Why We Won't Inflate Away the Debt

Karl Smith hits some of the themes that I've expressed recently:

First, its actually not that easy from a technical point of view. A significant portion of the US debt is in very short term securities, like 90 days. If I remember correctly the bulk of foreign holdings is in securities with a maturity of less than a year. This is because they are using Treasuries as a liquidity vehicle and under those circumstances you want the shortest maturity possible.

So what happens with this massive inflation? It simply drives up the interest rate of Treasuries. You get to screw investors for 90 days and then much of the jig is up.

Second, large domestic holders of Treasuries are folks the US government has implicitly agreed to backstop: pension plans, major US banks, insurance companies, state and local governments. What is the point of screwing these folks out of their money if you are just going to turn around and give the money right back to them?

Third, why is this better than a structured default? Its not as if people are going to be oblivious to the fact that they were screwed. Having done it raises the risk premium on US debt. Not the default risk premium but the inflation risk premium. What do you really accomplish with inflation versus structured default?

Fourth, what do you accomplish period? Structured default scares everyone because of the prospect that it will bring a crushing recession. An effective attempt to screw holders of US Treasury bonds should accomplish the same thing. Whose interest is that in? The Fed? Politicians? Bureaucrats?

I just don't see the internal constituency for saying, yeah lets inflate away the debt.

Never mind the constituency; I don't see the point.  In fact, we'd get longer than Karl postulates, because money supply data is noisy; it would take a while for the markets to realized what had happened, and that it was US policy, not a blip.  But we wouldn't have much more time--a few years, not a few decades.

Presented by

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.

Never Tell People How Old They Look

Age discrimination affects us all. Who cares about youth? James Hamblin turns to his colleague Jeffrey Goldberg for advice.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

Never Tell People How Old They Look

Age discrimination affects us all. James Hamblin turns to a colleague for advice.

Video

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

Video

Pittsburgh: 'Better Than You Thought'

How Steel City became a bikeable, walkable paradise

Video

A Four-Dimensional Tour of Boston

In this groundbreaking video, time moves at multiple speeds within a single frame.

Video

Who Made Pop Music So Repetitive? You Did.

If pop music is too homogenous, that's because listeners want it that way.

More in Business

Just In