Inflation and Exchange Rates
As noted below, debt is normally denominated in a particular monetary currency, and so changes in the valuation of that currency can change the effective size of the debt. This can happen due to inflation or deflation, so it can happen even though the borrower and the lender are using the same currency. Thus it is important to agree on standards of deferred payment in advance, so that a degree of fluctuation will also be agreed as acceptable. It is for instance common to agree to "US dollar denominated" debt.
The form of debt involved in banking accounts for a large proportion of the money in most industrialized nations (see money, broad money, and demand deposits for a discussion of this). There is therefore a relationship between inflation, deflation, the money supply, and debt. The store of value represented by the entire economy of the industrialized nation, and the state's ability to levy tax on it, acts to the foreign holder of debt as a guarantee of repayment, since industrial goods are in high demand in many places worldwide.
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Famous quotes containing the words exchange and/or rates:
“I live in my house as I live inside my skin: I know more beautiful, more ample, more sturdy and more picturesque skins: but it would seem to me unnatural to exchange them for mine.”
—Primo Levi (1919–1987)
“[The] elderly and timid single gentleman in Paris ... never drove down the Champs Elysees without expecting an accident, and commonly witnessing one; or found himself in the neighborhood of an official without calculating the chances of a bomb. So long as the rates of progress held good, these bombs would double in force and number every ten years.”
—Henry Brooks Adams (1838–1918)