Nominalism

Nominalism is the principle of keeping the amount of a debt obligation fixed despite fluctuations in the money's purchasing power or exchange rate. Nominalism is a legal principle that states the dollar amount of a loan must remain a fixed figure on the balance sheet. It does not fluctuate with the rate of inflation. This can provide a certain amount of risk to the lender because as inflation rises, the purchasing power of money erodes. When the purchasing power of money erodes, it makes the real value of the repayments of the loan less. Essentially, in an inflationary environment, a lender receives less money back in the form of principal repayment than they loaned.

Nominalism is the concept that the dollar amount of a loan remains fixed on financial statements, despite fluctuations in inflation or exchange rates which may affect the actual purchasing power of the money. Nominalism puts the risk of depreciation on the creditor and the risk of appreciation on the debtor.

XYZ Company, a company located in Morovia, borrowed $1,000,000 on January 1. The inflation rate in Morovia increased significantly during the following 12 months. It increased so much that six months later on July 1, the $1,000,000 that was borrowed on January 1 will now only purchase about half of what it did at the beginning of the year. The value of the $1,000,000 has dropped by 50%. This is bad news for the lender to XYZ Company because their scheduled principal repayments are now also worth only half of what they would've been without the current rate of inflation. However, because of nominalism, the dollar amount of the loan stays fixed at $1,000,000 despite the fluctuations in the real value of the currency.