<p>In this case “wipe out the debt” is meant in real terms not nominal terms.</p>
<p>You are correct that inflation cannot literally wipe out the debt in nominal sense. However, economic behavior is based on real not on nominal values.</p>
<p>For example, worker will not consider it a raise if employers increase their salary 100% if inflation increases by 1000%, in the same period. In that case employees will behave as if their pay was cut, because in real terms their pay was actually cut and that is what matters for economic decision making.</p>
<p>As a result jargon in economic profession is often based on real variables. When economists say economy grows, they mean <strong>real GDP</strong> grows. When economists say wages are increasing, they mean by default <strong>real wages</strong>.</p>
<p>Similarly, here Ferguson clearly thinks in a real not nominal terms. Debt is wiped out, because <strong>real</strong> debt burden is wiped out.</p>

CC BY-SA 4.0
2024-12-18T01:20:05.177Z
Thank you very much! If I buy a $100  bond that yields another  $100 and the maturity date is within a year, but there is an inflation rate of 1000% before that maturity date, resulting in everything costing 10 times more, then by the time I receive the $100 yield, the purchasing power of that amount will have diminished so significantly that the debt’s worth/burden will essentially be gone, correct?
Enrique
CC BY-SA 4.0
2024-12-18T13:25:23.407Z
@Enrique I think you overall get the idea but there are some mistakes in your comment. Bond yield is typically expressed by % and if you bought 100 dollar bond at par value and you only get paid 100 dollars your yield is 0. For example, if you buy 100 dollar bond at par value and coupon rate is 10% then bond yield is also 10%. However, if you want to get examples with numbers let’s simplify things. Let’s suppose you have 0 coupon bond with face value 100, you also buy it at par because maybe economy is in a state where there are no good alternatives (like in aftermath of Great Recession when
1muflon1
CC BY-SA 4.0
2024-12-18T13:30:34.543Z
Some bond yields even were not just zero but also negative). Now since you are the creditor, this 100 dollar bond represents 100 dollars of wealth that you own (since for you the bond is asset not liability). Your accountant would record this as 100 dollars of wealth, and that would be end of a story. However, economics is not accounting. We care about what this means, does 100 dollars of wealth makes you rich or poor? That depends on what these 100 dollars represent. I technically owe 1 trillion dollars since I have 1 trillion dollar Zimbabwe banknote I use as a prop when I teach macro at uni
1muflon1
CC BY-SA 4.0
2024-12-18T13:38:06.000Z
but that does not make rich, I don’t behave in my consumption habits as rich person and so on. The reason for that is that real value of that bank note is nothing. In similar way although the accounting value of that wealth from the bond you hold is 100 dollars if there is 1000% inflation the real value your assets is $\approx 9.09$ dollars that number represents your real wealth. If it’s still confusing consider physical analogy, suppose you have to walk 1km to work and it takes you 2 hours. Then suppose that government redefines what 1km means and suddenly the distance to your work
1muflon1
CC BY-SA 4.0
2024-12-18T13:40:02.627Z
Is 10km, however, it still takes you 2 hours to arrive at the same speed because real distance is the same, just government decided to change what numbers mean, and if physicists would want to study this distance they would always either recalculate old distances to new distances or vice versa, that’s what we economists have to always do every year, and we tend to think in terms of these real (recalculated) values not in terms of nominal values printed on the paper. So for example, if GDP increases but real (recalculated) GDP decreases we will say economy is in recession even if the official
1muflon1
CC BY-SA 4.0
2024-12-18T13:45:55.797Z
Nominal number goes up
1muflon1
CC BY-SA 4.0
2024-12-18T16:29:13.127Z
Thank you! I do not quite understand the part where you owe 1 trillion dollars just by possessing 1 trillion dollars Zimbabwe bank note. Might you also please tell me why the figure for a 1000 inflation rate  on 100 would be 9.09. and not ten?
Enrique
CC BY-SA 4.0
2024-12-18T17:00:07.103Z
@Enrique 1. because it’s is literally trillion dollars just not US dollars. So I am trillionaire in that particular currency. The point is to illustrate that number of zeros on your accounts is economically meaningless. Number on your account can only be economically meaningful in relation to other goods and services, in absolute value it means nothing. 2. 1000% inflation means that price level increases by 1000 (or 10 in decimals). By default in comparison (base year) price level is 100 (or 1 in decimals) so 100/(1+10)=9,0909
1muflon1
CC BY-SA 4.0
2024-12-16T18:50:25.323Z
2024-12-16T18:50:25.323Z
1muflon1
<p>In Nial Ferguson's The Ascent of Money, he explains that hyperinflation can indeed wipe out people's debts including the government's debt:</p>
<p>A<em>s in the Weimar Republic, however, the principal losers of Argentina’s hyperinflation were not ordinary workers, who stood a better chance of matching price hikes with pay rises, but those reliant on incomes fixed in cash terms, like civil servants or academics on inflexible salaries, or pensioners living off the interest on their savings. And, as in 1920s Germany, the principal beneficiaries were those with large debts, which were effectively wiped out by inflation. Among those beneficiaries was the government itself, in so far as the money it owed was denominated in australes.</em></p>
<p>Ferguson, Niall. The Ascent of Money: A Financial History of the World: 10th Anniversary Edition (English Edition) (p. 105). Penguin Publishing Group. Edición de Kindle.</p>
<p>I can partially understand that money depreciates because inflation occurs when the government prints excessive amounts of currency. This leads to inflation, which devalues money and causes bondholders to lose money, sometimes resulting in no return at all. However, the debt remains technically whole. The only explanation I can think of for the so-called 'Debt Wipeout' is that since the government can print as much money as needed, the debt can be considered written off regardless of the current value of those newly printed bills. Nonetheless, they still need to hand out bills, notes, and coins to their creditors so the debt technically remains too.</p>

<bonds><default>
How does inflation wipe out a government's debt to bond holders?
Enrique
# How does inflation wipe out a government's debt to bond holders?

