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> Debtors over savers. This is well documented in econ textbooks - inflation is a transfer of wealth from savers to debtors, because debtors can pay back their

> Debtors over savers. This is well documented in econ textbooks - inflation is a transfer of wealth from savers to debtors, because debtors can pay back their debts with less valuable money. Wouldn't this be true when interest rates are fixed only? People with variable rates will suffer as interest rates tend to spike during inflation and drive bankruptcy. Also given wages lag inflation, the debt cost proceeds the payback. So it feels a mixed case of, this will make some people loose out significantly, but those that can see the other side do well.

nostrademons 4y ago
The debt effect is true for the term that the interest rate is fixed for. So for a 30-year fixed mortgage, you lock in expected inflation based on the interest rate when you take out the mortgage, and if inflation happens to run above that, you profit. For a 7/1 ARM, you lock it in for 7 years, then the principal will have inflated away by some percentage, and then you're at the mercy of current inflation expectations. Bonds are usually fixed rate for the term of the bond (I-bonds excepted), which is why 10-year Treasuries have gone down so much relative to 90-day Treasuries. Wages only lag inflation if you stick with one job. If you're forever job-hopping, you get the new wage as soon as you land the new job, which could be within weeks. Yes, this means that you have an incentive to never do any actual work and instead spend the time immediately looking for a new job. This is one of the positive feedback loops that turns inflation into hyperinflation and state failure. With everyone incentivized to look for new work rather than do the old work they signed up for, no actual work gets done. This exacerbates shortages, which causes further price hikes, which increases inflation, which means people have even more of an incentive to take very short jobs and not do them. It also prevents the formation of capital stock - nobody can get good at a job, or train on some expensive piece of machinery, if they need to take a new job tomorrow. That's why there's this compression of time horizons in countries undergoing inflationary episodes, where everything becomes focused around surviving until tomorrow rather than building for the long-term.
- Gustomaximus 4y ago
  Is a 30 year fixed mortgage common where you are? I'm Australia and they don't exist. About 25% of people have fixed mortgages and this is usually for 2-3 years so this view doesn't apply here. Also regarding job hopping, that may be true but taking a macro view of the world, most people don't or can't job hop that often, so I feel this is more the exception that the rule. Generally I'm not convinced debt is a good thing during inflation as a broad rule. I feel it's more there are good exceptions if the right conditions align but this is not true to the average.

nostrademons 4y ago

The debt effect is true for the term that the interest rate is fixed for. So for a 30-year fixed mortgage, you lock in expected inflation based on the interest rate when you take out the mortgage, and if inflation happens to run above that, you profit. For a 7/1 ARM, you lock it in for 7 years, then the principal will have inflated away by some percentage, and then you're at the mercy of current inflation expectations. Bonds are usually fixed rate for the term of the bond (I-bonds excepted), which is why 10-year Treasuries have gone down so much relative to 90-day Treasuries. Wages only lag inflation if you stick with one job. If you're forever job-hopping, you get the new wage as soon as you land the new job, which could be within weeks. Yes, this means that you have an incentive to never do any actual work and instead spend the time immediately looking for a new job. This is one of the positive feedback loops that turns inflation into hyperinflation and state failure. With everyone incentivized to look for new work rather than do the old work they signed up for, no actual work gets done. This exacerbates shortages, which causes further price hikes, which increases inflation, which means people have even more of an incentive to take very short jobs and not do them. It also prevents the formation of capital stock - nobody can get good at a job, or train on some expensive piece of machinery, if they need to take a new job tomorrow. That's why there's this compression of time horizons in countries undergoing inflationary episodes, where everything becomes focused around surviving until tomorrow rather than building for the long-term.

Gustomaximus 4y ago
Is a 30 year fixed mortgage common where you are? I'm Australia and they don't exist. About 25% of people have fixed mortgages and this is usually for 2-3 years so this view doesn't apply here. Also regarding job hopping, that may be true but taking a macro view of the world, most people don't or can't job hop that often, so I feel this is more the exception that the rule. Generally I'm not convinced debt is a good thing during inflation as a broad rule. I feel it's more there are good exceptions if the right conditions align but this is not true to the average.