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That works if inflation turns out to be higher than whatever the lender estimated when you took out the loan; otherwise the expected loss of purchasing power wo

That works if inflation turns out to be higher than whatever the lender estimated when you took out the loan; otherwise the expected loss of purchasing power would be priced into the interest rate. Rest assured, the bank knows that you will be paying back the principle with less valuable money, and they're not going to take a loss as a result. A policy which continually ensured that inflation was higher than expected, however, would inevitably result in currency collapse via hyperinflation. Those with means can also generally get secured loans at preferential interest rates, borrowing against the value of their other assets, whereas those without assets are mainly borrowing via credit cards and the like where the interest is far higher than inflation. Penalizing saving and pushing them to borrow instead does them no favors.

RC_ITR 6y ago
IDK why you think banks can magically predict what inflation will be. Since 1982, inflation has generally underperformed implied expectations, but there's a lot of reason to think that won't continue. The smart play over that period would have actually been to bet that banks have no f'ing idea about inflation (they do not: almost noone, myself included, does). TONS of banks left money on the table because they over-estimated inflation, there's no reason to think in an opposite environment, they wouldn't lose a ton of money by under-estimating it. Adding to the limited ability of banks to hedge in the way you describe: Mortgage credit (the most common debt Americans have) is priced on a small, relatively constant spread over 10-year treasury yields, which itself is artificially manipulated by FED actions (and the FED doesn't even believe in inflation right now, so there's plenty of chance for a surprisingly high inflation rate benefitting debtors). What I described is kind of the point of QE - the government essentially pays banks to "lose money" on loans b/c it's "good" for the economy. The two obvious weak-points of the above are: 1) Most super-low income people don't have mortgage debt, but rather personal debt. HOWEVER, Believe it or not, personal debt is priced almost independent of inflation, because 'ability to repay' is the dominant determinant of yield. Sure, in a super-high inflation environment, CC APRs may go up, but they haven't for 30 years & have like 1400bps of spread above current inflation, so they probably won't any time soon (it's a very competitive market & is subsidized by swipe fees). 2) QE is (at least in theory) a VERY expensive way to encourage banks to take a loss on loans, and a lot of the proceeds go to rich people & overseas investors, so even if it does help debtors, it's not an efficient way to do that. I don't necessarily disagree here.
- nybble41 6y ago
  > IDK why you think banks can magically predict what inflation will be. They don't need to predict the exact number. They know what the long-term target rate is (about 2%) and will tend to err on the high side. In a particularly bad year they might lose out with unexpectedly high inflation, but they don't consistently experience bad years. This is their core business and they're pretty good at ensuring that it comes out in their favor on average. They certainly wouldn't persist in making loans where they expected to receive less back in principle and interest (plus any subsidies, which just means someone else is paying back part of the loan) than what they loaned out after adjusting for inflation. Secured debt such as mortgages isn't as bad, though I have yet to see a mortgage were the interest payments were less than inflation over the full mortgage period. So instead of losing 2% purchasing power per year to inflation you lose 3-6% in interest to the bank (during a time of historically low mortgage rates). And as you pointed out, when it comes to unsecured debt at 12+% APR it hardly matters what the inflation rate might be; compounding interest payments will far outpace any devaluation of the principle. The problem there is that the inflation discourages saving, which would otherwise have allowed those affected to avoid interest payments altogether. In any case the main point was that the argument that inflation benefits debtors only applies to unexpected inflation. When it's systemic and predictable, like the 2% rate target the FED claims to be aiming for, and lenders are free to adjust their rates accordingly, there is no reason to think that debtors would have any inherent advantage.

RC_ITR 6y ago

IDK why you think banks can magically predict what inflation will be. Since 1982, inflation has generally underperformed implied expectations, but there's a lot of reason to think that won't continue. The smart play over that period would have actually been to bet that banks have no f'ing idea about inflation (they do not: almost noone, myself included, does). TONS of banks left money on the table because they over-estimated inflation, there's no reason to think in an opposite environment, they wouldn't lose a ton of money by under-estimating it. Adding to the limited ability of banks to hedge in the way you describe: Mortgage credit (the most common debt Americans have) is priced on a small, relatively constant spread over 10-year treasury yields, which itself is artificially manipulated by FED actions (and the FED doesn't even believe in inflation right now, so there's plenty of chance for a surprisingly high inflation rate benefitting debtors). What I described is kind of the point of QE - the government essentially pays banks to "lose money" on loans b/c it's "good" for the economy. The two obvious weak-points of the above are: 1) Most super-low income people don't have mortgage debt, but rather personal debt. HOWEVER, Believe it or not, personal debt is priced almost independent of inflation, because 'ability to repay' is the dominant determinant of yield. Sure, in a super-high inflation environment, CC APRs may go up, but they haven't for 30 years & have like 1400bps of spread above current inflation, so they probably won't any time soon (it's a very competitive market & is subsidized by swipe fees). 2) QE is (at least in theory) a VERY expensive way to encourage banks to take a loss on loans, and a lot of the proceeds go to rich people & overseas investors, so even if it does help debtors, it's not an efficient way to do that. I don't necessarily disagree here.

nybble41 6y ago
> IDK why you think banks can magically predict what inflation will be. They don't need to predict the exact number. They know what the long-term target rate is (about 2%) and will tend to err on the high side. In a particularly bad year they might lose out with unexpectedly high inflation, but they don't consistently experience bad years. This is their core business and they're pretty good at ensuring that it comes out in their favor on average. They certainly wouldn't persist in making loans where they expected to receive less back in principle and interest (plus any subsidies, which just means someone else is paying back part of the loan) than what they loaned out after adjusting for inflation. Secured debt such as mortgages isn't as bad, though I have yet to see a mortgage were the interest payments were less than inflation over the full mortgage period. So instead of losing 2% purchasing power per year to inflation you lose 3-6% in interest to the bank (during a time of historically low mortgage rates). And as you pointed out, when it comes to unsecured debt at 12+% APR it hardly matters what the inflation rate might be; compounding interest payments will far outpace any devaluation of the principle. The problem there is that the inflation discourages saving, which would otherwise have allowed those affected to avoid interest payments altogether. In any case the main point was that the argument that inflation benefits debtors only applies to unexpected inflation. When it's systemic and predictable, like the 2% rate target the FED claims to be aiming for, and lenders are free to adjust their rates accordingly, there is no reason to think that debtors would have any inherent advantage.