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Inflation is not bad for everyone, just ask debtors

Inflation is a pain. It costs more for dinner, fuel, and lodging – you can’t even buy a used car without seeing the savings evaporate as prices go up, up and up on that creaky old Subaru that would have been a good deal months ago.

But there’s a thin line of money: Inflation has started to eat away at the debt burden of people who owe money, a small favor anyone with a mortgage or student loan can be thankful for.

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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 the most on record in many advanced economies.

The reason this is happening is that the huge economic growth resulting from the lockdowns is linked to soaring levels of inflation, which together reduce debtors’ debts relative to the overall size of the economy. This considerably lowers the share of private debt:

  • The amount of debt held by households rose from 80.4% of GDP to 79% of GDP in the United States during the second quarter, the same figure rising from 62.5% to 61.2% in the area euro and from 67.9% to 66.5% in the G20.
  • Businesses enjoy the same terms – total credit to the U.S. non-financial sector rose from 165.8 percent of GDP to 161.3 percent in the second quarter, and profits rose 37 percent from a year earlier, according to data released last month by the Commerce Department.

Of course, almost all debt levels remain higher than in early 2020 as low interest rates and government stimulus made it easier to get loans.

Exaggerated expectations: If and when central banks take action to curb inflation by raising interest rates – which happened in the UK and Norway on Thursday – the loot will flow to the big banks. Higher interest rates would allow them to make billions by charging more on loans – Wells Fargo and Bank of America, for example, have both said they could generate more than $ 7 billion in revenue with a hike short and long term rates of 1%.