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.
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