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. Take this for example from Paul Krugman


The source of the confusion here is that it is popular do divide key economic variables by abstract measures of the prices across the economy (such as the Consumer Price Index). This makes sense sometimes but in other situations become nonsensical. Debt is one such example. In the United States most people have debts denominated in U.S. Dollars. A useful proxy for the burden of debt is the ratio between an individual’s or sector’s nominal debt to its nominal income.

The burden of this debt falls when they can refinance at a lower nominal interest rate, their nominal income rises or they default. In most discussions the “real value of the debt” is discussed while still talking about nominal income (or at least being unclear about the measurement of 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.

This is most obvious when you think about a rise in the price level driven by falling productivity in a key sector, like oil. Lets say the productivity of a large swath of oil fields suddenly falls markedly and as a result oil prices rise. Since energy is an input into nearly all production this would hit firm costs strongly (abstracting from hedging). If these increased costs were passed on in prices, the usual argument would claim that the burdens of debts has fallen. The problem is that most of the economy hasn’t seen its nominal income increase and thus the burden of debt hasn’t fallen for them.

To the individual borrower what matters is not the value of their debts denominated in some baroque concept like the Consumer Price Index, what matters is the value of their debts in dollars. In fact for the individual the burdens of their debts can fall when the price level falls because it shrinks the amount of money they need on a monthly basis to live and can thus devote more to debt service. The problem arises when deflation in prices leads or is a symptom of deflation in incomes.

Some will object that Krugman and many others are simply using increases in the price level as a proxy for increasing nominal income. The problem with this is that they never connect their arguments about inflation to income levels. Because of the mortgage crisis the burden of debt is largely borne by households. As Yves showed over five years ago the corporate sector has been in persistent surplus for many years. A rise in prices may increase incomes in the corporate sector but this could easily translate into larger mark ups, not higher household income. Further Krugman has been arguing for years for policies to stoke higher inflation in order to reduce the burdens of debts and thus allow people to spend more, creating jobs and leading to rising worker incomes. This is putting the cart before the horse.

Only policies and institutions that directly intervene into the wage setting process (such as labor regulations, minimum wage laws, public employment programs and unions) can guarantee nominal worker incomes rise. Increased demand from goods and services through expansionary fiscal policy can indirectly help support wage growth but increasing demand for goods and services doesn’t always translate into rising workers incomes. Incidentally this is why stagflation has historically been so politically destructive. Those whose nominal incomes stagnated relative to inflation so the burdens of their debts increase and were jealous and/or angry with those workers who could fight to have their nominal wages automatically increase with a measure of inflation like CPI.

Just as the inflation rate the elderly experience is much higher than the average American, the burden of debts individuals experience- or even most economic sectors experience- can be very different. It is much more useful to sidestep the price level issue all together and instead look at nominal income, nominal debts, the growth rates of each and the nominal size of debt service payments. Accelerating rises in prices can increase gross incomes for some sectors but there is no mechanism to distribute rises in income within the corporate sector or among households.

If we want to reduce the burdens of debts for certain sectors we need to reduce their nominal value or increase nominal incomes to those sectors directly through policy, whether that policy is expansionary fiscal policy or debt writedowns.

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  1. fresno dan

    I think the problem is due to a number of things:
    1. the use of aggregates
    2. not understanding falling horse manure prices and raising medical insurance prices do not cancel each other out. Who gets their debts forgiven (Banks) and who ends up on the streets. Are super low interest rates passed on to most people (have credit card interested cratered????) – or are they simply a subsidy to evil, incompetent banks.
    3. the inability of economists to look at some simple facts – we have had 40 years of mild inflation with ?1? year of disinflation. Yet 99% of the people’s wages are lagging or decreasing – inflation does nothing to help them (and back to aggregates – GDP does keep going up, but benefits only a very, very few)


    Perspective # 3 is the progressive position which is rooted in Keynesian economics
    and can be labeled the “destruction of shared prosperity hypothesis”. It is identified with
    the New Deal wing of the Democratic Party and the labor movement, but it has no standing
    within major economics departments owing to their suppression of alternatives to
    economic orthodoxy.

    economic orthodoxy. Unfortunately, Mr. Palley won’t say what all those endowments and think tanks are buying – just like Mr. Trump wouldn’t say what he REALLY buys with his influence peddling…er, uh, I mean campaign contributions….

    1. craazyboy

      ” or are they simply a subsidy to evil, incompetent banks.”

      There was a study released that calc’d the ZIRP transfer from savers to banks to be worth a half trillion $ thru the end of last year.

      Yes, credit cards still are 12-22%. Subprime car loans still pricy, but moving like hot cakes. Mortgages cheap so that’s a good thing. Got the housing bubble back. A biggie is Big Biz can hit the bond markets and re-fi at cheap rates – that worked and they finished doing that about end of 2010 maybe. Then we know the next thing they did was sell bonds to do stock buybacks, M$A, or perhaps invest offshore. Economists don’t have that one in their models yet.

      But whatever.

    2. washunate

      Well said. I’m not even sure those points can be separated from each other. The excessive use of aggregates, the hesitancy to examine distributional consequences, and the inability to sustain focus on facts are all intertwined in enabling inequality and protecting the looters.

  2. Yulek

    The theory behind the idea that “inflation eases debt burden” is well understood and quite simple. The problem is, the world is so much more complex, and economists omit most of those complexities.

  3. Jim Haygood

    ‘When the price level falls it shrinks the amount of money they need on a monthly basis to live and can thus devote more to debt service.’

    Earth to Nathan: when the price level falls, it also shrinks the debtors’ top line — their nominal income. But the payment needed to service their fixed-rate debt stays the same.

