New Ekonomistas post (in English). This is an English translation.
That low inflation and deflation increases the debt burden is well known to many. For instance, under the heading ”The spectre of eurozone deflation,” Martin Wolf recently wrote in the Financial Times: ”While falling prices would improve competitiveness, they would raise the real burden of private and public debt. This might well create another round of financial stresses.” Lower inflation than expected leads to higher real debt than anticipated and planned, and thereby increases the debt burden. In Sweden, a zero inflation rate during the last two years has led to real debt increasing in two years by SEK 40 000 for each borrowed SEK million, compared to if inflation had equaled the inflation target of 2 percent. But is this known and understood in the Riksbank? At the press conference after the publication of the Financial Stability Report on November 28, Governor Ingves was asked, if the low inflation rate made household indebtedness worse. What did he reply?
Question (29 minutes into the press conference, in Swedish): The low inflation rate that we have, does it make household indebtedness higher?
Ingves: Interest rates are low, and then it is easy to borrow. Sweden has done well for a long time. This has contributed to it being easy to borrow, because Swedish banks has found their financing easy, not least compared to many other banks. But in this context, this with the inflation rate is not a particularly significant issue.
Question: But the loan-to-value ratio must be higher, if inflation becomes negative.
Ingves: Yes, but in the end, and we are discussing and are worried about these issues, that your debt service comes from your current income. That means that that property kind of disappears when you look at different ratios; this is the property that debt has.
Ingves: Furthermore, if your are thinking about the mortgage market, which is the topic here, the fact is that mortgages do not produce any cash inflow, so what is to be paid, that has to be taken out of the current income you have. This is what naturally leads to macroeconomic problems, if you at any future point of time have borrowed too much, because this does not at least lead to, in a first stage, even if you don’t get problems in the financial sector because there are capital buffers that are enough, that it is likely that it hits consumption, because somewhere one has to get the money.
Question: But incomes are also related to inflation, aren’t they?
Ingves: Sure this is the case, but, at the same time, we do not get away from the fact that debt in Sweden, it has doubled, and it has grown under a long time. It takes time to turn around this kind of trend, and this means that these issues, they are not issues from one quarter to the next, but the most likely is that we have to live with these debt issues for a pretty long time, because you don’t turn around a trend like this overnight.
So, does Ingves think that lower inflation leads to higher indebtedness and a higher loan to value or not? Is in this context “the inflation rate not a particularly significant issue”?
But the most important thing here is that the governor and other members of the Riksbank’s executive board are obliged to provide clear and correct information to the media and the Swedish people about the Riksbank’s monetary policy and its consequences. Here, the media and the Swedish people obviously did not receive a satisfactory answer to a serious and important questions.