The only way to get out of a debt disaster without making hard choices about spending cuts or raising extra revenue via taxes, is to ruin your currency through inflation. The problem for politicians though, is that the U.S. dollar is the nicest house in a bad neighborhood, for now anyway. And the U.S. government can’t let that continue forever if they want to avoid an austerity reckoning.
Inflation, for the most part, is how we regularly get out of debt as a country. “The post-WWII debt decline was partly due to strong economic growth, but mainly due to the government shafting bondholders with unexpected inflation. Inflation reduces the real value of outstanding debt, and thus imposes losses on creditors. The ability to cut real debt by inflation depends on the debt’s maturity and whether creditors expect inflation. If the average maturity is long, the government can reduce the real debt load with unexpected inflation,” writes Cato’s Chris Edwards.
The problem today is that the average maturity on the debt is half of what it was in the 40s (you need more time on the clock to let inflation do its ruinous work) and the ownership, rather than 100% U.S. investors, is half owned by foreigners. Inflating the money supply quickly to deal with the shorter term debt could anger Americans and damage political careers. And don’t expect foreign creditors to go quietly into the night if they get paid back with mini dollars. Unlike the post-World War II era, politicians and Federal Reserve bankers will have to use more finesse if they want to employ inflation to manage America’s debt without causing trouble for themselves at home and abroad in the process.
Read the recent CBO report on debt here:
Latest posts by E.J. Smith (see all)
- A Risky Addition to an Otherwise Decent Dodd-Frank Reform: Part II - May 25, 2018
- A Risky Addition to an Otherwise Decent Dodd-Frank Reform - May 24, 2018
- A Warning for the Global Economy - May 23, 2018