He argues that there is not enough tax revenue available from seignorage for governments to inflate their way out of their debts. Because of financial innovation and money substitutes, it would take hyperinflation to use money printing to finance large deficits. Hummel says that of all the bad choices the U.S. government would face in a financial crisis, a formal default will be preferable.
As I've noted before, inflating away your debt only works if you don't have to finance current deficits; if you've still got a budget gap, any gains from inflation will quickly be eroded by the higher interest rates you need to pay to roll over your existing stock of debt. The faster that markets start demanding higher interest rates to compensate for inflation, the less mileage you get out of inflation.
And though I'm sure some commenters will scream to hear me say it, most markets have gotten more efficient over time. When I was doing my column on Warren Buffett, one thing I heard over and over is that it's simply harder to be a value investor than it used to be. Analysts now have computers that endlessly screen companies using a ton of different metrics to pick out possible investment targets; the result is that the "hidden gems" value investors used to uncover tend to be found faster and traded up to a higher price, meaning there are fewer lying around than there used to be.
This is broadly true of many (not all) asset classes. Bob Rubin's first job in finance consisted of calling London to find out various prices, and then exploiting any difference between the prices in London and New York. The advent of computer trading system ended this sort of thing.
The broader availability of information on things like currencies makes it much harder for governments to get seignorage. There's a lot of data that would tip analysts to a money supply growing unexpectedly rapidly, which means that interest rates on government debt would rise too fast for the inflation to do much good.
That's why I find the historical examples of all the sovereigns that debased their currency in order to ease their debt burden less than convincing, even though they are much beloved by many history-minded conservatives. I do not want to fall into the error of thinking that we are so modern as to be beyond all that sordid nineteenth century mess; human nature doesn't change much. But technology has, and it has made this particular piece of trickery much harder. The sovereigns who historically debased their currency did so when it was relatively easy to go undetected until things were quite far gone. That is no longer the case.
This article available online at: