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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: copper000 who wrote (28465)	3/11/2005 11:57:19 PM
From: bignadda2	Read Replies (2) \| Respond to of 110194

lender is being paid back in dollars that are worth less. assume that you loan someone $100. today, $100 can buy 10 big macs. inflation causes the price of big macs to double. now when you get paid back $100, you can only buy 5 big macs. under this inflationary scenario, the borrower benefited at the expense of the lender.

To: copper000 who wrote (28465)	3/12/2005 12:12:31 AM
From: Elroy Jetson	Read Replies (1) \| Respond to 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. .

To: copper000 who wrote (28465)	3/12/2005 10:00:52 AM
From: LLCF	Respond to of 110194

<Please explain how inflation wipes out the lender.> 1.) Domestic; You have lent 100,000 for 30 years fixed. Currently you can live for 4 years on that amount paying food, kids school, healthcare, etc.... everything. 5 years later, you can only live for 2 years on that amount due to rising prices. Your loan is worth about 1/2 of what it was. Note that it is not clear how much protection keeping money in a MM might offer... in the past short rates had all sorts of regulations on them making them 'sticky' and making them underperform inflation as well. Typically the fed keeps that rate too low, so you may lose substantial sums even staying on the short end of the yeild curve. 2.) International; You have lent a Trillion $US to the US government. Today that is worth about a Trillion Euros, a Trillion Yen, or A trillion of whatever currency {example of course} The Federal reserve just keeps printing money and it starts falling internationally against all currencies. 2 Years later that Trillion is worth only a MILLION Yen, Euro, etc. You've been wiped out. DAK