The rumbling has started: why not double inflation to start reducing debt? The country is burdened with unpayable debt: mortgages, student loans, credit cards, pension benefits and everything else that’s been consumed without paying for it upfront. So do we just inflate our way out from under our obligations? That seems to be the next can’t-fail plan.
“Raising the expected rate of inflation would reduce the real burden of debt on households, corporations and governments, spurring both investment and consumption,” Profs. Chinn and Frieden write, arguing the Fed should allow inflation to run “in the 4 to 6 percent range for several years.”
The authors recognize their proposal will likely be “met with howls of indignation” from creditors, who would see a policy of intentional inflation — which would reduce the value of their bonds — as an expropriation of their assets. “To an extent, they are right,” the economists say.
But one way or another, they continue, those debts aren’t going to be repaid in full, whether it’s through inflation, default, bankruptcy or negotiated settlements. Better to do it in a way that’s quick and, because it treats all debts equally, at least relatively fair. The logic is the same as in bankruptcy proceedings, they write: “For creditors, something is better than nothing; for debtors, relief is better than default; for both, certainty is better than uncertainty.”
What could possibly go wrong?