hi all, I have two rudimentary questions about economics.
When inflation is low, why is it harder for households/govts to cut their debt loads?
Why does low inflation postpone household/business spending and investment?
When inflation is high, you get to pay off debt with cheap currency; when inflation is low, you have to pay off debt with expensive currency.
When inflation is low, there’s less urgency to buy today as the price will be essentially the same tomorrow. When inflation is high, there’s incentive to buy today before the price increases.
Thank you. I read about this earlier in the WSJ and was scratching my head. To me the tricky part of economics is keeping track of all these moving pieces, while remembering which assumptions belong with which graphs.
My line of thinking was that low inflation meant expansionary policy, implying cheap interest rates on debt and easier to pay off. Do you have any advice for keeping my economic deductions on the right course as I continue to study?
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Thank you. I read about this earlier in the WSJ and was scratching my head. To me the tricky part of economics is keeping track of all these moving pieces, while remembering which assumptions belong with which graphs.
My line of thinking was that low inflation meant expansionary policy, implying cheap interest rates on debt and easier to pay off. Do you have any advice for keeping my economic deductions on the right course as I continue to study?
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Be careful with your deductions because low inflation does not mean expansionary policies.
Look, inflation is the consequence of the economic agent decisions. An expansionary, fiscal or monetary, policy leads to higher inflation, and the increased inflation level is seen after the policy. This is why we always talk about expected inflation, because expected inflation will change interest rates now and therefore will change the consumption and investment levels.
Start again. Imagine an expansionary monetary policy. This policy is set by reducing the interest rates given by the central bank, so the commercial banks now have more money to lend at a lower rates. Since there is commercial competition those banks will lend to people and companies at a lower rates. Now the companies and costumers have more money at lower rates so they spend more in goods and services. The increase of demand over the almost static supply will cause prices to rise creating the observed inflation (current inflation). Already knowing this, if I tell you we will lunch a expansionary monetary policy again what will be your inflation rate expectations? Exactly, to rise again.
The same happens with expansionary fiscal policy, but this time the vehicle is rising public comsuption and investment so economic agents have more resources spent around and this will lead to higher prices (higher inflation), but of course a higher aggregate demand.
Regards