Inflating Your Troubles Away

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Michael Kinsley is understandably skeptical that once we’ve stimulated our way out of the recession we’ll all suddenly see the light and begin saving more and consuming less.  So what will happen instead?

There is another way. If it’s not the actual, secret plan, it will be an overwhelming temptation: Don’t pay the money back. So far, even as one piggy bank after another astounds us with its emptiness, there have been only the faintest whispers about the possibility of an actual default by the U.S. government. Somewhat louder whispers can be heard, though, about the gradual default known as inflation. Just three or four years of currency erosion at, say, 10 percent a year would slice the real value of our debt — public and private, U.S. bonds and jumbo mortgages — in half.

Inflating away debts is a time honored tradition, but hasn’t its time passed in the developed world?  Most domestic debts (adjustable mortgages, credit card rates, etc.) are tied to LIBOR or the prime rate, which generally follow the inflation rate.  So if inflation goes up, so do your payments.  No help there.  As for foreign debt, inflation would weaken the dollar — assuming arguendo that other countries all kept their inflation in check at the same time — but that would cause interest rates to rise in response.  A weaker dollar would help exports and reduce domestic consumption, which is good, but higher interest rates on treasury bonds would make our fiscal situation worse, not better.  So there’s no help there either.

Do I have this right?  Or is Kinsley right to be concerned?  Isn’t inflation hedging too built in to our current economic system to offer the kind of benefit he suggests?

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And right now, we need to raise about $400,000 from our online readers over the next two months to hit our annual goal and make good on that mission. Read more about the information war we find ourselves in and how people-powered, independent reporting can and must rise to the challenge—and please support our team's truth-telling journalism with a donation if you can right now.

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