Inflation not an option to get rid of debt

Count_Dante

So says UBS via FT Alphaville:
http://ftalphaville.ft.com/blog/2009/08/04/65156/the-debt-inflation-myth-debunked-by-ubs/

UBS wrote:

The problem with the idea of governments inflating their way out of a debt burden is that it does not work. Absent episodes of hyper-inflation, it is a strategy that has never worked.

This is because:

As an example, the US can expect to roll over almost 45 per cent of its debt in the next 12 months and some 55 per cent over the course of the next two years. So according to UBS, if there is an inflation surge in the next 12 months, the US government would expect that to be reflected in higher borrowing costs — thus negating any ’sympathetic’ inflation-impact on its national debt. There’s also the issue of TIPS, or index-linked (inflation-linked) securities.

So it seems inflation isn't going to work for the government to reduce it's debt. However, a few commenters on the site have mentioned that inflation might be good for heavily indebted private debtors.

Really2

Inflation only works if there is wage inflation.

low inflation = Low IR.

I would argue low IR gets debt paid back faster than high inflation.

Generali

Count_Dante wrote: »

So says UBS via FT Alphaville:
http://ftalphaville.ft.com/blog/2009/08/04/65156/the-debt-inflation-myth-debunked-by-ubs/


This is because:


So it seems inflation isn't going to work for the government to reduce it's debt. However, a few commenters on the site have mentioned that inflation might be good for heavily indebted private debtors.

There's also something which is missed by all commentatros that I've read.

So we 'inflate our way out of trouble'. What's the process?

Problem: poorer people have borrowed money they can't repay
Solution(?): Induce inflation to reduce the value of those debts.

2ary problem: If you have inflation, outgoings rise on a monthly basis but income rises annually. People become insolvent faster than debt is reduced in real value.

Tertiary solution?

Actually create an economy that works - low tax, incentives to get off your bottom etc.

JonnyBravo

Generali wrote: »

Tertiary solution?

Actually create an economy that works - low tax, incentives to get off your bottom etc.

I come here for sensible economic chat not pie in the sky, fly by the seat of your pants, finger in the air, willy nilly, crazy talk. :rolleyes:

Really I do.

Count_Dante

Of course, governments can always fake a coup http://www.theonion.com/content/video/u_s_government_stages_fake_coup?utm_source=a-section

amcluesent

Inflation is now policy IMHO (given the name QE to bamboozle), why...

1) Economically it's stealing from the future. Labour needs votes now, ergo short-termist Clown is relaxed about putting inflation back into the system. NB All socialist escapades collapse with inflation or the regime just shoots people to stay in power.
2) Labour has crippled us with off balance-sheet PFI wheezes with 30 years of payments ahead. Inflation will erode the pain of these payments, which is tough on the companies after they build the schools/hospitals etc.
3) The government will hold down public sector pay increases while letting inflation go, so they cut public sector pay by stealth.

No left-leaning politician can resist the siren song of inflation!