The glory that is Ritchie the macroeconomist

So, let’s have some inflation to reduce the debt burdens!


Inflation only works as a tactic if it is unexpected. As soon as everyone recognises it it gets priced in.

Well, yes, quite true. Ritchie:

What complete nonsense

We have had inflation targets for years

Sigh. We’ve had the targets so as to anchor the amount that people might price in.

17 thoughts on “The glory that is Ritchie the macroeconomist”

  1. Ritchie’s favourite idea is “Green Quantitative Easing”, which would have the benefit (for him) of increasing inflation.

    Point this out to him though and he does get a bit touchy. I thought he’d be embracing it as another reason to go balls-out on Green QE.

  2. the burden of existing debt will be reduced by inflation whether anybody is expecting inflation or not.

  3. Only fixed interest rate debt. Which would mean most coprorate debt, almost no consumer debt and about 50% of government debt. And given that the idea is to inflate away consumer and government debt doesn’t look all that great an idea…..

  4. Tim,

    I’m not even sure about that. Suppose I have a variable rate mortgage so that the real interest rate is fixed. Doesn’t it matter that the size of the principal is fixed in nominal terms? I may be embarrassing myself in public here.

  5. bloke (not) in spain

    “And given that the idea is to inflate away consumer and government debt doesn’t look all that great an idea…..”

    Not a great idea, but what’s been the core principal of the UK economy for the past few decades. Or so folk who bought their houses for thruppence in the sixties & are now worth a million tell me.

  6. I think you’d find that the falling value of the principal to be repaid would rather quickly be incorporated into the interest rate.

    My guess would be that the yield curve would be rather different for a society with 2% (and steady) annual inflation and one with 10% out along that maturity range. Especially since it’s entirely standard that a mortgage is heavily back weighted on capital repayments. to begin with you’re paying, out of a $1000 a month payment, perhaps $10 a month of captial off. It’s only in the lsat couple of years that you’re paying $950- a month of capital off the principal amount.

  7. Luke,

    Not sure if this helps. You have a nominal debt of 100 to repay in 12 months, variable interest rate.

    Let’s pretend inflation and interest are both currently 0% (or near enough).

    You suggest that inflation and interest rates both rise (ie no change for you in your real interest rate); let’s assume that they both rise to 10%.

    Your corresponding assets may increase by 10% (let’s assume), but so does your debt – 100 nominal + 10 interest?

    Yes, of course that’s simplistic because of significant lags & variations (and other factors) between inflation and interest rates?

    Unless I misunderstood you?

  8. Especially since it’s entirely standard that a mortgage is heavily back weighted on capital repayments. It’s only in the last couple of years that…

    Quite. The figures are mind-boggling: I can get a loan at 1.69%, which means that the first monthly payment is roughly 1/3rd interest, 2/3rds capital repayment. Anyone who bought their house before rates fell should have either paid it all off by now or be living the life of riley.

  9. I do something very similar to this for a living….so let me share my 2p worth.

    Let’s say you are taking a 10y loan for a fixed nominal amount. All things being equal, given equivalence, a fixed rate mortgage and a floating rate one should have the same *present* value at inception.

    In a mortgage calculation typically the nominal final repayment is spread out along the loan’s life, thus amortizing the loan amount. People tend to prefer fixed monthly payments, so any interest cost is also factored in to the amortization to give you the fixed monthly payment.

    For a fixed rate mortgage, this payment will be constant over the life of the loan, but as mentioned above, the capital part will increase and the interest amount decrease over the life. For a floating rate loan that interest portion can obviously change.

    More importantly, a fixed rate payer is effectively “short” rates. If interest rates go up, the value of that mortgage also does as you will be paying less than the now extant market rate. Conversely, if rates go down, a floating rate payer has a “long” position and is better off.

    The important factor is to note that your capital/interest portions are largely irrelevant. If you borrow for 10y *at inception* you can work out the present value of those payments, and fixed or floating should trade at par with each other.

