Monday, May 24, 2010

Using Inflation to Reduce Public Debt and Rout Entitlements

A relatively simple way to reduce public debt and rout government entitlements is through inflation. The phenomenon of using inflated dollars to pay for existing debts is a well understood benefit of inflation. Similarly, cost of living increases tend to lag inflation resulting in reduced entitlement obligations.

The aggregate increase in the Consumer Price Index (CPI) between 1973 and 1982 inclusive was approximately 85% (see How High Can Inflation Go…?). However, even a relatively modest 5-9% annual inflation rate over a ten-year period can reduce public debt and entitlements by at least half. Also interesting is the fact that the government does not need a public referendum to “print” money. Indeed, an extended period of inflation could be a slick way to solve the nation's deficit and public debt problems...

Related Posts:

How High Can Inflation Go...?

Repairing Sovereign Indebtedness: Get Ready

Using Inflation to Erode the US Public Debt

Implications of the Financial Crisis


VangelV said...

Inflation is not so easy to pull off because of the duration problem. America's lenders are way down the curve and you have the bulk of the debt being retired or rolled over within a few years. This means that any attempts to inflate will be met by much higher interest rates. The alternative is a loss of confidence in the currency and the death of the USD. I am sorry but the solution is much harder than promoting inflation and Bernanke knows it. That is why he was not as aggressive in his Jackson Hole speech and why he will stand aside and let the Treasury flood the system with liquidity by using Fannie and Freddie to reset mortgage rates to much lower levels.

Dr William J McKibbin said...

Hi VangeIV, inflation is every bit that easy to "pull off" -- all the government has to do is what it has been doing now for a century -- watch and learn -- all fiat currencies in history of been consumed by inflation at some point -- that's a fact...

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