[Gllug] OT: Debt

[John Edwards]

On Thu, Mar 04, 2010 at 03:20:04PM +0000, Bernard Peek wrote:
> On 04/03/10 11:19, John Edwards wrote:
>> On Thu, Mar 04, 2010 at 10:36:44AM +0000, Peter Childs wrote:
>>    
>>> Does that work with personal debt too?
>>      
>> Yes.
>>
>> Inflation reduces the value of the currency and hence the value
>> of the debt. But it erodes both debt and savings, and has strong
>> feedback effects.
> 
> Surely that's only if the debt value remains static? Personal loans are 
> usually made at interest rates greater than inflation, so the value of a 
> debt increases faster than inflation.

During normal times, yes. But when inflation starts to spiral out of
control then lenders can not renegotiate the loans quickly enough to
make up the difference.


> Are sovereign debts made at lower rates?

Basic Gilts pay a fixed amount at fixed dates over a fixed term
(from 6 months to 50 years) regardless of inflation or interest
rates, so they are very susceptible to inflation. There are also
variable rate bonds linked to inflation or inflation rates, but
these are less common.

The Bank of England is both a borrower and lender. In the case of
"quantitative easing" it gives bonds to banks and then buys them
back, producing a short term increase in asset flow. This is
effectively "printing money" electronically. Of course the real
value of the economy is not increased by this, and so it can lead
to currency devaluation and inflation.


-- 
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|    John Edwards   Email: john at cornerstonelinux.co.uk    |
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