Inflating our way out of debt

The Congress has recently raised the official debt ceiling to $14.3 trillion.  This amounts to about 100% of GDP and is a sign of trouble ahead.  What is rarely mentioned is that this total does not include future unfunded obligations which run the total into the neighborhood of $100 trillion.  This level of debt is unsustainable and the day of reckoning may well occur this decade.  How can such massive debts ever hope to be paid?  There are four basic methods available to address the debt.

  • Rapid GDP growth
  • Rising inflation
  • Increased taxes
  • Outright default

As illustrated by the Laffer Curve and confirmed by history, the current level of taxation is near the point where higher levels will depress GDP growth.  Additionally, the sheer size of government at all levels will make it very difficult for the economy to grow sufficiently to reduce the ratio of debt/GDP.  This leaves default or inflation as the realistic options.  Outright default is politically unfeasible, requiring the government to renege on future Social Security and Medicare benefits, and current interest payments on the debt.  Inflation, which is a quiet, long-term form of default, is in all likelihood what the US will be experiencing in the future.  This paper demonstrates how this can be accomplished with a surprisingly modest level of inflation.  When you hear the term “quantitative easing” in the news, you’re seeing inflation being imposed on the economy.  In an inflationary environment debtors will be relatively better off, while savers will be crushed.

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