(Asked by: username_0 on 2024-12-16)

In Nial Ferguson's The Ascent of Money, he explains that hyperinflation can indeed wipe out people's debts including the government's debt:

A*s in the Weimar Republic, however, the principal losers of Argentina’s hyperinflation were not ordinary workers, who stood a better chance of matching price hikes with pay rises, but those reliant on incomes fixed in cash terms, like civil servants or academics on inflexible salaries, or pensioners living off the interest on their savings. And, as in 1920s Germany, the principal beneficiaries were those with large debts, which were effectively wiped out by inflation. Among those beneficiaries was the government itself, in so far as the money it owed was denominated in australes.*

Ferguson, Niall. The Ascent of Money: A Financial History of the World: 10th Anniversary Edition (English Edition) (p. 105). Penguin Publishing Group. Edición de Kindle.

I can partially understand that money depreciates because inflation occurs when the government prints excessive amounts of currency. This leads to inflation, which devalues money and causes bondholders to lose money, sometimes resulting in no return at all. However, the debt remains technically whole. The only explanation I can think of for the so-called 'Debt Wipeout' is that since the government can print as much money as needed, the debt can be considered written off regardless of the current value of those newly printed bills. Nonetheless, they still need to hand out bills, notes, and coins to their creditors so the debt technically remains too.

**Tags:** bonds, default


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## 1 answers

### Answer by username_1 on 2024-12-16. Score: 0

In this case “wipe out the debt” is meant in real terms not nominal terms.

You are correct that inflation cannot literally wipe out the debt in nominal sense. However, economic behavior is based on real not on nominal values.

For example, worker will not consider it a raise if employers increase their salary 100% if inflation increases by 1000%, in the same period. In that case employees will behave as if their pay was cut, because in real terms their pay was actually cut and that is what matters for economic decision making.

As a result jargon in economic profession is often based on real variables. When economists say economy grows, they mean **real GDP** grows. When economists say wages are increasing, they mean by default **real wages**.

Similarly, here Ferguson clearly thinks in a real not nominal terms. Debt is wiped out, because **real** debt burden is wiped out.

> **Comments:**
> **username_0**: Thank you very much! If I buy a $100  bond that yields another  $100 and the maturity date is within a year, but there is an inflation rate of 1000% before that maturity date, resulting in everything costing 10 times more, then by the time I receive the $100 yield, the purchasing power of that amount will have diminished so significantly that the debt’s worth/burden will essentially be gone, correct?  
> **username_1**: @username_0 I think you overall get the idea but there are some mistakes in your comment. Bond yield is typically expressed by % and if you bought 100 dollar bond at par value and you only get paid 100 dollars your yield is 0. For example, if you buy 100 dollar bond at par value and coupon rate is 10% then bond yield is also 10%. However, if you want to get examples with numbers let’s simplify things. Let’s suppose you have 0 coupon bond with face value 100, you also buy it at par because maybe economy is in a state where there are no good alternatives (like in aftermath of Great Recession when  
> **username_1**: Some bond yields even were not just zero but also negative). Now since you are the creditor, this 100 dollar bond represents 100 dollars of wealth that you own (since for you the bond is asset not liability). Your accountant would record this as 100 dollars of wealth, and that would be end of a story. However, economics is not accounting. We care about what this means, does 100 dollars of wealth makes you rich or poor? That depends on what these 100 dollars represent. I technically owe 1 trillion dollars since I have 1 trillion dollar Zimbabwe banknote I use as a prop when I teach macro at uni  
> **username_1**: but that does not make rich, I don’t behave in my consumption habits as rich person and so on. The reason for that is that real value of that bank note is nothing. In similar way although the accounting value of that wealth from the bond you hold is 100 dollars if there is 1000% inflation the real value your assets is $\approx 9.09$ dollars that number represents your real wealth. If it’s still confusing consider physical analogy, suppose you have to walk 1km to work and it takes you 2 hours. Then suppose that government redefines what 1km means and suddenly the distance to your work  
> **username_1**: Is 10km, however, it still takes you 2 hours to arrive at the same speed because real distance is the same, just government decided to change what numbers mean, and if physicists would want to study this distance they would always either recalculate old distances to new distances or vice versa, that’s what we economists have to always do every year, and we tend to think in terms of these real (recalculated) values not in terms of nominal values printed on the paper. So for example, if GDP increases but real (recalculated) GDP decreases we will say economy is in recession even if the official  
> **username_1**: Nominal number goes up  
> **username_0**: Thank you! I do not quite understand the part where you owe 1 trillion dollars just by possessing 1 trillion dollars Zimbabwe bank note. Might you also please tell me why the figure for a 1000 inflation rate  on 100 would be 9.09. and not ten?  
> **username_1**: @username_0 1. because it’s is literally trillion dollars just not US dollars. So I am trillionaire in that particular currency. The point is to illustrate that number of zeros on your accounts is economically meaningless. Number on your account can only be economically meaningful in relation to other goods and services, in absolute value it means nothing. 2. 1000% inflation means that price level increases by 1000 (or 10 in decimals). By default in comparison (base year) price level is 100 (or 1 in decimals) so 100/(1+10)=9,0909  

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