How does inflation affect banks?

Loans unsuitable as protection against inflation

The low interest rates also ensure that more and more German citizens are getting into debt.

This tendency is reinforced by the fear of inflation fueled by the media.

Low Interest Loans: Don't Be Too Myopic!

The hope is that inflation will devalue the loan and the "clever" investors will then get a property - or other material asset - particularly cheaply because they can repay the loan with an inflation discount, so to speak.

But in my opinion this logic is too simple to work out.

Interest rates are so low today precisely because we hardly have any inflation and the markets really do not fear any.

If there was actually a threat of inflation, the banks would have to price this immediately into the interest rate as an inflation surcharge.

Inflation therefore always goes hand in hand with significantly rising lending rates.

No bank is so naive today and gives cheap loans that it will only get back in the future if it has been canceled.

The interest rates are so low because there is NO threat of inflation

We only have such low lending rates today because there is no threat of inflation. So I expect exactly the opposite, namely deflation.

In a crash in particular, there is a risk that loans will be reclaimed. Then more and more money flows into debt servicing and is missing for consumption.

Therefore every real crash creates a deflationary tendency. The best example of this is the crash of 1929 and the subsequent deflation in the Great Depression of the 1930s.

Deflation is the real danger

And it is precisely then that it looks completely fatal for the supposedly “clever” debt makers: In deflation, loans are realistically revalued because the purchase value of money increases.

So you have to raise more and more money in order to be able to guarantee the debt service.

If this is no longer possible for you, the bank will very quickly proceed to foreclosure on the pledged property.

But even if you can still pay the debt, it is often enough for banks if your circumstances change to terminate the loan agreement.

It can be enough that you become unemployed.

Fear of loss is causing banks to cancel loans that they consider to be unsafe for security - even if there is no real reason to do so.

The performance of the pledged item can also be dangerous

Another risk can arise from the performance of the pledged item:

If, in a deflation, the value of your property falls below the amount of the outstanding loan and no longer secures the loan, the bank can also terminate the loan agreement and run the foreclosure auction.

Conclusion

Avoid debts or pay them back as soon as possible!

No one has ever gone bankrupt because they did not go into debt - but very many have been completely ruined by debt.

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