Wholesale prices up 0.4% for month, 8.5% for year

yeah, but what if inf was 2% when I took out the car loan & 7% when I took out the sig loan?????

 

you seem to have a fixation on nominal rates & further, you're assuming real rates increase with inf (you may not realize that you are making this assumption). look at this. was not true in the 1970s

 

Do you know who you’re arguing with?

 

You'd be that much closer to default, as everything else is costing you more and therefore your debt is less sustainable to service. If you're really arguing that drowning in debt is okay so long as inflation continues going up, I think we're done here.

 

Psst….he’s an economics professor

 

Well, that's scary.

 

Everything is costing you more but you're taking in higher revenues to pay for it. And if the real interest rate is less than 0, you make money by borrowing. Right now inflation is at 8.3% and 10 year bonds are at 3.9%. That will change over time as the inflation rate comes down, but at the moment the US is making a lot of money by borrowing, and the US is making even more money on older debt at lower rates.

 

not what I am saying. As far as the real value of debt FALLING, we are saying the same thing. you posted that bond prices have gone down. In fact, the best scenario for this bout of inflation is not that it continues - BECAUSE that is what will drive up long term borrowing costs, which are driven more by expectations of future inf rather than current inf. In sum, the real value of debt is insta reduced when inf goes up, but the cost of servicing that debt (which depends on real, not nominal rates) is sensitive to expectations of future inflation.

the place I am working at now has taken out about .5 billion for capital projects at silly low rates. They are looking like geniuses.

yet another way to think about it. Do you really think folks with 3% 30 year mortgages are kicking themselves?

 

Are you sure you didn’t go to Auburn and not just using their cheer?

 

Only if they have to continue borrowing additional money at higher rates to repay that 3% 30 year mortgage. Then yes, they are kicking themselves in that scenario. As for expectations of future inflation, that was my entire point to begin with. That being the Fed does not want to chance inflation becoming par for the course, as it will inevitably drive borrowing costs higher. The big elephant in the room on this convo is of course, the Federal government has the fallback of arbitrarily raising their debt ceiling whenever the need is seen. Ordinary borrowers such as you and I don't have that option. So the Federal government kicks the can down the road. At any rate, inflation begets higher interest rates and it will cost the government more to borrow, which was the point I was making from the beginning. Inflation reducing the value of real debt doesn't mean anything if you're having to take out new debt at a higher rate to repay the original debt.

Tell me please, with all due respect, are you one of those "the national debt doesn't matter" types?

 

you keep assuming that inf increases borrowing costs. All I can figure is you don't understand what the cost of borrowing means. the 1970s had high inf & very low borrowing costs....

 

You posted 2022 actuals. I linked a 2023 forecast, which says we'll produce record oil domestically. We aren't producing record numbers today. If the forecast is wrong, I'd admit it. If it's right, will you admit it?

 

I'm not an econ professor like you, but it looks like to me borrowing costs/"real rate" in the US rose significantly from 1976 to 1982 based on this graph, which was when inflation spiraled and then real rates have been mostly on the decline since the inflation bubble burst in the early 80s up until recently. In fact, the highest "real interest rate" noted in this 70 year graph is in the period of time correlating with the highest inflation numbers seen during said 70 year period. Borrowing costs went up with inflation, more than any other time period on the graph.

 

The only reason why we went off on this tangent is because @okeechobee said inflation "will make our national debt ungodly expensive. It already is, but if rates go much higher, the interest payback on our debt is going to be catastrophic" which is only true for new debt. The $31 Trillion we already had declines in real value, that's my point, inflation is not all bad for borrowers and can be a good thing.

That's just a fact. I'm sorry that you two can't seem to comprehend this. But here's a link I found, to a federal reserve blog, stating just that....

Possible Effects of Recent Inflation
In summary, the recent burst of inflation in the U.S. and the rest of the developed world will have two effects: It will immediately reduce the real value of existing debts, but it will also tend to raise expected inflation—and therefore yields—perhaps for years to come, which will increase the cost of borrowing in the future.

Inflation and the Real Value of Debt: A Double-edged Sword

 

Yes, the real rate of interest jumped from -7% in 1975 to +6% by 1982 when we were at peak inflation. A 13% swing upward in real rate of interest which correlates perfectly with the increase in inflation during that same time period, which also happens to be the largest swing upward in real interest rates on the entire 60+ year graph. Thank you for supplying the data to back me up, Sir!

 

wow. all this data & you pick literally 1 pt. wadda you think the correlation coefficient is for that data? I bet isn't even positive.

back you up? direct to the post where you mentioned real rates

 

However you slice it, real rates peaked at the end of a prolonged inflation cycle. Any rational thinker looking at that graph is going to tell you inflation inevitably led to higher borrowing costs. There may have been some ups and downs along the way, but the end result was a higher cost to borrow. I'm surprised you're even attempting to debate it. All the while ignoring the fact that the 14% inflation made everything else around us more expensive to purchase.

 

Things don't become more expensive because nominal prices increase. They only become more expensive if real prices increase.

 

It is true for new debt which also includes the refinancing of mature debt. I know that the USG did refinance some of their debt a few years ago(which was smart) but I am fairly confident that the range of interest rates on the debt is fairly wide.