (including wages), and cause people to take on excessive debt because people care about monthly payments rather than principal amounts and subsidized interest causes the borrowable principal amount to explode at a given monthly payment, since government-subsidized interest then constitutes a large fraction of the payment and is at no risk of default so lenders are willing to make excessively large loans. See also housing crisis. Undoing the damage done by those subsidies requires their inverse, which is inflation. It transfers wealth from banks to the government to the benefit of taxpayers, allows the real price of housing and education to fall to where they should be without shocking the market by reducing their nominal prices, and allows people to pay off the unwisely-induced existing debt principal with lower value currency. > Also, this causes interest rates to go up as lenders will expect another surprise inflation. And then people won't borrow as much principal in the future, so paying down principal will be easier at prevailing wages, which is the desired result. You're also assuming lenders have control over that given the way the government creating money affects interest rates. When the government creates money it has the effect of reducing the amount of government debt in circulation (they have money, they don't need to issue bonds), which reduces interest rates on bonds and forces would-be bond purchasers into buying some other debt, which increases competition for lending and reduces interest rates in other lending markets too.
- witty_username 10y ago
  Interest rate subsidies help students and banks. Also, where's the money coming from? From lenders, i.e. people's bank accounts. > It transfers wealth from banks to the government to the benefit of taxpayers No, it transfers money from lenders (like you and me who have bank accounts) to borrowers. People own banks and lend money to banks. Banks don't have any magical stash of money. If banks lose wealth, then I lose wealth (my bank account earns less real interest). > You're also assuming lenders have control over that given the way the government creating money affects interest rates. When the government creates money it has the effect of reducing the amount of government debt in circulation (they have money, they don't need to issue bonds), which reduces interest rates on bonds and forces would-be bond purchasers into buying some other debt, which increases competition for lending and reduces interest rates in other lending markets too. Yes, the government will loan less, but interest rates will go up (right now they're a low 2-3%) to adjust for the risk of inflation which cancels that affect. Lenders have control over interest rates obviously; only they buy bonds. Infact, if the inflation is a surprise, then lenders will be risk-averse causing drastic increase in interest rates (they'll be thinking "what if the government inflates money even more next time in a surprise?"). Lenders like stability.

AnthonyMouse 10y ago

> Why should debt be forgiven via inflation? Because the debt was induced by harmful interest rate subsidies that bring about a highly undesirable wealth transfer from government (i.e. all taxpayers) to banks, distort markets like housing and education by inflating their prices relative to the rest of the economy (including wages), and cause people to take on excessive debt because people care about monthly payments rather than principal amounts and subsidized interest causes the borrowable principal amount to explode at a given monthly payment, since government-subsidized interest then constitutes a large fraction of the payment and is at no risk of default so lenders are willing to make excessively large loans. See also housing crisis. Undoing the damage done by those subsidies requires their inverse, which is inflation. It transfers wealth from banks to the government to the benefit of taxpayers, allows the real price of housing and education to fall to where they should be without shocking the market by reducing their nominal prices, and allows people to pay off the unwisely-induced existing debt principal with lower value currency. > Also, this causes interest rates to go up as lenders will expect another surprise inflation. And then people won't borrow as much principal in the future, so paying down principal will be easier at prevailing wages, which is the desired result. You're also assuming lenders have control over that given the way the government creating money affects interest rates. When the government creates money it has the effect of reducing the amount of government debt in circulation (they have money, they don't need to issue bonds), which reduces interest rates on bonds and forces would-be bond purchasers into buying some other debt, which increases competition for lending and reduces interest rates in other lending markets too.

witty_username 10y ago
Interest rate subsidies help students and banks. Also, where's the money coming from? From lenders, i.e. people's bank accounts. > It transfers wealth from banks to the government to the benefit of taxpayers No, it transfers money from lenders (like you and me who have bank accounts) to borrowers. People own banks and lend money to banks. Banks don't have any magical stash of money. If banks lose wealth, then I lose wealth (my bank account earns less real interest). > You're also assuming lenders have control over that given the way the government creating money affects interest rates. When the government creates money it has the effect of reducing the amount of government debt in circulation (they have money, they don't need to issue bonds), which reduces interest rates on bonds and forces would-be bond purchasers into buying some other debt, which increases competition for lending and reduces interest rates in other lending markets too. Yes, the government will loan less, but interest rates will go up (right now they're a low 2-3%) to adjust for the risk of inflation which cancels that affect. Lenders have control over interest rates obviously; only they buy bonds. Infact, if the inflation is a surprise, then lenders will be risk-averse causing drastic increase in interest rates (they'll be thinking "what if the government inflates money even more next time in a surprise?"). Lenders like stability.