bad Credit

Inflation Isn’t Bad For Everyone, Just Ask Debtors

Inflation Isn't Bad For Everyone, Just Ask Debtors
Written by Publishing Team

Inflation is a pain. It costs more for dinner, fuel, and housing—you can’t even shop for a used car without watching the savings evaporate as prices soar, up, and up on a roaring old Subaru that could have been stolen months ago.

But there’s a weak upside: Inflation is starting to take off the debt burden of people who owe money, a small service that anyone with a mortgage or student loan can be grateful for.

get the ratio

New data from the Bank for International Settlements shows that in the second quarter, household and business debt as a share of economic output fell to the lowest extent ever seen in many advanced economies.

The reason for this is that the massive economic growth resulting from the shutdowns is associated with high levels of inflation, which together reduce the liabilities owed by debtors relative to the overall size of the economy. This led to a significant decrease in the share of private debt:

  • The amount of debt held by households fell from 80.4% of GDP to 79% of GDP in the US during the second quarter, with the same number dropping from 62.5% to 61.2% in the euro area and from 67.9% to 66.5% in the US . Group of Twenty.
  • Businesses benefit from the same conditions — total credit to the US nonfinancial sector fell from 165.8% of GDP to 161.3% in the second quarter, plus profits increased 37% from a year earlier, according to data released last month from the Department of Commerce.

Of course, almost all debt levels remain higher than they were at the start of 2020 because lower interest rates and government stimulus made it easier to get loans.

Inflated expectations: If and when central banks take steps to rein in inflation by raising interest rates – which happened in the UK and Norway on Thursday – the spoils will shift to the big banks. Higher interest rates would allow them to make billions by charging more on loans — both Wells Fargo and Bank of America, for example, said they could generate more than $7 billion in revenue from 1% higher short- and long-term interest rates.

About the author

Publishing Team

Leave a Comment