Entering text into the input field will update the search result below

Is The Ballooning Debt Really Inflationary?

Last week, Kevin Muir wrote a very interesting piece on debt and whether it is inflationary or deflationary. To wit:

"One of the greatest debates within the financial community centers around debt and its effect on inflation and economic prosperity. The common narrative is that government deficits (and the ensuing debt) are bad. It steals from future generations and merely brings forward future consumption. In the long run, it creates distortions, and the quicker we return to balancing our books, the better off we will all be."

As he states, he is no fan of the Paul Krugman's "all stimulus is good stimulus" philosophy. Neither am I.

While I agree with the majority of Kevin's views regarding the impact of debt on the inflation/deflation debate, I do disagree on the following point:

"Creating debt is inflationary, while paying down debt is deflationary. That's pretty basic.

The easiest way for me to demonstrate this fact is to look at an area where debt has been created for spending in a specific area. No better example than student loans.

Over the past fifteen years, inflation in college tuition has exploded. It's been absolutely bonkers. Here is the chart of regular CPI versus tuition CPI."

He is correct, debt used to directly make a purchase of a service or product is inflationary.

I agree 100% with Kevin in his prognosis of how debt affects prices in the short term. However as I will explain, it is the servicing of debt (paying interest and principal) over the long run that applies deflationary pressures to the economy.

As he states, this is basic.

If I have $100, then I can buy $100 worth of goods. That's it. However, if I am able to borrow an additional $200, then I can buy $300 worth of goods. When there is more demand, due to leverage, the price of the product or

This article was written by

Lance Roberts profile picture
Unique, unbiased and contrarian real investment advice

After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; I have pretty much "been there and done that" at one point or another. I am currently a partner at RIA Advisors in Houston, Texas.

The majority of my time is spent analyzing, researching and writing commentary about investing, investor psychology and macro-views of the markets and the economy. My thoughts are not generally mainstream and are often contrarian in nature but I try an use a common sense approach, clear explanations and my “real world” experience in the process.

I am a managing partner of RIA Pro, a weekly subscriber based-newsletter that is distributed to individual and professional investors nationwide. The newsletter covers economic, political and market topics as they relate to your money and life.

I also write a daily blog which is read by thousands nationwide from individuals to professionals at www.realinvestmentadvice.com.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.