Inflate away the debt? Yes, that is a stupid idea …

September 11, 2009

As Bruce Bartlett correct observes:

Although it is thought that inflation is an effective way of
reducing the burden of debt, this is no longer true. For one thing, a
declining portion of the debt is financed with long-term securities.
Today, just 3% of the debt consists of bonds with maturities of 20
years or more; 10 years ago, the proportion was four times greater. To
the extent that the debt consists of short-term securities that must
constantly be rolled over, inflation does nothing to erode its value
because interest rates just rise to compensate, raising interest
payments and borrowing, thus maintaining the real value of the debt.

Inflation
will also cause the dollar to fall on international markets, which will
cause foreigners to dump their bonds. With foreigners now owning more
than 50% of the privately held debt, this may force the Treasury to
issue foreign currency denominated bonds. At this point, our finances
will effectively be controlled by foreigners and the International
Monetary Fund (IMF), just like Third World countries.

No one knows the point at which debt becomes unsustainable. According to an IMF report,
the critical point is when a government is borrowing just to pay
interest on the debt. According to the CBO, we will reach that point in
2019 when the federal government is expected to borrow $722 billion and
its net interest expense will also be $722 billion.

2 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Raising the debt ceiling last week certainly didn’t help anything.

Posted by Frank | Report as abusive

Thanks! That’s a sobering new perspective. Of course, one should never play cards with a magician…

Posted by Pete Cann | Report as abusive