    Take a farmer in 1929, who was devoting $10,000 of his income to debt service, and the other $10,000 to living costs. Now apply a 30% deflation, and fast-forward to 1933:

    Income: $14,000 (actually much lower, since commodities crashed more than the CPI did)
    Debt service: $10,000 (fixed, and utterly impossible to refinance in a depression)
    Available for living costs: $4,000
    Actual living costs: $7,000

    When it’s your skin in the game, it’s all about microecon, not macro.

    1. MyLessThanPrimeBeef

      For a state, like Greece, it’s macro, and inflation over 100 years will allow them to pay the debts they can’t pay today.

      If not, make it 1,000 years.

    2. washunate

      Wait, Jim, you’re using the incredible financial excesses of the 1920s as…a guide for how you want things to work?

      One of the major developments of early 20th century agriculture was how our system of political economy was destroying family farms in favor of large industrial conglomerates, a trend that has permanetly reshaped American agriculture. At the beginning of the 20th century, average farm size was around 150 acres. The actual family ran the farm. Today the average farm is about three times that scale, and as often as not it is owned by an absentee landlord where the actual work is performed by low paid seasonal employees, not the family farmer in permanent residence.

      That is the problem. We have scaled up production beyond what a family can handle, all so that the financial system (and energy producers and Wall Street and biotech) can take their part of the skim.

  4. MyLessThanPrimeBeef

    The eiltes’ inflation is wage inflation.

    Your and my inflation is what we pay for potable water, if we can get it.

    1. MyLessThanPrimeBeef

      The other thing is, when more people are out of work looking for jobs, the less likely the Fed will raise rates, and correspondingly, the higher the stock market will go (more likely it will climb 200 points a day).

  5. Ben Johannson

    A flexible incomes policy is the only method that can successfully do as you suggest. Powerful labor unions are not coming back and even if they did would simply generate type II and III inflation as they competed with price administrators for share of national income. Proper wage and price guideposts will simulate the missing market functions which in theory should be ensuring proper distribution.

  6. Michael G

    I think that you have to distinguish higher steady state inflation from an increase in inflation. Higher steady state inflation seems to me to be almost entirely beneficial because (a) higher interest rates impose a limit on unwise borrowing and (b) Interest payments are part of the repayment of capital. Very low inflation and interest rates encourage borrowing where there is little chance of repayment of capital. Inflation CHANGES in either direction can cause a lot of grief. But the main effect of gently increasing inflation should be to bring forward pain that is inevitable. (I quite like inflation. The high inflation of the 70s hurt at the time, but it gave us our house almost for free a few years later)

  7. vlade

    The theory is that steady higher inflation puts a pressure on wages, which rise (maybe with some lag, but will rise).

    Of course, the practice, as I was pointing years ago, is quite different. Inflation can be said to decrease debt burden if the real wages stay at least the same. If real wages fall, inflation may in fact destroy the ability to pay debts. If the budget was stretched to start with, and the outgoings ex debt repayments are now higher due to the inflation, it’s less likely one will repay the debt.

    Unfortunately, a number of central bankers, who were looking back at inflation generated by rising wages, put the cart before the horse. Yes, if inflation was rising due to rising nominal wages, it would be good for debt repayment. But, as mentioned above, if real wages decrease, it’s even worse. Indeed, one could argue since the wages tend to be sticky on the way down, for those lucky to stay employed in deflation the situation is _better_ than in inflationary environment with decreasing real wages. Indeed, if real wages are driven down, it’s likely that the employment situation is not that great even in the inflationary situation, so even those on benefits (which tend to be sticky too) may be better off.

    So, yes WAGE driven inflation is good for debt. But that’s not what we were seeing recently.

  8. backwardsevolution

    As Michael G said, “The high inflation of the 70s hurt at the time, but it gave us our house almost for free a few years later.” Doesn’t that just say it all.

    Inflation always helps the first ones in. They buy cheaply, and then everything increases around them. They get their house “almost for free”. Ha! It’s the second, third and subsequent waves, as prices increase, that get hammered. They paid double or triple the price, in essence bailing out the first ones in.

    The problem has been not so much cheap credit, but credit that was far too easily available (to virtually anyone who could make an X). It allowed no money down (IOW, no hard work to begin with). Interest rates were artificially suppressed and when loans were handed out cheaply, they did not mirror risk (hairdressers buying huge houses with no money down/cash back).

    Inflation has kept the game going, but it kills all of us. It kills the elderly (which ultimately you will be), savers, and all those who aren’t getting wage increases (the illegal immigrants and H-1B’s ensure this). Too much easy credit causes too much money sloshing around, which causes prices to rise on everything.

    It’s one great big circle of too much easy credit, prices rise, people ask for raises (in a perfect world), prices rise some more, more easy credit is issued, prices rise again, people want another raise…..and on and on it goes.

    Stop! You don’t need more money if prices aren’t rising, and the only reason prices rise is because there’s artificial demand brought forward by too much easy credit.

    So you can “quite like inflation” all you want, but one day it will come back to bite you, in ways you do not see right now.

    The biggest problem is everybody wants something for nothing, and something for nothing just does not exist. You will pay in the end.

    1. Ben Johannson

      You’re making the mistake of assuming inflation is always caused by spending. For spending to be inflationary it must be more than sufficient to drive output to maximum, a condition under which there cannot, by definition, be mass unemployment. In other words you will have inflation but not depression, whereas for many years we have had inflation and depression.

      Failure to understand inflation had more than one potential source has crippled economic policies for decades.

      1. backwardsevolution

        Ben – “You’re making the mistake of assuming inflation is always caused by spending.” Did I say it was “always” caused by spending? No, I was referring to the recent housing bubble. But, as long as we’re talking about inflation, is it not true that the Fed (through Greenspan, Bernanke and Yellen) have blown bubble after bubble?

