Posted on by Art Powell

This post is to accuse the Buttonwood columnist in The Economist of encouraging the theft of people’s savings.

In the Nov 30th 2013 issue he/she says “Debt needs to be reduced by default, inflation or financial repression (keeping interest rates as low as possible).”

Lots of others including economists concerned with government policy make similar statements.

The problem is that one person’s debt is another person’s savings. Therefore when debt is reduced by default or inflation it is going to take away from somebody’s savings. This might be more visible if loans were made directly from a saver to a borrower without the financial intermediation of banks.

It might also be easier to understand if we were to define money as something representing purchasing power. Thus a loan is a transfer of purchasing power from the lender to the borrower. If the loan is not repaid because of default or is reduced by inflation then the lender has lost some of his/her purchasing power.

Some people might say the losses from default are carried by financial institutions. This is true only if the banks are making excess profits. If they are not making excess profits and maybe even if they are the losses are most likely to be spread over all their depositors in the form of reduced interest payments.

Of course people who owe lots of money, especially governments, benefit from inflation because they don’t have to repay as much purchasing power. The ideal should be price stability – zero inflation and zero deflation.

However it happens default or inflation reduces the purchasing power previously owned by savers. To me this is theft by or on behalf of borrowers.

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Filed under: Economics | Tagged: banks, Buttonwood, default, financial institutions, financial intermediation, inflation, money, purchasing power, savings, The Economist, The Econommist |