So the scenario I’m proposing is a loaf of bread costing $100 and having a lot of debt pre-inflation so like 250K mortgage, 50K car loan, maybe student loans, or even business debt. I would imagine it would be an awful time to be alive in the world, but since you had a ton of debt to begin with you would come out the other end with a ton of worthless cash to pay down the debt.
Do lenders just stop accepting the worthless currency as payment?
How has this been handled in the past or other countries where inflation gets out of control?
In: Economics
Yes. It’s one of the basic ‘concept’ of lending/borrowing money. Borrower wins and Lender loses. The central banks adjust the interest rates accordingly tho.
Assuming this is in the U.S.
Creditors are obligated by law to accept debt repayments in the form of U.S. dollars (see the Legal Tender Act). So yes, inflation is good for debtors. The “Free Silver” movement of the late 1800s was an attempt by debtor farmers to push through monetary policies that would have spurred inflation, and helped them reduce their debt loads.
The gotcha is that there is no economic law that requires that wages keep pace with inflation, so for the average wage earner, everyday living expenses grow more and more difficult to meet. It doesn’t do you much good to pay off your loans if you can’t afford that $100 loaf of bread.
If the interest is set in proportion to the debt and not to any form of value index, then yes, in the end you would need a worthless amount of cash to cancel it. The problem is the other part of the equation: a lot of companies will bankrupt because the amount they earn is not even close to cover their expenses. One of the concepts you should know is the “replacement cost”, which is how much it costs to restock the items they sell, and this is tricky to calculate in places where it’s common to sell in installments and has a high inflation rate.
For instance, I remember there was a period of hyperinflation in Argentina at the end of the 80s, and a subway ride costed more than the installment of a TV my family bought. The way companies try to cover from it is by not selling in that many installments, or by setting an interest rate way higher than they think, which in turn could lead to more inflation.
Except the people who would most benefit (those with negative net wealth) are people who live paycheck to paycheck. Hyperinflation inevitably results in some businesses failing, etc resulting in economic crash, so jobs are cut.
Your example person could pay off the mortgage in a month, except not only did his paycheck not increase to match inflation, he’s actually out of work now. So he’s much worse off
Latest Answers