        Yes, all three of them have been responsible for engineering and manufacturing bubble after bubble, with the intent of creating inflation (as Bernanke said his objective was). And “spending” did factor into these bubbles, did it not? More demand created by cheap rates, easily available credit, lots and lots of demand, and copious amounts of spending.

        Of course you can get inflation in other ways, but the primary form in the last few decades has been through “spending”.

        1. Ben Johannson

          You cannot have inflation and depression simultaneously from spending. The former precludes the latter, as stated in my previous comment.

          1. backwardsevolution

            Ben – Since the early 80’s, give or take a few very short periods where the Fed lost control of their massively engineered bubbles and they accidentally started to deflate (whoops), we have had inflation. No, not wage inflation (although the upper few percent have seen huge gains), but almost every other type of inflation there is. Take your pick from the list:


            Currently there is a tug-of-war between the central banks trying to create inflation and consumers too indebted to take on more debt, the beneficiaries again being the upper few percent. Corporations are taking on debt, buying back stock (because they’re sure as hell not going to expand into an environment like this), and again the beneficiaries are – you guessed it, the upper few percent.

            Deflation is winning, and it will win. You cannot print your way out of a mess like this.

            My original comment pertained to Michael G being able to pay off his house, which compared to house prices in 06/07, he probably got for a song. Interest rates were artificially suppressed in order to Ponzi-up the bubbles, and no doubt Michael G has had “some” wage increases.

            It smells and feels like depression out there, and it’s coming.

            1. Mike Sparrow

              poppycock. deflation has been going on for years since the tech revolution caused a major deflation in industrial prices.

              you can’t deflate your way out of mythical debt either.

              1. backwardsevolution

                Mike Sparrow – poppycock right back at ya. “You can’t deflate your way out of mythical debt either”. When you take too big a risk, when you bite off more than you can chew, what do you think happens? The problem is and has been that people do not want to take their losses – plain and simple. Apparently even in the new world of monopoly money losses have to be taken.

                “A loss? You mean I have to swallow that? What? I thought taking this easy credit was going to pay off. My god, could it actually be that whatever profit I thought I had was just an illusion? What do you mean you can’t paper over my losses?”

                It’s coming. Best get ready.

                1. Skippy

                  “It’s coming. Best get ready.”

                  That is purely an ideological choice and not some immutable law of the Universe, tho some do seem to beseech the heavens to punish the wonton, sadly it works out just the opposite.

                  Per your “I thought taking this easy credit was going to pay off” quip.

                  Did you mean to say private contracts are private and as such industry should set the standards, which enabled endemic fraud and payed off the principles, so now its time to off the bag holders?

                  “The problem is and has been that people do not want to take their losses – plain and simple.”

                  Skippy…. Have to agree that the MPS mob does not understand the premiss of False.

                  1. backwardsevolution

                    Skippy – I’m not quite sure what you’re trying to say. In fact, I’m never quite sure what you’re trying to say. “That is purely an ideological choice and not some immutable law of the Universe.” We shall see.

                    1. skippy

                      Ahhh…. the old “I’m not quite sure of shtick” w/ the pejorative inference use of the adjective never. One minute your mob knows everything and the next its completely befuddled, or should I say confronted with more core idiosyncrasy.

                      I thought my invocation of MPS and its quasi religious habit of having no understanding of the word False and what it implies – was….

                      Seems the confusion stems from when anything interrupts the context of MPS mass media, through a model of mediated quasi interaction in which, two-way communication is reduced to a monologue.

                      Skippy…. Quasi religious sophists thingy…..

                    2. skippy

                      This is the record:

                      Pre WWII

                      1. 1817-21: In five years, the national debt was reduced by 29 percent, to $90 million. A depression began in 1819.

                      2. 1823-36: In 14 years, the debt was reduced by 99.7 percent, to $38,000. A depression began in 1837.

                      3. 1852-57: In six years, the debt was reduced by 59 percent, to $28.7 million. A depression began in 1857..

                      4. 1867-73: In seven years, the debt was reduced by 27 percent, to $2.2 billion. A depression began in 1873.

                      5. 1880-93: In 14 years, the debt was reduced by 57 percent, to $1 billion. A depression began in 1893.

                      6. 1920-30: In 11 years, the debt was reduced by 36 percent, to $16.2 billion. A depression began in 1929.

                      Post WWII

                      · Deficit reductions, 1971-74, led to the recession that began at the end of 1973; a slow recovery did not help Gerald Ford in 1976.

                      · Deficit reductions, 1977-80, gave way to a recession in 1980 that damaged Jimmy Carter’s re-election hopes.

                      · Deficit reductions, 1987-89, were followed by the 1990-91 recession that harmed George Bush.

                      Skippy…. That’s not to mention when Rubin was yacking to Bill about stuff and was informed productivity had diverged from wages, he pipped, I did not know that. Kinda like you with out the acknowledgement, even if it was just a temporary glitch.

            2. Ben Johannson

              This is now off-topic. You argued that “credit” (meaning spending) has created inflationary conditions. My response was that this cannot be true as spending cannot create inflation without driving an economy past productive capacity. This means that demand for goods and services is greater than the quantities which can be provided. For such a condition to exist we must, by definition, be at full employment, meaning one job offer for every job seeker with no additional labor available to expand production. We’ve only experienced this once in the past thirty years, during the latter Clinton Administration. Spending therefore cannot be responsible for observed inflationary pressures.

              Arguing that inflation is everywhere and simultaneously arguing deflation is in ascendance is nonsensical and logically contradictory; never mind it has no relevance to the subject under discussion.

