5 ms·

Inflation also decreases the value of debts, doesn’t it?

by pfraze 5y ago

csunbird 5y ago
Debts always have greater interest rates than the inflation.
- tmountain 5y ago
  Your statement doesn't apply to long-term debt like mortgages with fixed interest rates.
- SantalBlush 5y ago
  That doesn't matter. No matter what the nominal rate of interest is, higher inflation will result in a lower real interest rate. Edit: This is regarding debt that already exists, not newly issued debt.
- ethbr0 5y ago
  Even the US government's?
- dukeyukey 5y ago
  This isn't true. For example, current UK government bonds (denominated in £) have a yield of 0.674%, but inflation even before the post-covid increase was around 1.8%.
- zie 5y ago
  While in theory what you say is mostly true, it's not really true in reality. The EU govt issued bonds that produce negative real interest rates in 2020. The US Govt let their treasuries hit 0% interest. bond/debt interest rates are usually fixed at the time of purchase. When you buy debt you know exactly what you will get at the end(provided the person/entity in debt doesn't default). You don't know what the inflation rate will be at the end of the bond when you get the principal back. You can make a pretty good guess, but you can't know. It typically doesn't ever change, so if you bought a 4% yielding bond, then inflation hits at 5%, then you WILL lose money on your bond. This is normal in a rising rates/inflationary environment. Bonds are "safe"(for some definition of safe), and you have to pay for safety. US Treasuries pay next to nothing(and generally always have) because they are the reserve asset, everyone in the world considers them safe debt. FDIC insured bank accounts similarly get away with paying basically no interest on the deposited money. Safety costs you. Holding cash means you are generally going to lose to inflation. The only exception really are TIPS, I-Bonds and other inflation protected bonds. But that's only if you how they define inflation is also how you define inflation. Right now Inflation is like 5%, but a lot of that inflation is from things like buying cars, or in the recent past lumber. If you aren't currently buying those things, then those inflationary pieces don't really apply to you. So your personal inflation rate might be 2% or .5%, it just depends on what you are buying. Anyways, bonds are complicated, and debt even more so. At the moment you can get 30yr mortgages(debt) under the current 5% inflation rate.. does that mean owning a house with inflation is a good deal.. MAYBE.
- woofie11 5y ago
  (1) Mortgages currently have LOWER interest rates than inflation. Right now inflation is above 5%, and I know people who refinanced below 3%. (2) It doesn't matter too much in either case. If I took on a debt 5 years ago, and I'm paying $500 per month, if we see inflation will mean I'm paying half of that. Inflation is really good for people (and governments) with excessive debt. If your net worth is negative, inflation is a tax on your debtors, not on you.
- deleted 5y ago
  [deleted]
da_big_ghey 5y ago
This is depending on terms of a loan, most loans trying to price in inflation costs with higher interest rate. Maybe with surprise inflation on fixed terms loan?
tastyfreeze 5y ago
Inflation does decrease the value of debts. That only matters if the borrower has a non-inflated asset to pay off their debt. Most people earn in dollars which will decrease in value at the same rate as their debt. Earning the same amount of dollars with inflation means more of earnings go to paying for life and less to go towards debts. Now, lets say you have a gold bracelet and inflation only cuts the value of the dollar in half one time. The gold bracelet can be sold for twice as many dollars that can be used to pay off debt. One halving is a mild inflation scenario. Romania in the 90s went through 14 halvings.

Inflation also decreases the value of debts, doesn’t it?

by pfraze 5y ago

Inflation also decreases the value of debts, doesn’t it?

csunbird 5y ago

Debts always have greater interest rates than the inflation.

tmountain 5y ago
Your statement doesn't apply to long-term debt like mortgages with fixed interest rates.
SantalBlush 5y ago
That doesn't matter. No matter what the nominal rate of interest is, higher inflation will result in a lower real interest rate. Edit: This is regarding debt that already exists, not newly issued debt.
ethbr0 5y ago
Even the US government's?
dukeyukey 5y ago
This isn't true. For example, current UK government bonds (denominated in £) have a yield of 0.674%, but inflation even before the post-covid increase was around 1.8%.
zie 5y ago
While in theory what you say is mostly true, it's not really true in reality. The EU govt issued bonds that produce negative real interest rates in 2020. The US Govt let their treasuries hit 0% interest. bond/debt interest rates are usually fixed at the time of purchase. When you buy debt you know exactly what you will get at the end(provided the person/entity in debt doesn't default). You don't know what the inflation rate will be at the end of the bond when you get the principal back. You can make a pretty good guess, but you can't know. It typically doesn't ever change, so if you bought a 4% yielding bond, then inflation hits at 5%, then you WILL lose money on your bond. This is normal in a rising rates/inflationary environment. Bonds are "safe"(for some definition of safe), and you have to pay for safety. US Treasuries pay next to nothing(and generally always have) because they are the reserve asset, everyone in the world considers them safe debt. FDIC insured bank accounts similarly get away with paying basically no interest on the deposited money. Safety costs you. Holding cash means you are generally going to lose to inflation. The only exception really are TIPS, I-Bonds and other inflation protected bonds. But that's only if you how they define inflation is also how you define inflation. Right now Inflation is like 5%, but a lot of that inflation is from things like buying cars, or in the recent past lumber. If you aren't currently buying those things, then those inflationary pieces don't really apply to you. So your personal inflation rate might be 2% or .5%, it just depends on what you are buying. Anyways, bonds are complicated, and debt even more so. At the moment you can get 30yr mortgages(debt) under the current 5% inflation rate.. does that mean owning a house with inflation is a good deal.. MAYBE.
woofie11 5y ago
(1) Mortgages currently have LOWER interest rates than inflation. Right now inflation is above 5%, and I know people who refinanced below 3%. (2) It doesn't matter too much in either case. If I took on a debt 5 years ago, and I'm paying $500 per month, if we see inflation will mean I'm paying half of that. Inflation is really good for people (and governments) with excessive debt. If your net worth is negative, inflation is a tax on your debtors, not on you.
deleted 5y ago
[deleted]

da_big_ghey 5y ago

This is depending on terms of a loan, most loans trying to price in inflation costs with higher interest rate. Maybe with surprise inflation on fixed terms loan?

tastyfreeze 5y ago

Inflation does decrease the value of debts. That only matters if the borrower has a non-inflated asset to pay off their debt. Most people earn in dollars which will decrease in value at the same rate as their debt. Earning the same amount of dollars with inflation means more of earnings go to paying for life and less to go towards debts. Now, lets say you have a gold bracelet and inflation only cuts the value of the dollar in half one time. The gold bracelet can be sold for twice as many dollars that can be used to pay off debt. One halving is a mild inflation scenario. Romania in the 90s went through 14 halvings.