Case 1: Inflation rate is 5%, interest rate is 10%. I loan somebody $100; at the end of a year he or she pays back $110. I have gained $10 of cash due to interest, and lost $5 of value due to inflation. Net gain of $5.
Case 2: Inflation rate is 0%, interest rate is 5%. I loan $100; get back $105. I have gained $5 in cash, not lost or gained any value. Net gain of $5.
Case 3: Inflation rate is -5%, interest rate is 0%. I loan $100, get back $100. I have not lost or gained any cash, but have gained $5 of value due to deflation. Net gain of $5.
Case 4: inflation rate is -10%, interest rate is -5%. I loan $100, get back $95. I have lost $5 of cash, but have gained $10 in value due to inflation. Net gain of $5.
What is wrong with this argument?
Case 5: Inflation rate is -10%, interest rate is now adjusted by the government to -10%. I loan $100, get back $90. I have lost $10 of cash, but have gained $10 in value due to inflation. Net gain of $0 and there is risk. So I don't make loans in this case, either...
Hmmm.
