2 Thoughts on How does inflation reduce debt burden (in theory)?
  1. Reply
    Anjaree
    July 18, 2011 at 8:39 pm

    Hey
    If you had a $ 1,000 debt in 1903, you might need a year to pay back. But if you have it today, you might need only a day to pay back.That means the inflation from 1930-2010 has swallowed your debt totally.Deflation will go on the contrary increasing your debt because it increases your dollar value.

  2. Reply
    Sienna
    July 18, 2011 at 9:30 pm

    Rising prices are only the symptom of inflation. The cause is increasing the supply of money or money substitutes. (Credit is a money substitute.)

    The effect of increasing the money supply is to dilute the existing stock of money. This reduces the burden of debt because the value of the old money – that was lent – is more per unit than the value of the money its being repaid in.

    Think of it this way. Suppose there’s a million units of money in the economy. You’ve got a debt of 100 units you’ve got to pay back. Now the government increases the number of units of money in the economy to 10 million. Only the amount of paper money has increased. The amount of real wealth is the same. So each dollar now buys 1/10th of what it used to buy before the increase, because there’s more money chasing the same amount of goods.

    Which is easier for you – paying back your original debt before or after the increase of the money supply? After – because money is easier to get – it’s worth less. Inflation means you’re paying back debt with money that’s worth less per unit than the money you borrowed.

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