Inflating away the debt?
I just ran across an interesting comment, claiming that the Fed is planning a “controlled” inflation. It’s in a comment to Dave Cohen’s latest post on ASPO-USA:
A fellow on CNBC today said that the decision has been made by the Federal Reserve Bank that the US dollar has to be devalued by 50% over the next 15 years to allow the National Debt to be able to be managed. I think his name was Jim Richards. He was on very early. He said that the Federal Reserve has determined that the $60 trillion debt to be incurred by the US in the next 15 can’t possibly be paid. No combination of growth and tax increases can do it. Trying to do so would collapse the US, and thus the world, economy by destroying world trade. The plan is to cut the US debt in half thru inflation. The IMF will create a new money out of thin air to use to boost international trade. It is already being quietly done. I was surprised to learn that only 4% inflation will cut the value of the dollar in half in 17 years. That is the plan which the Fed will adopt – target a 4% inflation rate for 15 years. The US promised the G-20, that if the market tries to rapidly collapse the dollar, they will raise interest rates quickly in big chunks to prevent a rapid dollar collapse. At least that is the plan agreed to at the G-20. I told people when AIG and all the rest got bailed out, that the only way to deal with that amount of government debt was to inflate it away.
Chris et al., do you suppose they could actually hold inflation within that bound for that long? (Caveat: I did a little searching, and couldn’t find a link to anything like this.)
By the way, I find Cohen’s posts an interesting complement to Chris’ posts. Cohen’s focus seems to be different from Chris’, so it makes for a richer perspective. Here’s links to some recent posts (unfortunately, the site lacks a good way to search for articles by author):
- http://www.aspousa.org/index.php/2009/07/the-sixth-extinction/ (especially follow the “planet of weeds” link)
I enjoy Cohen’s articles too – very well reasoned. As far as “inflating away debt,” I agree with an article that appeared on the George Washington blog:
August 28, 2009
Commonly-accepted wisdom says that we can inflate our way out of our debt crisis.
Ben Bernanke and Paul Krugman apparently think we should force inflation on the economy. University of Oregon economics professor Tim Duy thinks the U.S. will ultimately try to inflate its way out of debt.
Warren Buffet says:
A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it’s going to inflate its way out of the burden of that debt.
But as I have previously noted, UBS economist Paul Donovan has demonstrated that governments can’t inflate their way out of debt traps, saying:
The problem with the idea of governments inflating their way out of a debt burden is that it does not work. Absent episodes of hyper-inflation, it is a strategy that has never worked.
Megan McArdle points out
It is a commonplace on the right that we’re going to have enormous inflation, not because Ben Bernanke will make an error in the timing of withdrawing liquidity, but because the government is going to try to print its way out of all this debt.
Clusterstock notes that it doesn’t quite work this way:
As this chart shows, instances of declining debt-to-GDP rarely coincide with periods of inflation. If it did If it did, we’d see more dots in the lower right-hand
The bad news for central bankers is that creating currency isn’t like, say, diluting shareholders in a company. You’re always rolling your debt, and the market’s response to an inflationary strategy is (not surprisingly) higher interest rates. It’s a treadmill, and it’s extremely hard to get ahead.
Inflating your way out of debt works if you’re planning to run a pretty sizeable budget surplus–big enough that you won’t have to roll your debt over. Otherwise, your debt starts to march upward even faster, as old notes come due, and you have to roll them at ruinous interest rates. Hyperinflation might wipe out that debt, but also your tax base.
Just as a hungry lion will not leave prey alone unless his hunger is reduced, our massive debt can only be dealt with by starting to pay down the debt.
Instead of trying to outrun the hungry lion, the monkey should (climb a tree) grab any food he can find and start throwing it towards the lion. If he gives the lion enough food, the lion may leave him alone for the time being. And if he gets busy finding food to keep giving the lion, the lion may eventually learn to see him as an ally, instead of a meal, and make sure the monkey is safe.
And as I have previously written, abolishing the central bank and taking over the money and credit creation functions from the private banks may be an important part of the solution to our debt trap. See this and this.
Source: Washington’s Blog for the entire article
The power of compounding is what would devalue the dollar by 48.7% in 17 years with only 4% inflation.
In maths that is 100/ (1.04)^17 = 51.34.
In words 100 divided by 1.04 to the power of 17 (1.04 multiplied by itself 17 times) gives you 51.34.
Or, take a calculator, tap in 100. Now divide it by 1.04, seventeen times.
This is the effect of compounding over 17 years, and would be even more dramatic with higher inflation.
Thanks for the math. There’s also a simpler, but less accurate, estimating tool that can be used here, since the goal is a reduction by half: the “Rule of 70”: dividing 70 by 4 (percent per year) gives 17.5, which is a good estimate of the number of years to reduce the dollar’s value to half its starting value. (Wikipedia has a good article on the rules of 69, 70, and 72, which are usually used for compound growth, but can be used “in reverse”, as here.)