How would I respond to this post below. I just need something very short. If I h

Question

How would I respond to this post below. I just need something very short.

If I had a fixed 30-year mortgage and the economy experienced unanticipated inflation,the borrower would be the winner and the lender would be the loser in the given scenario. The reason being is if a society experiences unanticipated inflation, individuals and institutions will change their behavior. For example, potential homeowners will not be able to borrow from banks at fixed rates of interest, but will be required to accept loans whose rates can be adjusted as inflation rates change. Banks do not want to lend money at a fixed interest rate if there is a strong likelihood that inflation will erode the real value of the income stream they expected. However, if banks become reluctant to make loans with fixed interest rates, this imposes more risk on homeowners.  In this scenario the fixed loan was made prior to the unexpected inflation sodebtors will gain at the expense of creditors. Creditors, on the one hand, will lose because inflation will erode the amount of money they planned to earn on the loans. Since the loans have already been made, there

Explanation / Answer

From a borrowers perspective: if the loan is locked in & there is an inflation shock that increases nominal interest rates, if I were to get a loan after the shock, I would have to pay that higher interest rate. This means that more money comes out of my pocket.

On the money supply side, if I already have debt (I am a debtor), inflation yields an increase in the amount of money in the economy. This means where my salary could have been before $50k could increase to $55k to adjust for inflation. This would mean I have an extra $5k to pay off a loan, even though this $5k isn't worth as much as $5k before the shock.

Banks now do not want to lend at a fixed rate because rates are historically extremely low. Therefore, they are hoping that an improvement in the economy will yield an increasing rate environment where they can collect more interest from new loans. Furthermore, a rising rate environment would imply an improved economy, i.e. more loans. Locking in fixed rates for banks locks in a bad deal for them.

Hope this helps!

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