Inflating Away the Debt?

Some commentators believe that the best way for Greece — and by extension, everyone with a debt problem — to deal with debt is introducing some mild-to-moderate inflationary pressure (or least, the expectation of such a thing).

The problem is, the evidence (thanks to regular reader Andrei Canciu) suggests this isn’t in the least bit effective:

The real solution for the terminally indebted is not to get into debt in the first place. Once you are there, the pressure of creditors means that the chosen path will generally be a succession of unsuccessful Keynesian can-kicks (or, in Europe, crushing austerity) up to a slow, painful default.

As Keynes put it:

The boom, not the slump, is the right time for austerity at the Treasury.

16 thoughts on “Inflating Away the Debt?

  1. Today’s Statement of the Bleeding Obvious award goes to Azizonomics!

    Of course you’re right. Austerity when broke is like making a wound bleed more than it already is. Default is ruinous for reputations, but beyond a point is certain.

    At a certain point, leaders should resign as a matter of convention. Australia’s treasurer Wayne Swan (no prizes for guessing his nickname) used Keynes as an excuse to go into debt, but when growth returned, kept the dent running unabated. He now routinely compares us to Greece and our debt disingenuously to GDP. “Selective Keynesians”!

  2. I am an environmentalist, so I prefer that the world economy takes a breather.

    However, in order to keep the world economy from imploding, We need people to spend, rather than bunker down and incite a deflationary spiral. Unless inflation eats away at savings, people will not be tempted to spend.

    Deflation is a natural cycle anyway. Unproductive items and services will be cast away during this “Austerity” period. Too bad if your job is labeled “unproductive”; Re-evaluate your life, Do something positive.

    I don’t know if you are aware about Australian economic practices, but 2 years ago, at the time of the GFC crisis, the Australian Government, gave $900 to every taxpayer, through their Tax Office nominated bank account. I applauded this because it allowed the free market to see the benefits through direct consumer choice. Not Government spending choice (Mal-investment)

    This kept Australia out of Technical Recession. We have had over 20 years of positive growth (Avoiding technical definition of 2 quarters of successive negative GDP)

    However, our Government is now in debt (Not as high as other nations) and unlikely to have a surplus. With the commodities boom ending, and ill winds blowing around the world, the Government will be unable to provide another direct stimulus method, in times of high deflation and depression. Helicopter money (Money saved via taxes in a sovereign wealth fund, not printed) given to the masses, is the best panacea for a Depression. Then you will see what is productive or unproductive in an economy.

    • I am an environmentalist too, but I believe the world needs organic growth more than ever. Simply, the more growth we get, the higher oil prices will trend, the more money the market will put into alternatives and creating the alternative infrastructure the world needs.

    • The best thing I can say about the Australian stimulus was that it wasn’t a bank-bailing exercise like in the US. We may well see that considering the derivatives house of cards our banks currently have.

      They should have reduced the bank deposit guarantee after the GFC, and not raised it to outdo Turnbull. Our banks as a result took on more risk, bought smaller banks under that safety net, and became too big to fail.

      Also, they could have temporarily lowered taxes to create the same effect, without the cost of churn. P.J. O’Rourke pointed out that the US stimulus almost equalled personal income tax receipts for the year, but much funnier than I ever could.

      Keynesian principles only applied in recession is a recipe for disaster, as it ultimately results in austerity, which governments should have practiced in growth periods.

      As for environmentalism, we need our planet to support us and to provide its intrinsic beauty. Our carbon tax will do neither!

  3. While we are on the subject of the environment, it is worth noting that Ron Paul, who seemingly alone among all the candidates wants to tame the banks and the MIC, also wants to sell off public lands. Public lands have often been abused, but for most people represent their best hope of enjoying Nature. This stance is a big part of why I would have a very hard time supporting Paul, much as I like most of what he says. For all I know he may also be proposing to abolish EPA and all those onerous environmental regulations that have kept us from poisoning ourselves the way the Chinese are so good at.

    • Well I am sure you have considered it (and I am trying very hard to not sound like a dogmatic Austrian here) but the other side of the coin is that land in private ownership might well be better taken care of than land under government ownership. The government have done some good work with national parks, but they’ve done some very bad work with nuclear test sites, Deepwater Horizon, etc.

      The Chinese, should I remind you, do not have private property per se, everything is owned by the state and reapportioned under 100-year leases. In some cases more government control just means more freedom for crony corporations to dump whatever they want, and more land cordoned off for military testing and operations (global empire, etc).

      Plus less government land means they can put in more dollars per square mile. I really doubt he’ll try and privatise Yosemite or Yellowstone, etc.

      There are some things I think Paul will do that will hurt (at least in the short term), but I’m really optimistic about this one.

  4. I wish I could be as optimistic about RP as you, but I am not. Libertarianism is great in theory, but I wonder about the practice. The worst abused lands in Washington state are those owned by the timber companies. It’s not as bad now as it was, thanks to regulations, but standard practice in the past was to log off everything, and do whatever it took to squeeze every last dollar off every last acre. The public paid the price of devastated fish runs,wiped out wildlife…the costs were all externalized.

    Your points about the environmental destruction being far worse under Communism are well taken, though.

    If even someone like me is put off by RP, I wonder how he could ever get elected. It almost seems too convenient, that the one candidate out there willing to go after the bankers and the MIC, can so easily be portrayed as a nutcase. That certainly seems fortuitous for bankers and MIC. There is just something about RP that doesn’t feel right to me, I’m sorry to say.

    • There is just something about RP that doesn’t feel right to me, I’m sorry to say.

      Other people I have a great deal of respect for have said the same thing. They point out various tidbits of information; that he has received support from influential globalists, that he is a Freemason, etc.

      As you probably know, I cannot vote in American elections, although if I could I would certainly vote for Ron Paul because I cannot honestly say any other candidate would be better. Are there aspects of his economic and political thought I disagree with? Yes. Do I think he might screw up? Yes, he might. Could certain things get worse in the short, or even medium term? Certainly.

      But I for one cannot say any candidate in the next Presidential election will come closer to representing most of my views, for better or worse. Then again, I thought Obama would be significantly closer to me on issues (particularly regarding War on Terror, national Sscurity, American Imperialism) than Bush II, and he has arguably been worse. That, though, was an educated guess about a mystery-shrouded junior senator who spoke mostly in equivocation. Ron Paul’s record speaks for itself.

      As regards the mainstream, Paul calls for the deepest and fastest cuts of any Republican candidate. I think that that will carry significant political weight. I personally doubt he can win the nomination, but in various polls he has smashed the “13% libertarian ceiling” the nation press put on him — he’s riding at 25% now in Iowa.

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