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THE LIQUIDATION OF GOVERNMENT DEBT

https://imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdf

I’m trying to see if I can understand this correctly, feel free to help out.

My brain can’t seem to figure out how the “neg real rates”erodes the debt. It seems to be something to do with inflation, given they state a “healthy dose” of it helps. So inflating money supply erodes debt somehow?? Help I’m tail spinning!

But I do understand how low nominal interest rates would help when servicing debt. I now understand the terms “negative real interest rates” and how it’s derived. Just missing something.

Thanks in advance

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Discussion

ThornTooth 2y ago

Interest Rate - Inflation Rate = Real Rate. The debtor is benefiting from a negative real rate since, in theory, the money is worth more now than later. Negative real rate is an indicator that the creditor miscalculated the 'cost' of money in the future.

By inflating the debt away, the debtor is printing money and using the asymmetry of knowledge about money supply to essentially defraud the creditor of assets.

Whoever took out a 30yr mortgage at 3% while inflation was at 7%, they were benefiting from a -4% real rate. The mortgage provider (actually the banks) are paying the homeowners 4% annually in net value while the annual inflation rate was 7%.

Hope this clarifies the situation

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