Deal With The Debt!

Or face serious inflation. To my mind, the key test of the Obama administration next year will be a serious move to get long-term deficits under control. It's asinine to expect fiscal improvement in the depths of a deep recession, and dumb to want government to cut back now. But in ten years' time? John Taylor sees the scenarios that could take place if we don't get a handle on long-term entitlements and defense soon:

Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth – probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.