Lars Syll rounds up two great quotes on the interaction of inflation with debt, one from Keynes, one from Fisher, and they both point out something which should be obvious, but not many people understand.
Deflation makes the nominal value of debt larger relative to current incomes, and increases the difficulty of paying off that debt.
“6) the dollar may swell faster than the number of dollars owed shrinks; (7) in that case, liquidation does not really liquidate but actually aggravates the debts, and the depression grows worse instead of better, as indicated by all nine factors; (8) the ways out are either laissez faire (bankruptcy) or scientific medication (reflation), and reflation might just as well have been applied in the first place.”.
I’d say this hold even for low levels of inflation. How many real world assets depreciate in value at only 2% per year? I’d like to own a car or house where I could put zero money into it and have it depreciate in value at 2% per year. It’s recommended you spend between 1.5% and 3% per year on a house to keep it in top shape.
The world of money and the real world must have some meeting point, some place where they agree on terms. Since most lending is done against real estate, and much of the worlds wealth is held in real estate, a prime candidate for this point is at the depreciation rate of real estate values.
What are these debts Keynes and Fisher speak of, these debts which will throw sand into the gearbox of commerce? They are real estate lending debts, at least in todays society.