3 ms·

The article talked a lot about winners and losers. It's interesting that there's no mention of debtors and creditors. The biggest winners in hyperinflation ar

The article talked a lot about winners and losers. It's interesting that there's no mention of debtors and creditors. The biggest winners in hyperinflation are people in massive debt. It's inflated away to nothing. The biggest losers are creditors for the opposite reasons. When inflation is just abnormally high (~8%), your debt doesn't get deflated to nothing, but you're getting a ~6% discount.

brabel 4y ago
My car loan just increased the interest rate I have to pay due to "increased costs". I had no idea they could do that (yeah, didn't read the fine print). I'm pretty sure consumer goods' creditors are doing just fine with rising inflation!
lordnacho 4y ago
With hyperinflation yes, because then there are only real incomes, prices (and debts) become meaningless. A plumber can fix the toilet for a carpenter who makes a doorframe for the plumber, they don't need a number if they can agree those services are worth the same. Thus real incomes are still real. With merely high inflation you still have insecurity. Many salaries are not inflation indexed (I struggle to think of anyone I know), so the only way to maintain your budget is to get a new job. For many lines of work, especially at the lower end of the scales, that's utterly unappetizing, and people would rather pressure their union to push up salaries.
gpderetta 4y ago
Only if you never need to refinance a debt.
yxhuvud 4y ago
The most common reason for hyperinflation is that the productive capabilities of society has gone down the crapper. That mean everyone is a loser. Some more than others, but even the debtors are losers in that situation.
- onlyrealcuzzo 4y ago
  I don't know if Argentina counts as hyperinflation. But that's not really the case there. Nor was it in Zimbabwe. Venezuela's hyperinflation was just due to the price of oil dropping ~50%, and the government being completely irresponsible. Where else was this the case beside Germany?
- dragonwriter 4y ago
  > The most common reason for hyperinflation is that the productive capabilities of society has gone down the crapper. That mean everyone is a loser. Correction: The most common reason for hyperinflation is that the productive capabilities of the local economy has gone down the crapper. That mean everyone entirely dependent on the local economy is a loser. But, in the places where hyperinflation has occurred, it's not uncommon for elites to have significant foreign investments.
helen___keller 4y ago
> When inflation is just abnormally high (~8%), your debt doesn't get deflated to nothing, but you're getting a ~6% discount. That’s only true for fixed rate debt, which is common to think about for Americans due to the popularity of the 30 year fixed rate mortgage but in many countries ARMs are more popular or most popular. In theory, fixed rate debt products should be priced in to reflect interest rate risk as well, so it’s hard to say the creditors are losers per se.
- lesam 4y ago
  Creditors definitely do lose money when they price debt at 2% but inflation runs at 7%. Talking about mortgages misses the larger fixed rate bond market (government and company long term debt).
  - helen___keller 4y ago
    Yes but what I’m saying is all fixed rate debt prices in interest rate risk. Any one creditor could be in a bad spot, but a creditor holding lots of fixed rate debt can / should be hedging against that risk. When we’re talking about institutions with billions of dollars (and not joe lending Bobby $20), I wouldn’t call them a loser unless they specifically failed to properly hedge their positions.
    - lesam 4y ago
      How would you hedge interest rate risk on trillions of dollars in US treasuries? Who takes the other side of that trade, and why? I don’t think that sort of hedge exists.
      - onlyrealcuzzo 4y ago
        Isn't this the point of TIPS?
      - helen___keller 4y ago
        I don’t really know what specifically you’re referring to. I’m not aware of anybody trying to hedge trillions in treasuries in one trade. I’m not aware of anybody even holding trillions in treasuries except maybe a few foreign countries. Hedging is done at the portfolio level using derivatives. This allows you to move your unwanted exposure to interest rate risk (or just about any kind of risk) to someone else in exchange for a premium. Whoever is taking that risk off your hands probably has a more diverse portfolio and wants the premium (ie their risk profile is different). In this manner, large fixed-rate creditors shouldn’t be largely exposed to rising interest rates, because they’ve been hedging that risk all along.
ryathal 4y ago
Debtors only benefit from inflation if their pay actually goes up. If you were making $15/hour 1 year ago and still making $15/hour now, you just get fucked.
- lamontcg 4y ago
  This is why the headlines to focus on are the ones not about inflation, but about wage increases and unionization happening right now. > Consumer spending climbs sharply again — and not just because of inflation > Rising incomes partly cushion Americans against high inflation https://www.marketwatch.com/story/consumer-spending-climbs-sharply-again-and-not-just-because-of-inflation-11653655888?mod=mw_latestnews https://www.marketwatch.com/story/consumer-spending-climbs-s... But rising wages and the threat of a wage-price spiral and the effect on debts is precisely why the Fed is indicating they're going to crash the economy.