      2. tiebie66


        Not in the face of automated mechanization or resource scarcity, I’d wager. Also, “definition” is not reality.

  9. Oregoncharles

    What’s inflating – prices or incomes?

    and Whose incomes?

    Back when the Fed was worrying about income-inflation (aka “social justice”), it became evident that increases in wages were “inflation,” but increases in CEO pay were not.

    Incidentally, and also generally ignored by the Fed: interest is someone’s income AND a price, so increasing it is also inflation, making monetary measures a contradictory way of “fighting” inflation.

  10. Adam Eran

    Believe it or not, the propaganda about inflation is ubiquitous. For example, if I say “Governments that create their own currency (sovereign, fiat) are fiscally unconstrained,” I guarantee someone in the room will say “But if you just ‘print’ money, then you’ll get [gasp!][hyper-]inflation!”

    It’s like listening to trained parrots. But their statement is incorrect on a couple of counts. Let’s grant the hypothetical possibility that government, with its limitless dollar reserves could out-bid the private sector for some item or other. But notice: bidding has to occur, and the item(s) have to be in fixed or diminishing supply for even that statement to make sense.

    So…Government could employ the unemployed without causing inflation. Who else is bidding? And supply isn’t fixed or declining.

    The Fed’s audit says it issued $16 – $29 trillion to cure the frauds of the financial sector in 2007-8. No measurement of inflation (CPI, Shadowstats, MIT’s Billion Price Index) shows a surge of inflation them, primarily because those dollars extinguished liabilities, they did not bid for goods or services. Now, banks are speculating, and corporations are sitting on hoards of cash. Apparently the idea of money unspent, or liabilities extinguished can never be spoken aloud!

    Oh yes, and Shadowstats says inflation is higher than government’s CPI figures, but hasn’t raised its subscription prices in eight years…;-)

    So government could employ all the unemployed without raising taxes (it issues the money, remember?) and without causing inflation.

    That would, however, diminish the misery of the unemployed, so they might not take whatever crappy job was on offer.

    Of course there’s a real economy that has to respond to the bidding of more dollars, but the best way to ensure it won’t be able to respond now or in the future is to make sure the manufacturing base and human capital languish unemployed (and uneducated–Federal funding for higher education is down 55% since 1972…gosh, I wonder why tuition is so high?).

    1. backwardsevolution

      Adam – “Believe it or not, the propaganda about inflation is ubiquitous.” Yes, it is. While we certainly have had an increase in the price of most goods (way, way higher than CPI states in their magical world of picking and choosing whatever the hell they want to put in the basket, and changing the way they calculate CPI in order to better suit whatever they want to hide), deflation is fast overtaking any inflation the Fed and other central banks have tried to conjure up and is coming to a theatre near you. Shadowstats is a lot closer to actual CPI than the government’s joke is.

      You most certainly can have inflation from government and banks printing too much money. “Currency inflation: a situation in which more money becomes available without an increase in production and services, causing prices to rise.”

      “Thanks to a credit boom that dates back to at least the early 1980s, and which accelerated rapidly after the millennium, the vast majority of the effective money supply is credit. A credit boom can mimic currency inflation in important ways, as credit acts as a money equivalent during the expansion phase. There are, however, important differences…currency inflation divides the real wealth pie into smaller and smaller pieces, devaluing each one in a form of forced loss sharing.”

      Your money becomes worth less. It’s not hyperinflation, but it still bites.

      And you wonder why tuition is so high? Because they’re handing out student loans to anyone who breathes, creating more demand, forcing prices higher. You keep handing out cheap and easily available money, and you’ll get rising prices.

      1. backwardsevolution

        Adam – “…corporations are sitting on hoards of cash.” And a huge pile of debt, which they keep rolling over into lower and lower interest rates. Wait until rates start going up.

        1. Mike Sparrow

          You mean a huge pile of nominal debt. If the capitalist wants to dissolve the corporation or restructure it to a collapsed economy, they can do so.

          1. backwardsevolution

            Mike Sparrow – spoken like a true corporate lawyer: “If the capitalist wants to dissolve the corporation or restructure…” More something for nothing – ha! Those laws cost a lot of money to have put in, didn’t they? I mean, a lot of palms had to be greased. Strip that sucker dry, and then exit, stage left.

            If you had said anything else, it would have surprised me.

            People, sociopaths are running the asylum!

  11. Greg

    Nice piece Nathan

    I think you make a great point when dividing the household from the business sectors.

    One of the things that I heard about Japans experience, and maybe this explains why they dont seem to be doing as bad as so many think they should be, is that their debt bubble of the late 80s early 90s was a corporate debt bubble not a household debt bubble. So business investment fell, liquidations rose, stocks fell but households were still able to consume for the most part. When a corporation has debt trouble there are lots of ways politicians can (and will) ameliorate the consequences. They arent as eager to step in for households.

  12. Jeremy Grimm

    I very lazily jumped to this point without reading all the previous comments — apologies if my comment is redundant. I associate the notion of inflation as a relief for debtors, with the “Cross of Silver” speech by William Jennings Bryan. The idea then was that dollars in gold or silver kept growing … growing farmer’s debt with them. Too few dollars for the size of the economy left farmers paying more and more on the same debt.

    I think this old belief is the root of the notion that inflation is beneficial to debtors. The nuances of modern finance do not erase the power of this idea, though I confess I am unable to follow the arguments in this post — intended to lead me to conclude that inflation is NOT beneficial to debt.

    The relationship between inflation and an individual’s income is highly problematic — and though discussed in the post, it complicates without elucidating.

