What happens to debt in the event of inflation?
Financial experts speak of two possible scenarios in solving the debt issue. On the one hand, national bankruptcy and, on the other hand, inflation come into question. The answer to the question of what happens to debt in the event of inflation may be back to history.
Financial experts agree that inflation has winners and losers. It was no different with the hyperinflation of 1922/23 in Germany. However, the current situation is only partially comparable with that of the past.
A look back in history - what happened back then
- One of the findings of the inflation of the 1920s is that the losers include, on the one hand, all those earners who receive fixed income that does not change quickly. On the other hand, the losers from inflation are in any case the owners of money-denominated entitlements.
- It is worth taking a look at the expropriating effect emanating from the German hyperinflation over the years. Fixed-salary recipients and lenders suffered yet another setback, which further consolidated the expropriation. Because the repayment of loans was decided by German case law and not by the market.
- It was stipulated that one mark is equal to one mark. Loans before the war were taken out on the basis of gold marks. In 1923, debtors were able to repay the debt with worthless paper money. This also made war bond holders the losers of inflation. Analogously, the state became the big winner.
- Not only were the retirees the losers as recipients of fixed incomes, but this also affected civil servants, many wage earners, landlords and all owners of savings.
- The winners included those who acquired real assets (land, companies or consumer durables) on the basis of credit. Farmers could pay old debts with worthless paper money and get rid of their mortgages.
Economically difficult times and economic fluctuations can with a ...
What happens to debt from credit in the event of inflation
- To get rid of debt, inflation is a worthwhile thing, at least for the state. An important prerequisite for debt relief through inflation is that interest rates do not rise at the same rate as inflation.
- Here is one starting point for looking at what happens to borrowing debt in the face of inflation. Those who have a long-term fixed interest loan are more likely to get rid of their debts than a debtor with variable interest rates. With variable interest rates, inflation and interest payments balance each other out. The debts therefore tend to be more than less.
- It should therefore be clear what happens if inflation and rising interest costs do not simultaneously lead to an increase in wages and salaries. Only if you hold the devalued money in your hands and not only have a theoretical loss of purchasing power, debts can ultimately be paid off.
Since general inflation is a creeping process, private debtors hardly benefit from it. Inflation rates of 15 percent would have to be achieved in order to be able to get rid of debts as a borrower. In the event of an absolute economic crash, the state will intervene in any case.
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