No, Inflation Doesn’t Erode the Burden of Debts


Naked Capitalism has the article No, Inflation Doesn’t Erode the Burden of Debts.

The author comes to sort of the right conclusion for sort of the wrong reasons.

Debt is one such example. In the United States most people have debts denominated in U.S. Dollars. A useful proxy for the burden of debt is the ratio between an individual’s or sector’s nominal debt to its nominal income.

To me the author wanders back and forth between identifying the right issue and confusing the situation. I guess I should state what I think the right answer for the right reasons is.

With the current rigged economy in the US and the world, long term moderate inflation is not as likely to erode the burden of your long term debt the way it used to do. This outcome could be changed by changing the way the system is rigged. So it is wrong to leave the impression that long term moderate inflation never eroded long-term debt burden, or to leave the impression that it never could again.

I posted the following comment:

The inflation/debt argument really only applies to long-term debt – mortgages [at fixed principal and fixed or refinanceable interest rate], student loans [at fixed principal and fixed or refinanceable interest rate], etc. And, yes, it depends on the historical relation between price inflation and wage inflation.

Rabid outsourcing and destruction of unions (related to each other) seems to have broken the connection between price inflation and wage inflation. If that connection remains severed, then inflation won’t do for the economy what is has done in the past.

When economists build theories on historical evidence of relations and correlations, they must always ask what caused those relations and correlations. If those causes are no longer present, then they are probably looking at a history that does not apply to current conditions. Not surprisingly, applying the wrong historical precedents leads to faulty predictions about the future.

If the economists won’t exercise the proper care when promoting theories, at least the reader can make her or his own judgment. Don’t depend on the corporate media to make that judgment for you. Almost none of the corporate media “journalists” have the competency to judge economics, and those that have the competency don’t have the incentive. Either way, the “journalists” get paid to tell you what their bosses want them to tell you.

Perhaps debtors can take solace in the fact that although inflation may no longer erode the burden of debts, it does at least erode the value of the debt to the lender. Misery loves company.

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