Inflating Away the Debt

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Tyler Cowen points today to John Hussman saying something that’s been in the back of my mind for a long time but never quite made it onto the blog:

Here in the U.S., [debt held by the public] amounts to about 60% of GDP and rising, due to recent budget deficits of about 10% of GDP annually. This is presently manageable since so much of that debt is of short-maturity and is being financed at very low interest rates.

….Still, it’s precisely that short average maturity that makes the debt problematic from a long-run perspective, because it can’t be inflated away easily. In the event of sustained inflation, the debt would have to be constantly refinanced at higher and higher yields. Contrary to the assertion that the U.S. can easily inflate its debts away, it is clear that sustained inflation would create enormous risks to our long-run fiscal condition by driving interest costs to an intolerable share of revenues. At that point, any shortfall in GDP growth or government revenues would result in a rapid spike in debt-to-GDP (as Greece and other peripheral European nations are experiencing now). Prior to embarking on an inflationary course, the first thing a government would want to do is dramatically lengthen the maturity of its debts.

This is true, isn’t it? I keep hearing repeatedly, from tea partiers and assorted tea party leaners, that the real danger we’re running isn’t that the United States will literally default on its debt in the future, but that it will try to inflate away its debt. Sort of a soft default, if you will.

But that’s not even possible, is it? The vast bulk of U.S. debt matures in three years or less, which means that a bout of inflation would simply raise the cost of borrowing. Virtually all debt holders would roll over their holdings long before inflation had any serious effect on them and the government would gain nothing. On an inflation-adjusted basis, the new debt issued would be about as expensive as the old debt.

So where does this whole “inflating away the debt” meme come from? Is it just the gold bugs, or is it coming from somewhere else too? What’s the deal?

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SIX TRUTHS

Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

Truth #2: Team Reality is bigger than it seems.

Truth #3: Facebook owns this.

Truth #4: When we go to work, we're in the fight.

Truth #5: It's about minority rule.

Truth #6: The only thing that can save us is…us.

Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

And if you think journalism like Mother Jones'—that calls it like it is, that will never acquiesce to power, that looks where others don't—can help guide us through this historic, high-stakes moment, and you're able to right now, please help us reach our $350,000 goal by October 31 with a donation today. It's all hands on deck for democracy.

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