Unpredictable inflation and borrowing money

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Discussion Overview

The discussion revolves around the implications of inflation and deflation on borrowing and lending money. Participants explore the relationship between inflation, interest rates, and debt, considering both theoretical and practical aspects of financial decision-making during varying economic conditions.

Discussion Character

  • Debate/contested
  • Conceptual clarification
  • Technical explanation

Main Points Raised

  • Some participants propose that borrowing money during high inflation and lending during deflation is a sound strategy, particularly if interest rates do not keep pace with inflation.
  • Others argue that while inflation erodes debt, deflation increases the burden of debt due to the increased purchasing power required to repay loans.
  • A participant questions whether loans are structured similarly to inflation-indexed bonds and whether banks would alter their lending practices in anticipation of inflation.
  • It is suggested that banks would likely raise interest rates in response to anticipated inflation, which could lead to reduced lending.
  • Another viewpoint emphasizes that personal circumstances significantly influence financial decisions, noting that low or negative real interest rates may encourage spending, while high rates might favor saving.

Areas of Agreement / Disagreement

Participants express differing views on the implications of inflation and deflation for borrowing and lending, indicating that the discussion remains unresolved with multiple competing perspectives.

Contextual Notes

Participants acknowledge that the effectiveness of borrowing or lending strategies depends on individual financial situations and future price expectations, highlighting the complexity of the economic environment.

rootX
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Is it true that we should borrow money during high inflation periods and lend during deflation periods?
 
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Yes (assuming the interest rates don't keep up.)

Inflation effectively destroys debt - that's why the rich and banks object to it so much.
My parents bought a house in the early 70s for what would now be a months salary.
 
well, that is an oversimplification, but essentially true. inflation does erode debt, but deflation increases the burden of debt, because you would owe more in terms of purchasing power.
 
How true? I know that US government has inflation-indexed bonds but are loans interest also work like that?

Does that also mean if banks sense that inflation is coming, they would stop lending money? Or, they will just raise the interest rates?
 
rootX said:
How true? I know that US government has inflation-indexed bonds but are loans interest also work like that?

Does that also mean if banks sense that inflation is coming, they would stop lending money? Or, they will just raise the interest rates?

They would raise the rates. This would indirectly cause them to lend less.
 
rootX said:
Is it true that we should borrow money during high inflation periods and lend during deflation periods?



It all depends on your personal circumstances really.
If the real interest rate is low (bank rates - inflation) or negative you may as well spend.
If it is high saving looks a good option.
A lot depends on what you want to buy and what future prices are likely to be.
 

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