    So where is par? Well, long term interest rates traded in the market of course – be it government bonds or interest rate swaps (plus a credit spread for the borrower’s implied credit rating). And of course inflation is one of the main drivers of those long term interest rates.

    Push CPI up and the guy on a fixed mortgage might be doing very well, the floating rate holder not so well. But that’s because interest rates have risen, and one guy is short, the other long. The actual structure of the mortgage in terms of capital/interest matters little (to be accurate, it does matter in terms of interest rate convexity, but the affect is small in comparison to the first order sensitivity of the loan duration).

    So saying that high inflation will reduce both public and private debt is a bit of a stretch. For some individuals, it will indeed reduce the debt burden. For some it won’t. For governments, even though most bonds are fixed coupon nominal bonds, the debt burden doesn’t really decrease either – simply because the amount of debt being issued tends to at least equal (or exceed in when running a deficit) the amount maturing. And of course new debt is issued at prevailing market rates – so the cost of financing for a government tends to roughly average prevailing interest rates. The idea that we can issue loads of debt now to lock in low interest rates really doesn’t hold too much water.

  10. Price inflation doesn’t reduce debt. It makes debt harder to service, because people have less money left over to pay down debt when they’ve paid for the things they need to buy to survive.

    Only wage inflation reduces debt, because it reduces the value of that debt relative to wages. And most people aren’t getting much of that, because governments have been fiddling inflation figures for years to keep wages low.

    Of course, as mentioned, interest rates will rise in inflationary times, so it’s more complex than just ‘increasing wages make debt easier to pay off’. But, if your wages are going up 10% a year, after a few years the payments will be a small fraction of your income even with interest rates at 15%.

  11. NAIRU
    A concept invented under New Labour once people noticed that the bad side-effects of inflation, such as unemployment, outweighed the good ones. In order to get the benefits of inflation on uunemplyment rates, it has to continuously accelerate.
    Obviously this has no impact on shills employed by the union representing HMRC employees

  12. Bloke in North Dorset

    The other problem with allowing inflation to let rip is that it will the savings of people like me who are just about to retire and there’s a lot of us just coming in to this category.

    We all remember what happened when Labour tried it in the ’60s and ’70s and then what was needed in the ’80s to sort it out. As a demographic we are more likely to vote and any politician that suggests such a route will be severely punished in the polls.

  13. What really does my head in, looking over at Ritchie’s blog, is that someone has asked the following question:

    “I notice that you have long campaigned for local authorities to begin issuing bonds, and indeed this may be about to happen. What do you believe will be the effect upon bond prices, and thus the value of the holdings for the buyers of these debts, of an escalation in inflation ?”

    To which Ritchie correctly responds that they will go down in price.

    But then still insists they will remain the best available investment.

    Honestly, it’s liked some f**ked up Escher portrait.

  14. A target?

    People base their decisions on a target?

    A target that is set by politicians but not within their control?

    Wow. The Big Dick must have someone help him across the road every time.

  15. Tyler

    That was followed up by this exchange:


    ‘All bond prices reduce in real terms if there is inflation’

    ‘They would remain the best investment available’

    I only have a very limited understanding of investments and am probably missing something obvious, but could you please explain how something which would drop in price in the event of inflation would remain the best investment available ? I can see how selling the bond would be best for the local authority, but not for investors.


    You know the answers so I won’t bother


    ‘You know the answers so I won’t bother’

    Candidly, if I knew the answer, I would not have asked the question. I have taken the trouble to contribute a comment to your blog. Perhaps you could do me the courtesy of answering my question.

    If bond prices were to fall because of a rise in inflation, as you have confirmed, how would these investments be the best available ?


    Because others would fare worse

    That’s it, that’s his expertly informed explanation…

  16. @ PF

    He simply has no clue when it comes to finance and economics. Not a surprise really, but I know some people have actually followed his rare investment advice.

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