How bank lending could lead to widespread inflation?
- What is the consequence of the increase in bank loans on the generalization of inflation?
- Case concrete generalization of inflation
Where a creditor (e.g. a bank) and a debtor (e.g. a household) are bound by a fixed interest rate, inflation favors the debtor at the expense of the creditor (credit). Consider a household that borrows from his bank a sum S the nominal interest rate of 8 %, payable the following year.
If inflation is zero, the bank key in the following year the sum plus interest provided either: S * (1 +0.08). The sum has the same value as paid (S).
With an inflation rate of 3 %, the bank still affects the amount plus interest provided either: S (1 +0.08). But the sum made the repayment year allows the bank to buy less than it could have bought the year of the loan. The actual value of the rebate is received: (1 +0.08) * (1-0, 03) * S is approximately (1 +0.05) * S of the sum lent. This means that in real terms, the debtor repays less. And even much less than the rate of inflation exceeds the nominal interest rate of the loan.
When the inflation rate is higher than the nominal interest rate, the real interest rate is negative: that is to say we earn money to borrow. It also stimulates demand and tends to further fuel inflationary pressures.
Inflation costs for the whole economy, linked to difficulties in efficient allocation of resources and also gains linked to irrationality in financial markets.
Faced with the threat of inflation, the creditor may only partially cover, inflation is an unpredictable phenomenon. It can then either be used to cover financial systems , including swaps interest rate established relationships , and ask in new relationships guarantees , such counterparties ready insensitive to inflation ( mortgage property, inflation-indexed value , indexed property reference like gold for example) value or reimbursement rates indexed to inflation ( variable rate mortgage ) .