You Can't Inflate Your Way Out of Debt

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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.

debtf.jpg

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.

This applies, in reverse, to the notion that it was perfectly okay for the Bush and Obama administrations to borrow any amount of money, no matter how large, because the flight-to-safety was keeping interest rates low.  In a few years, the Treasury is going to have to roll over a huge chunk of that debt at newer, almost certainly higher, interest rates.


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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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