    1. Nathan Tankus Post author

      Farmers have a direct benefit in a rise in the price of their goods since they sell what they produce directly to the market. It makes sense that in the late 19th century and at various other times they saw a rise in prices as benefiting them. the problem is that as the economy gets relentlessly more capitalistic- ie laborers become “free” of property- the connection between price increases and wage increases become disconnected. in our modern world inflation doesn’t necessarily “trickle down” to people’s wages and directly reducing nominal debts or increasing wages are the only ways to truly relieve the burden of workers debts.

    2. Nathan Tankus Post author

      the short form is this: you have to ask whose in debt and what prices are rising to know which sectors are feeling a more of a debt burden and whose feeling less of a debt burden.

    3. Mike Sparrow

      The problem with inflation/debt relationship is not a singular answer. Both Paul Krugman and backwardsrevolution both fail miserably. They take intellectual and linear approaches.

      For example, total debt in commercial real estate is very low in real terms. This is ground for a bubble. Hot money looks for the little niches that have not been tended to in some time and CRE is a excellent candidate despite some of its slowness since 2000 being demographic. Then once the hot money flows boost spending, the herd follows and a bubble becomes a reality. This is what happened in the 90’s once it was clear in 1999 the tech boom had crested and they needed a new sector. 2002-06 became a self-prophecy. How this inflation of CRE and deflation of commodities effect inflation hit everybody a bit different.

      1. backwardsevolution

        Mike Sparrow – Paul Krugman is an elite puppet who won the pseudo-Nobel Prize because he says what the elite want to hear. The elite know it’s a bunch of bull, but Krugman doesn’t. A patsy.

        Hot money might be looking for these “little niches”, but they certainly wouldn’t be acting on them if it wasn’t for cheap and extremely available credit. If hot money were made to pay some “risk” money for going after these little niches (commercial real estate – gag me – over-built everywhere!), they’d think twice.

        No, easy and cheap credit is first initiated by the Fed, with the Presidents and other politicians helping out: Bush with his “every American deserves a house/get out and consume” and Obama with his “buy stocks”. Then the first ones take a bite. Bankers, realtors, mortgage brokers, media all cheer on the crowd, rah-rah. Others join in. After all, why not, they’re practically giving the money away (no money down/no doc/cash back). The Ponzi is now starting to fly and…..well, you know the rest of the story. Rates are kept down artificially low, demand rises because everybody wants something for nothing and they’re chasing gains, and prices begin to rise. Blah Blah.

        Nice try at reshaping history, but your fantasy approach doesn’t cut it. These bubbles are manufactured and engineered (not some idiot looking for a niche). Too much hot money changes hands between politicians and vested interests for it ever to be that they’re looking for niches. Yeah, right! Ha ha.

  13. Roland

    The inflation of the 1970’s mortally wounded the postwar North American labour movement. Yeah sure, the unions, through frequent labour action, could keep pace with the monetary expansion. But by the late 1970’s, the constant strikes wearied much of the union membership and angered much of the public.

    When the right wing really started attacking the unions in 1980’s, the unions no longer enjoyed broad-based political support.

    1. backwardsevolution

      Roland – which is too bad, Roland, because without some labor strength (there is virtually none now because the elite have made sure of that – illegal immigration/H-1B’s, etc.), the average working man doesn’t have a chance. All they do is follow the propaganda and media direction, where they’re herded into one Ponzi scheme after another. It’s sad, but it will revert again. Everything does.

      I often wonder what’s worse – the financial parasites we have now or the unions of the 70’s. I’ve always said that most people would never even dream of asking for a raise if it weren’t for pricing constantly rising. I mean, if nothing went up in price, why would you ever bother? IMO, prices rise first, and then labor asks for a raise. Some see it the other way around, but that just doesn’t make sense (because of what I said above).

      The elite crushed the unions in order to take all of the profit for themselves, which is what they’ve been doing. When they shipped the jobs overseas is the day that people should have stopped buying any of their products – period! Boycott the lot of them.

    2. craazyboy

      Been thru one of the strikes. It sucked. White collar employees were trying to build the backlog stuff for 3 months! (productivity sucked) New orders dropped off because customers knew you were on strike. Worse was going into your review as an “exempt” employer and being told “we are not having inflation at this company!” and you get your 5% raise and outside in the world inflation is 12%.

      Then much later I learned it was all due to the 60s – early 70s Fed with a too cheap monetary policy in order to keep financing cost of the Vietnam War down. I thought that was really dumb and maybe they realized they made a mistake, or something. Nah.

      1. backwardsevolution

        craazyboy – good example. Same with the Roaring Twenties – Fed’s monetary policy of cheap, available credit caused the bubble, the crash, and then the Depression. Even old Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Whenever you see the Fed with their hands in the cookie jar, you can rest assured that a bubble is not too far behind.

          1. backwardsevolution

            Nathan – I’m not a fan of Milton Friedman, I’m not a fan of any of these financial parasites, but I agree with him on this. The housing bubble, the stock bubble, the commodities bubble (Goldman Sachs/J.P. Morgan, cheap money, and lots of warehouses/tankers full of commodities) – all caused by the Fed and their cheap, easy-to-get money. The big boys pile in first, and then the herd follows along. Same old, same old. Wage inflation? The elite are never going to allow that to happen again, not on their watch.

            Central bankers meeting every other month in Basel, Switzerland are not meeting to discuss Swiss chocolate.

            1. Nathan Tankus Post author

              How can you not be a fan of Milton Friedman but agree with him on the most central tenet of his ideology? It’s like saying you’re not a fan of Obama but you like what he did with the banks, health care, financial regulation etc. I’m not up for debunking monetarism right now but you’ll find a wealth of materials criticizing the doctrine by searching Naked Capitalism.