brabel 4y ago

My car loan just increased the interest rate I have to pay due to "increased costs". I had no idea they could do that (yeah, didn't read the fine print). I'm pretty sure consumer goods' creditors are doing just fine with rising inflation!

lordnacho 4y ago

With hyperinflation yes, because then there are only real incomes, prices (and debts) become meaningless. A plumber can fix the toilet for a carpenter who makes a doorframe for the plumber, they don't need a number if they can agree those services are worth the same. Thus real incomes are still real. With merely high inflation you still have insecurity. Many salaries are not inflation indexed (I struggle to think of anyone I know), so the only way to maintain your budget is to get a new job. For many lines of work, especially at the lower end of the scales, that's utterly unappetizing, and people would rather pressure their union to push up salaries.

gpderetta 4y ago

Only if you never need to refinance a debt.

yxhuvud 4y ago

The most common reason for hyperinflation is that the productive capabilities of society has gone down the crapper. That mean everyone is a loser. Some more than others, but even the debtors are losers in that situation.

onlyrealcuzzo 4y ago
I don't know if Argentina counts as hyperinflation. But that's not really the case there. Nor was it in Zimbabwe. Venezuela's hyperinflation was just due to the price of oil dropping ~50%, and the government being completely irresponsible. Where else was this the case beside Germany?
dragonwriter 4y ago
> The most common reason for hyperinflation is that the productive capabilities of society has gone down the crapper. That mean everyone is a loser. Correction: The most common reason for hyperinflation is that the productive capabilities of the local economy has gone down the crapper. That mean everyone entirely dependent on the local economy is a loser. But, in the places where hyperinflation has occurred, it's not uncommon for elites to have significant foreign investments.

helen___keller 4y ago

> When inflation is just abnormally high (~8%), your debt doesn't get deflated to nothing, but you're getting a ~6% discount. That’s only true for fixed rate debt, which is common to think about for Americans due to the popularity of the 30 year fixed rate mortgage but in many countries ARMs are more popular or most popular. In theory, fixed rate debt products should be priced in to reflect interest rate risk as well, so it’s hard to say the creditors are losers per se.

lesam 4y ago
Creditors definitely do lose money when they price debt at 2% but inflation runs at 7%. Talking about mortgages misses the larger fixed rate bond market (government and company long term debt).
- helen___keller 4y ago
  Yes but what I’m saying is all fixed rate debt prices in interest rate risk. Any one creditor could be in a bad spot, but a creditor holding lots of fixed rate debt can / should be hedging against that risk. When we’re talking about institutions with billions of dollars (and not joe lending Bobby $20), I wouldn’t call them a loser unless they specifically failed to properly hedge their positions.
  - lesam 4y ago
    How would you hedge interest rate risk on trillions of dollars in US treasuries? Who takes the other side of that trade, and why? I don’t think that sort of hedge exists.
    - onlyrealcuzzo 4y ago
      Isn't this the point of TIPS?
    - helen___keller 4y ago
      I don’t really know what specifically you’re referring to. I’m not aware of anybody trying to hedge trillions in treasuries in one trade. I’m not aware of anybody even holding trillions in treasuries except maybe a few foreign countries. Hedging is done at the portfolio level using derivatives. This allows you to move your unwanted exposure to interest rate risk (or just about any kind of risk) to someone else in exchange for a premium. Whoever is taking that risk off your hands probably has a more diverse portfolio and wants the premium (ie their risk profile is different). In this manner, large fixed-rate creditors shouldn’t be largely exposed to rising interest rates, because they’ve been hedging that risk all along.

ryathal 4y ago

Debtors only benefit from inflation if their pay actually goes up. If you were making $15/hour 1 year ago and still making $15/hour now, you just get fucked.

lamontcg 4y ago
This is why the headlines to focus on are the ones not about inflation, but about wage increases and unionization happening right now. > Consumer spending climbs sharply again — and not just because of inflation > Rising incomes partly cushion Americans against high inflation https://www.marketwatch.com/story/consumer-spending-climbs-sharply-again-and-not-just-because-of-inflation-11653655888?mod=mw_latestnews https://www.marketwatch.com/story/consumer-spending-climbs-s... But rising wages and the threat of a wage-price spiral and the effect on debts is precisely why the Fed is indicating they're going to crash the economy.