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High inflation rates are not bad news for everyone. They can be beneficial to debtors – which in today’s world economy means almost everyone.
In the second quarter of this year, measures of household and corporate debt as a share of economic output saw some of the biggest drops recorded in many advanced economies, according to data released last week by the Bank for International Settlements.
This is not because consumers and businesses have been borrowing less, in dollars, euros or pounds – which they did in the long recession that followed the 2008 crisis. In fact, they are borrowing more. The mere combination of rapid post-lockdown growth and accelerated inflation means that their liabilities have shrunk relative to the overall size of the economy as measured by those same currencies.
The declines over a quarter or two certainly don’t weigh much on the overall debt burden that soared earlier in the pandemic, as central banks expanded credit safety nets for businesses, while mortgage lending took off amid the housing boom.
Almost every type of debt is still larger, as a share of the economy, than it was at the start of 2020, and well above historical standards.
America’s corporate borrowing spree, in particular, has raised some red flags — and while companies generally post profits from pandemic fat, the overall numbers don’t tell the whole story: it may not be companies with debt problems that are activating the cash. High interest rates – the next antidote to inflation – will make debt service more difficult.
However, the data is a reminder that higher prices can have some beneficial side effects – which is one reason central banks spent the decade before Covid-19 trying to engineer higher rates of inflation, even if they are now spinning in the opposite direction. After a greater than expected rise.
What about governments?
BIS figures show a decline in government debt-to-GDP ratios in the last quarter as well. This has been the fastest-growing type of borrowing in the pandemic, just as it has been since the crash of 2008.
Public debt may be less worrisome, because in the developed world it has generally been shown to be less flammable than the private kind.
Debt crises in advanced economies over recent decades have not been the result of governments borrowing too much of their currency, commitments they can always meet. Instead, it has arisen from high levels of private debt — such as the bursting of the Japanese corporate credit bubble in the 1990s, and the collapse of US subprime mortgages in the following decade — or public debt in countries that do not issue their own currency. , like Greece.
With most economists forecasting relatively high rates of inflation, and strong growth in real output, to continue into 2022, the erosion of the debt burden could take further progress.
But in the United States at least. It will take an extended period of wage increases for workers, particularly at the bottom of the income ladder, to revitalize the economy in a way that can relieve household debt burdens, says Daniel Albert, founding managing partner at Westwood Capital LLC. He is skeptical that this will happen.
Albert, author of a recent research paper, “Inflation in the Twenty-first Century,” says the high debt levels of average Americans are the result of decades in which income has shifted from labor to capital. “What is going to lead to the kind of longer, sustainable inflation that you really need to lighten the burden on households?” He says. “The answer is continuous wage improvement, which I don’t think we’ll get.”
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