              1. backwardsevolution

                Nathan – I don’t know enough about economics to rip apart monetarism vs. Keynesianism. I hate all of this ridiculous terminology, and economics is a pseudo-science that should be flushed down the nearest toilet. It gets used by the elite to justify their actions. All I know is that the average guy is suffering, and I know I do not like that.

                The Fed and all of the other central banks are in control of our lives. What has become painfully obvious to me is that in their attempts to bail out the banks (and other elite), we all suffer. Our currency buys less because of government’s increasing debt: “Currency inflation divides the real wealth pie into smaller and smaller pieces, devaluing each one in a form of forced loss sharing.”

                The dollar buys less and less every year. This is what is really killing everyone. What used to cost me $500.00 not so long ago now costs me $1,000.00 to buy. Any money I had saved for retirement is now worth less. It is unrelenting and it hurts people.

                But worst of all, everything we are doing – demanding more and more growth – ends up raping and killing the Earth. We are like obsessed parasites who can’t stop ourselves. It will be our undoing.

                1. Nathan Tankus Post author

                  Than perhaps you should take the opportunity to search nakedcapitalism for critiques. This site is a really great resource- when you’re willing to learn.

            2. craazyboy

              Don’t mix up asset bubbles and what the Fed and all monetarists call “inflation”, ie CPI or the other index “measures”.

              That is precisely the problem ( or cool part), the Fed looks at inflation indexes to modulate the gas pedal, but the loose money goes to fueling the asset bubbles. Then bang – and it’s bailout time.

              1. backwardsevolution

                craazyboy – I don’t think the Fed looks at inflation indexes. If they do, it must be to have a good laugh around the central bank water cooler. They know inflation is much higher than the CPI shows: food, housing, everything is going up a lot more than what the CPI says.

                The Fed is purposely channeling money to their friends in order to pump up asset prices. It knows exactly what it’s doing. This is done with intent. You see the Fed coming in and modulating the gas pedal, giving the economy more or less (trying their best to help the economy), whereas I see the Fed as far less benign, more malignant.

                The Fed is owned by bankers; they are their first priority. The way I see it (and it’s apparent from their actions), they could care less about society as a whole. Sure, they want to keep us alive in order to benefit their friends, and if we happen to benefit from their actions, fine, but their first priority is to the bankers and other vested interests.

                Bankers are in the business of making money. The Fed steps in to assist them. They engineer and manufacture various bubbles (changing them up as they see fit). Soon bankers are flowing in money from various schemes, but eventually they (because they’re greedy bastards) get in over their heads (as does the public). Things start to turn ugly, losses begin to appear, and because they don’t want to take their losses, more money is added, new bubbles are hatched, and on we go.

                I know there are a lot of people who see the Fed as benign, merely an institution that is there to help when needed. I’m not one of them. I see them as a destructive force that is killing the country.

                1. craazyboy

                  I certainly don’t see the Fed as benign. I wish someone could find the “smoking gun” proving they are evil by intent. Lots of circumstantial evidence tho.

        1. craazyboy

          To clarify, I don’t think monetary policy works, unless the economy works reasonably well. So having the Fed run or fix things is quite silly. It gets even sillier in light of a world economy.

          I’m not one that is a big enough fan of typing to want to go into the hundreds of pages it would probably take to flesh that out properly. But I’m fairly certain todays unprecedented loose money doesn’t result in inflation – unless we get hyperinflation because the country just failed.

          My ultra short reason would be that 40 years of neoliberalism, globalization, warmongering, and financialization has changed the structure of the economy, so if the Fed is using their old economic insights, they have been making another mistake for quite some time now. The result will be different – another financial crisis, or M&A results in job loss/job quality loss or the exodus of jobs from the country continues, or who knows what. (taking the naïve view and assuming they have our interests in mind – and not the people that are really making out lately)

        2. Ben Johannson

          Inflation is not solely a monetary phenomenon. Most of the time it isn’t a monetary phenomenon. Friedman was wrong.

  14. tiebie66

    I found the post quite interesting, particularly because the symmetry of logic suggests that it could be applied to debt and deflation as well. It casts Fisher’s debt deflation process in a different light.

    Despite all the debunking, the basic economic act remains, for good, an exchange of goods and services for goods and services. If you produce too little, goods become scarce; too much, goods become plentiful. The use of tokens allows some flexibility and much sleight of hand, but ultimately economics cannot be severed from the conservation laws of physics.

  15. backwardsevolution

    Nathan Tankus – a lot of people took out second mortgages/Helocs. They spent this money into the economy, sometimes buying another house to flip. A lot of this money has not been paid back. In a way, you could say that “some” people did get a “wage increase”. They got money (that they still owe on); it just hasn’t been paid back yet, if it ever will be.

    Others (quite a substantial number) have not been paying their mortgages at all (for up to four years). You could say that this is extra income (a wage increase). The banks don’t want to foreclose because they don’t want to have to write off the debt. Everything sits in limbo, and yet the homeowners are, in a way, getting a hefty wage increase because of it.

    I know it’s not the average person doing this, but there are pockets of people out there who are getting, not a wage increase, but an increase nonetheless.

    1. Nathan Tankus Post author

      lets be coherent. that isn’t a wage increase its a reduction (or elimination) in debt servicing and an unrecognized fall in the face value of debt.

      1. backwardsevolution

        Nathan – I’m trying to be coherent, but it’s late and I’m getting tired. I did say, “…not a wage increase, but an increase nonetheless.” I know it’s not a “wage” increase, but it is money that they didn’t have to pay, allowing them to save it or expend it elsewhere. If I don’t have to pay my property taxes or someone else doesn’t have to pay their rent (just hypothetical) and instead gets to pocket the extra money they ordinarily would have paid, is that not an increase in income? In my world, it is.

