Monday, August 10, 2015

Nathan Tankus — No, Inflation Doesn’t Erode the Burden of Debts

It is commonly argued that inflation erodes debts. However, the usual defenses amount to little more then circular logic.…
Naked Capitalism
No, Inflation Doesn’t Erode the Burden of Debts
Nathan Tankus


The Arthurian said...

Thanks for the link, Tom.

Nathan Tankus: "A useful proxy for the burden of debt is the ratio between an individual’s or sector’s nominal debt to its nominal income... It is basic math that dealing with such a ratio you have to divide the numerator and the denominator from the price level to stay consistent. However, from that point of view it becomes clear the exercise is nonsense."

Tankus assumes the inflation adjustment calculation that works for "flow" variables like GDP also works for "stock" variables like accumulated debt. His assumption is incorrect.

And Tankus ignores the extant definition of inflation -- a *general* increase in the level of prices. He also ignores the fact that wages ARE prices. Granted, inflation doesn't seem to push wages up like it once did. But Tankus should have pointed that out explicitly. He does not.

Ignacio said...

Sure if there is no wage inflation debts are not really eroded and it reduces spending power of the indebted families even more. But I take economists who are pushing for inflation, as Krugman, are pushing for WAGE inflation too.

Tom Hickey said...

"Inflation" is one of those weasel words that is ambiguous enough to mean anything unless the author defines how it is being used in context. Inflation is not an observable quantity. It is a theoretical one that is dependent on the measures chosen and how they are implemented.

Nathan's premise is basically correct if I understand it rightly, but as Art points out, he needs to clarify.

As a matter of policy, the Fed is guided more by wage pressure than goods index. So CPI can be rising without wages keeping pace, which implies that the real wage is falling, so workers' debt is not getting "cheaper."

It's all relative.