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Debt Is Not Really 'eroded' By Inflation ....

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I have been thinking about the claims that inflation erodes debt.

It is said as if there are no losers, but everydebtor is a winner, but this is not true.

Would anyone agree that greater inflation causes higher interest rates and hence simply forces debtors to pay back the debt in real terms?

Hence, the same effect as an increase in inflation of 5% could be brought about by lenders of mortgages demanding a return of 5% of capital on all loans.

A need for inflation, therefore, can surely be nothing but a way of bringing confusion so that Gov and banks can pull off dirty tricks on the unsuspecting.

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Guest UK Debt Slave
I have been thinking about the claims that inflation erodes debt.

It is said as if there are no losers, but everydebtor is a winner, but this is not true.

Would anyone agree that greater inflation causes higher interest rates and hence simply forces debtors to pay back the debt in real terms?

Hence, the same effect as an increase in inflation of 5% could be brought about by lenders of mortgages demanding a return of 5% of capital on all loans.

A need for inflation, therefore, can surely be nothing but a way of bringing confusion so that Gov and banks can pull off dirty tricks on the unsuspecting.

It only holds true if wages rise with inflation as they did in the 1970s

That isn't going to happen this time

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It only holds true if wages rise with inflation as they did in the 1970s

That isn't going to happen this time

I don't see the difference.

If wages, prices etc all rise and debt stays same debt reduces by 5% pa relatively.

Same as debt repaid at 5% pa with no inflation.

The comments by certain economists suggest that the first is less of a problem, but surely interest rates in first scenario would be 5% higher than second and therefore the 'pain' will be the same.

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I don't see the difference.

If wages, prices etc all rise and debt stays same debt reduces by 5% pa relatively.

Same as debt repaid at 5% pa with no inflation.

The comments by certain economists suggest that the first is less of a problem, but surely interest rates in first scenario would be 5% higher than second and therefore the 'pain' will be the same.

All this talk on here about gold, stagflation, bitflation, deflation, holocaust inflation, super inflation, megainflation?

A pound in your pocket, only in my mind loses its value, when the pound you once earned, is now £1.10, so by this i mean that pound in your pocket has devalued in relation to your earning power, its the same with debt.

Like a poster said, we ain't gonna see wage inflation, no way, so with wages actually dropping, that pound in your pocket is actually increasing in value, so hiold on to your currency for now. Because you and i will know when wage inflation takes hold, you know why, because watch interest rates soar!

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The comments by certain economists suggest that the first is less of a problem, but surely interest rates in first scenario would be 5% higher than second and therefore the 'pain' will be the same.

Not true. Wage inflation is a yearly thingy, whereas the interest paid on debt is not. In other words, if you're paying a grand a month at 5% interest rates, you'll still be paying a grand a month at 5% interest rates ten years later. However, tens years worth of 5% wage inflation would take someone earning £30kpa up to nearly £50kpa. That, in a nutshell, is how the "housing ladder" worked ( <-- note tense ).

The "problem" at the moment is the debt burden itself is large enough to mean the interest rates needed to keep wage inflation controlled at around that 5% mark would make the debts themselves of many completely unpayable. The ladder scenario only works as long as the level of debt itself is controlled. Or, to put it another way, the greater the outstanding debt relative to current incomes, the harder it is to wage inflate it away in a controlled manner - it's like a car where the airbags deactivate and the seatbelts disconnect once you go over 40mph.

Then again, that's all a bit moot really, given that wage inflation is dead and buried for a few years at least.

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I have been thinking about the claims that inflation erodes debt.

It is said as if there are no losers, but everydebtor is a winner, but this is not true.

Would anyone agree that greater inflation causes higher interest rates and hence simply forces debtors to pay back the debt in real terms?

Did this happen during the boom?

(House price) inflation clearly eroded debt during that period.

Those saving for a house lost out because interest rates were not high enough to keep up with the asset class they were chasing.

So a transfer of wealth from savers to borrowers ... the class inflationary con trick.

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Any nominal value is eroded by inflation.

The BoE may impose a real rate or not over and above the rate of inflation which can cause near term pain.

In the 70's homeowners had real negative rates and only had to wait 3 years to see their debts halve in value.

BUT, to buy anything, their new debt was double.

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Are the rest of the world going to pay for our inflation linked wages?

Nope.

That is the difference between now and before, we and the rest of the west do not have luxury of significant leads in a growing number of industries. Yet, we still have the burden of carrying significantly higher internal costs.

Utterly unsustainable.

Edited by OnlyMe

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It only holds true if wages rise with inflation as they did in the 1970s

That isn't going to happen this time

+1

Inflation doesnt erode debts.Wage inflation does.As you say like the 70s.Also as you say this wont happen this time.Inflation in goods/services but wages not keeping up is the next big story 18 months out from here IMO.

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+1

Inflation doesnt erode debts.Wage inflation does.As you say like the 70s.Also as you say this wont happen this time.Inflation in goods/services but wages not keeping up is the next big story 18 months out from here IMO.

Oh Yes, oh yes, it seems many do not understand the difference between inflation and inflation.

The administration administer;

essential cost inflation

house inflation

everything we like inflation

everything we need inflation

All these, happily happening in the past, one not now, and not in the future, well not for at least 7 years.

But the dreaded word, the dreaded inflation, the dreaded we must raise interest rates to cope with, the one kind which erodes debts, and savings, if you spend your yield, or your yield is too low.

You've got it "Wage Inflation" Not coming to a town near you!

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stagflation, bitflation, deflation, holocaust inflation, super inflation, megainflation

I predict all will occur simultanously.

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