        I agree, most workers have not seen wage increases, but “some” most certainly have.

        1. Nathan Tankus Post author

          its not an increase in their wages, its a reduction in the value of debts ie a reduction in their cost of living. the most basic parts of cost of living are basics of food, shelter, insurance and debts. This is why Hudson talks about how the FIRE sector makes the U.S. less competitive because finance, insurance and real estate extract ever larger sums out of them. defaults militate against that trend because debts that can’t be paid won’t be paid, to quote hudson.

          1. backwardsevolution

            Nathan – I think we’re agreed that it’s not a wage increase, but I’m certainly not going to just agree that “it’s a reduction in the value of debts”. Of course, it is that, but it’s more. If I’m making $4,000.00/month, for example, and I usually have to fork out $1,200.00/month for my mortgage payment, but now I’m refusing to pay this money (although I still get to live in the house), instead of having $2,800.00/month left over to spend elsewhere, I now have the whole $4,000.00/month.

            The first month I buy a flat screen TV, the next a new air conditioner and a two-day trip to Disneyland, the next I buy a new camera and flash, some new tires for the cars, and on and on.

            My neighbor says, “Dude, how are you doing all this?” I explain, then say, “Well, the economic gurus say I’m not making more money, that it’s some sort of reduction in the value of my debts.” The neighbor says, “Who cares what they call it, it’s like you’ve just had a big raise of $1,200.00/month.” I say, “Yeah, let’s go out and spend some of my debt reduction on a few beers.”

            There has been an increase in his disposable income, plain and simple. His cost of living went down, and he has more money in his hands at the end of every month. Picture it: $2,800.00 in the palm of his hands, and then add on another $1,200.00.

            I don’t care what you call it; it’s an increase, not a loss.

              1. backwardsevolution

                Nathan – “…that isn’t a wage increase its a reduction (or elimination) in debt servicing and an unrecognized fall in the face value of debt.”

                Whatever you want to call it. The bottom line is that the borrower ends up with MORE money at the end of the month. The money he now has versus what he used to have has increased. His income has increased.

                But getting back to your post – are you telling me that the first ones into a bubble or Ponzi do not benefit from inflation? Come on! Of course they do. It’s done over and over again. Sure, the last ones in get killed because they bought at the end and paid way too much, but the first ones in get in, wait, wait, wait, and then quickly get out. They definitely benefit from inflation.

                After the last crisis the Fed stepped in, handed out cheap money to their friends, pushed up commodity prices, house prices (private equity/institutional buying), food prices, stock prices. All of this price inflation has severely hurt the ones who paid way too much and are barely hanging on. I get you there.

                But the ones who got in at the beginning, they are laughing. Inflation has definitely helped them.

  16. Arthurian


    Your “basic math” works for *flow* variables like GDP, Federal deficits, and the annual change in private sector debt. It does *NOT* work for “stock” variables like the Federal debt or total accumulated private sector debt.

    Sometimes, things that are “clear” are incorrect.

    1. Nathan Tankus Post author

      your link doesn’t contain an argument, just a link to a data analysis unrelated to my post. Explain how i can pay back a debt divided by the price level in nominal income.

      1. Arthurian

        Nathan, I am not arguing that you “can pay back a debt divided by the price level in nominal income.” I am arguing that your “basic math” does not apply in cases like debt, where the total accumulates over several years.

        1. Nathan Tankus Post author

          this is obfuscation. when dealing with a stock flow ratio like a sector’s debt to its income explain why dividing the numerator or the denominator by the price level but not dividing both by the price level is valid. Repeating your assertion is not the same as an argument.

          1. Arthurian

            “… explain why dividing the numerator or the denominator by the price level but not dividing both by the price level is valid.”

            A flow number like income or GDP represents a total for one year. A stock number like accumulated debt or accumulated savings is a total for many years. One year versus many years; this is the key difference. The inflation in the one-year number is not the same as the inflation in the multi-year number.

            To adjust income or GDP for inflation, we can take the value for any one year in the dataset, divide it by the “price level” number for that same year, and multiply by the price level for the “base year”. This is a commonly used calculation and there is nothing wrong with it.

            That calculation does not work for multi-year accumulations like debt or savings, where the total for any one year includes amounts from many prior years. Each “price level” number is good for one year only. There is no single price level number that can be used to correctly remove the inflation from a multi-year accumulation of debt.

            To solve this problem, adjust each year’s *addition* to debt separately. Each year’s addition to debt is a total for one year. So it is easy to find the right “price level” number for each year’s addition to debt.

            Again: To adjust a “stock” variable for inflation, break it down into “flow” components, adjust the components separately for inflation, and then add up the inflation-adjusted components. For example, take the Federal debt, break it down into annual deficits, adjust each year’s deficit separately for inflation, and then add up the inflation-adjusted deficits to get the inflation-adjusted Federal debt.

            I refer you again to my link above.

            1. Nathan Tankus Post author

              this is incoherent. there is no reason to adjust each years change in debt and income by that years abstract measure of the price level and add all these numbers together. all that produces is nonsense. what’s producing a difference in the ratios from nominal to nominal and real to real is inaccuracies in measurement and changes in the basket of goods used in these abstract measurement that make the data set useless for doing balance sheet analysis, whether that analysis is done in nominal terms or real terms.

              taking the nominal stock of debt at any given year and comparing it to nominal income of that year is perfectly valid. I don’t go back 20 years to pay my debts, I pay my current nominal debts in nominal dollars. I pay my debts in dollars and that doesn’t change year to year. All you’ve done is play an obscurantist game with me because you’re very excited about an irrelevant data analysis and want to propagate it somewhere. please respond to the actual point or stop responding.

