<p>While many points can be made about the pros and cons of inflation, the following is one of the most fundamental.</p>

<p>Suppose A borrows \$100 from B and inflation is 5% per year. To keep things simple, assume the terms of the loan require repayment after one year. When the repayment falls due, A pays B \$100, but because of the inflation it is only worth (at the original price level) $100/1.05 \approx \$95.2$.  So A's debt has been somewhat eased by the inflation (and if the term of the loan were much longer the easing could be much greater).  But what about B? In real terms B has lost the same amount that A has gained.</p>

<p>Other things being equal, therefore, inflation benefits borrowers and costs lenders. And in total, amounts lent must equal amounts borrowed. It may be that the the borrowers (government, struggling households) are more visible than the lenders (better-off households, foreigners).  Nevertheless, the effects on lenders, and on incentives for future lenders, cannot be ignored.  Where inflation is expected, lenders will as suggested in Henry's comment demand a higher interest rate to offset their expected loss on the principal repayment.  </p>

CC BY-SA 4.0
2018-05-18T12:25:16.417Z
2018-05-18T12:25:16.417Z
Adam Bailey
<p>Going through the <a href="https://en.wikipedia.org/wiki/Inflation" rel="nofollow noreferrer">Wikipedia article</a> on inflation, a number of pros and cons to inflation are covered. Most of the "cons" of inflation (cost-push inflation, hoarding, hyperinflation, diminished allocative efficiency, etc.), don't become a problem until inflation is well above the levels currently targeted by The Fed.</p>

<p>A number of "pros" are also covered, but one I don't see addressed anywhere I've looked is this: the average U.S. household debt is 3x the average annual income. Our government is also in debt to the tune of \$21T, which comes at a cost of \$400B per year in interest paid. I do see acknowledgement that higher inflation eases debt, but nothing on why increased debt hasn't incentivized us to increase inflation.</p>

<p>Wouldn't a higher inflation rate be a good thing? It would devalue those (household and federal) debts, making them easier to pay off, and saving the interest paid for other budget items. If the Government (and most Americans) were running closer to the black, I can see why you'd want to keep interest low, but given the unprecedented situation, why not allow inflation to float higher?</p>

CC BY-SA 4.0
2018-05-15T21:05:14.257Z
It is common for nominal interest rates to be higher in periods of higher inflation, which can have the effect of balancing out the effect you mention.
Henry
CC BY-SA 4.0
2018-05-16T08:36:27.063Z
There’s also a need to try and control inflation based on exchange rate. If we devalue our currency too quickly, money the government, citizens, and companies owe overseas would be really hard to pay off. And this would surely influence international trade. If I owe two million abroad and the exchange rate with that county’s currency lowers on my end by ten percent, I now owe 2.2 million.
Atticus
<inflation><debt>
Why, in such a debt-heavy era, is inflation still such a Bad Thing(TM)?
Sniggerfardimungus
# Why, in such a debt-heavy era, is inflation still such a Bad Thing(TM)?

(Asked by: username_0 on 2018-05-15)

Going through the [Wikipedia article](https://en.wikipedia.org/wiki/Inflation) on inflation, a number of pros and cons to inflation are covered. Most of the "cons" of inflation (cost-push inflation, hoarding, hyperinflation, diminished allocative efficiency, etc.), don't become a problem until inflation is well above the levels currently targeted by The Fed.

A number of "pros" are also covered, but one I don't see addressed anywhere I've looked is this: the average U.S. household debt is 3x the average annual income. Our government is also in debt to the tune of \$21T, which comes at a cost of \$400B per year in interest paid. I do see acknowledgement that higher inflation eases debt, but nothing on why increased debt hasn't incentivized us to increase inflation.

Wouldn't a higher inflation rate be a good thing? It would devalue those (household and federal) debts, making them easier to pay off, and saving the interest paid for other budget items. If the Government (and most Americans) were running closer to the black, I can see why you'd want to keep interest low, but given the unprecedented situation, why not allow inflation to float higher?

**Tags:** inflation, debt

> **Comments:**
> **username_1**: It is common for nominal interest rates to be higher in periods of higher inflation, which can have the effect of balancing out the effect you mention.  
> **username_2**: There’s also a need to try and control inflation based on exchange rate. If we devalue our currency too quickly, money the government, citizens, and companies owe overseas would be really hard to pay off. And this would surely influence international trade. If I owe two million abroad and the exchange rate with that county’s currency lowers on my end by ten percent, I now owe 2.2 million.  

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## 1 answers

### Answer by username_3 on 2018-05-18. Score: 2

While many points can be made about the pros and cons of inflation, the following is one of the most fundamental.

Suppose A borrows \$100 from B and inflation is 5% per year. To keep things simple, assume the terms of the loan require repayment after one year. When the repayment falls due, A pays B \$100, but because of the inflation it is only worth (at the original price level) $100/1.05 \approx \$95.2$. So A's debt has been somewhat eased by the inflation (and if the term of the loan were much longer the easing could be much greater). But what about B? In real terms B has lost the same amount that A has gained.

Other things being equal, therefore, inflation benefits borrowers and costs lenders. And in total, amounts lent must equal amounts borrowed. It may be that the the borrowers (government, struggling households) are more visible than the lenders (better-off households, foreigners). Nevertheless, the effects on lenders, and on incentives for future lenders, cannot be ignored. Where inflation is expected, lenders will as suggested in username_1's comment demand a higher interest rate to offset their expected loss on the principal repayment.


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