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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: copper000 who wrote (28465)3/12/2005 12:12:31 AM
From: Elroy Jetson  Read Replies (1) of 110194
 
Historically, increasing inflation erodes the profit margin of people who have already lent money at fixed rates.

Once inflation has increased, but now remains stable, lenders are not impaired further.

Let's say a lender borrows money from savers at 3% and lends at 6%, that's a 3% margin.

Let's say inflation now rises to 9% and the bank must now pay savers 10% - obviously the lender is losing money on the existing 6% loans. Lenders margins are compressed by rising inflation.

But new loans, for which they charge 13%, they have the same traditional 3% margin.

When inflation declines, borrowers tend to refinance at lower rates, eliminating any extra profit margin lenders could expect from declining inflation.

The real loss occurs when the central bank creates more money eliminating a portion of the value of everyone who has money.
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