              Edit: I realized that I was wrong in my initial reaction. the difference in ratios can’t be produced by changes measurement inaccuracies or changes in basket of goods. You have to be not dividing the change in federal debt and the income of that year by that years price level but instead arbitrarily choosing which one to divide by the price level. You’re still doing exactly what i’ve described as invalid and you haven’t defended it with any actual arguments besides “well i’m doing it so…..”

    2. washunate

      I’d say your employment of aggregate debt numbers is exactly the kind of sloppiness the author is describing.

      Inflation only makes debt payment easier if the money printing goes to people who need the currency units. That kind of inflation is exactly the opposite of what the US has been doing over the past few decades. In our system, the money printing is going to the wealthy. This actually makes debt harder to pay off for the bulk of Americans since it increases prices without a corresponding increase in income. You are assuming inflation is caused by median wage growth when that is exactly the proposition being critiqued.

      That’s why the ‘stock’ of debt you write about is so high now. Everything from cars to condos to colleges have become ridiculously expensive under the deluge of inflation. If we gave that money to average citizens instead of connected insiders, debt levels would be much lower.

  17. dcb

    I’ve been writing about this for years and it drives me bonkers that with 6th grade (fractions and %) math I can show it’s true (inflation does not lower debt burden ) and prominent economists say it does over and over. along with the lay press.

    For the life of me I can’t understand how economists keep saying this.

    It does not mean it can’t lower debt burden, but it doesn’t mean that it does.

  18. p

    What you’re really concerned with is the metric being used to measure inflation. This is a genuine concern for many, many discussions. Not just those surrounding debt. In fact, this is almost always the case when dealing with macro variables.

    A more accurate title would have been:

    “Why CPI Inflation May Not Erode Specific Debt Balances and What This Means for the Deleveraging Process”

    What is really wrong with the mainstream macro stuff underlying much of the discussions around inflation is due to the fact that they never talk about the distributional aspects of inflation. But that speaks to wider problems with (a) the mainstream macro framework and (b) the (ab)use of inflation metrics by economic institutions in our societies.

  19. washunate


    Right on. The use of poorly defined terms is one of the major reasons why economics has become such a discredited discipline. Especially in our present era, it is negligence and obfuscation to imply that median wages are related to prices.

    Because if we acknowledged that there is no such thing as a general price level, well, the whole academic justification of the looting of trickle down economics would collapse in a heap of self-interested econ spewing jibberish. Oh no, “deflation”, how terrible that we make food and housing and education and healthcare and recreation more affordable for folks in the bottom 80% of the wage distribution. What kind of society does that? I mean, people might not have to work 40 or 50 hours a week to obtain the basic necessities of life. And if they didn’t, then society would fall apart as the unwashed masses had the gumption to demand things of their government. We can’t have citizens wandering around with free time on their hands.

    1. todde

      The problem with your post is that the first thing to deflate is wages.

      When a business has prices to high sales decrease and inventories pile up.

      The action that businesses always take before dropping the price of their goods or services is to slash their labor costs by firing workers or decreasing pay.

      Also consumption slows because why would I buy something today when I know that in the future it will be cheaper because of deflation.

      And why invest money and take a risk when you can hold cash and increase your future purchasing power risk free?

      Be careful what you wish for.

      1. washunate

        You make decreasing pay sound like a terrible thing. Yet income inequality is the root problem in our system. Highly paid employees shouldmake less in real terms relative to the rest of the workforce, both in a moral sense and for cold, basic economic efficiency. Now because wages are sticky, it’s easier to raise low-end pay than cut high-end pay in nominal terms. But the basic principle is that extreme concentration of wealth and power is unsustainable over the long term, and the longer public policy tries to sustain it artificially the worse the consequences in ongoing preventable human suffering and ultimately massive dislocation in some kind of collapse/reset/revolution/whatever.

        The fact that wage pressure is on the bottom rather than the top demonstrates that there is no link between some kind of aggregate general price inflation/deflation and some kind of aggregate general wage level going up or down. It is the distribution that matters.


        Are you familiar with investing, actual investing in a business venture, not the faux kind of Vanguard paper investing we do today? What you are describing is saving. Saving is a very good thing. Investing, though, is completely different. The point of investing is precisely to increase your future purchasing power by taking risks to earn a rate of return above that of the risk free rate. You are not saving past labor (wealth) for transport into the future. You are creating new wealth to have in the future. It is the difference between buying a book that has already been written (saving) and writing a new book (investing). Both are good activities; they are just different kinds of activities.

  20. Jeff N

    I’m so confused. I’ve been telling everyone for years that wage inflation + price inflation = a reduction in debt burden.

      1. Jeff N

        of course, that makes sense. but price inflation cannot be *sustained* without corresponding wage inflation.

        1. Nathan Tankus Post author

          I hope you’re right about that. in the mean time trying to raise prices without trying to raise wages can cause a lot of damage even if in some “long run” its unsustainable.

  21. Steven Greenberg

    The inflation/debt argument really only applies to long-term debt – mortgages, student loans, etc. And, yes, it depends on the historical relation between price inflation and wage inflation.

    Rabid outsourcing and destruction of unions (related to each other) seems to have broken the connection between price inflation and wage inflation. If that connection remains severed, then inflation won’t do for the economy what is has done in the past.

    When economists build theories on historical evidence of relations and correlations, they must always ask what caused those relations and correlations. If those causes are no longer present, then they are probably looking at a history that does not apply to current conditions. Not surprisingly, applying the wrong historical precedents leads to faulty predictions about the future.

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