As public balance sheets were growing at an unprecedented pace during the early days of the pandemic and even during the build back from the financial crisis -- a cycle which has never quite turned -- much discussion was had in the business and economic press about how equilibrium might eventually be regained. There are two basic paths out. Annual government deficits could shrink through reduced public sector spending and increased taxes. Or we could inflate our way out of it.
This second option is less intuitive. Inflation measures the cost of a basket of goods purchased at a given point in time. As costs go up, people get paid more. We're seeing that. So people get more money for each our of their time.
But what doesn't rise is the real cost of debt -- measured in the amount of time it takes to earn an amount of money. So someone with a 30-year fixed mortgage who makes a payment of $1500 a month has to work fewer hours to earn that amount of money, which means that servicing her debt is now cheaper for her.
This is also true for governments. A billion or trillion dollars of fixed rate debt becomes cheaper for a public sector entity who is benefiting from increased taxes on wages, sales, etc.
The problem is that this process is regressive in its benefit in that it helps only those who have bought things by borrowing money. Homeownership in the US has risen from a nadir reached after the financial crisis, but there are still an awful lot of people paying rent. Over time, rising rents and the collapse of retail real estate should bring more rental housing into being and bring down costs. But that will also depend on the liberalization of zoning and less zealous NIMBYism.
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