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Furthermore, collateral is not indexed to inflation. When inflation increases, the real value of the debt falls, no matter what the effect is on interest rates.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Dec 12th, 2011 at 12:35:39 AM EST
[ Parent ]
That would not do you any good if the interest rate behaved like the loanable funds models predict and just added inflation to the market-clearing real interest rate. It would help the bank, because your unpayable loan (due to high interest compensating for the reduction of the excessive principal through inflation) would be secured on less crummy collateral. But it wouldn't help you.

Fortunately, interest rates don't work according to the loanable funds model.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Dec 12th, 2011 at 01:04:06 AM EST
[ Parent ]
Oh yes, I didn't think about that. Still, it would work if you hadn't got a variable rate loan. Having a fixed rate loan is, more or less, a bet you make on what the inflation rate will be.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Dec 12th, 2011 at 01:22:26 AM EST
[ Parent ]

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