Kinsley on inflation impacts on debt and wealth:
Here's an easy prediction: Soon, many of the people who have been talking about how the return of high inflation is terribly unlikely will start talking instead about how a bit of inflation is harmless or even healthy for the economy. In fact, it's already started. This is from a news article in the New York Times: "[T]he purchases [of debt by the Federal Reserve Board] have improved economic conditions, all but erasing fears of deflation…. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds."
Why are people talking this way? Here's the missing explanation: Inflation reduces the value of debt. If poorer people are on balance borrowers and wealthier people are on balance lenders, inflation can help to reduce one of our most serious economic problems, which is the increase in income and wealth inequality. More important, inflation is the only conceivable easy way we can pay down the national debt to a manageable size, or at least slow its growth.
This is how it works: The debt ceiling we're about to crash through is $14.3 trillion. But even as we borrow more (about $1.6 trillion this year), inflation erodes the value of what we already owe. At an inflation rate of 2.7%, $14.3trillion will be worth about $13.9trillion in today's dollars a year from now. That's nearly $400billion wiped away from the national debt without fuss, without debate and seemingly without cost or pain. A quarter of the deficit. And that's with inflation at record lows. If inflation were 5%, it would wipe out $715 billion; at 10%, nearly the entire projected annual increase in the national debt, even at its current record high of $1.6 trillion.
Of course, it would also wipe out people's savings at the same rapid clip. Anyone who lived through the inflation of 1979-81 knows that there are noxious social effects as well. To say that inflation, at 2.7%, has "climbed closer to healthy levels" is insane.
Here's an easy prediction: Soon, many of the people who have been talking about how the return of high inflation is terribly unlikely will start talking instead about how a bit of inflation is harmless or even healthy for the economy. In fact, it's already started. This is from a news article in the New York Times: "[T]he purchases [of debt by the Federal Reserve Board] have improved economic conditions, all but erasing fears of deflation…. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds."
Why are people talking this way? Here's the missing explanation: Inflation reduces the value of debt. If poorer people are on balance borrowers and wealthier people are on balance lenders, inflation can help to reduce one of our most serious economic problems, which is the increase in income and wealth inequality. More important, inflation is the only conceivable easy way we can pay down the national debt to a manageable size, or at least slow its growth.
This is how it works: The debt ceiling we're about to crash through is $14.3 trillion. But even as we borrow more (about $1.6 trillion this year), inflation erodes the value of what we already owe. At an inflation rate of 2.7%, $14.3trillion will be worth about $13.9trillion in today's dollars a year from now. That's nearly $400billion wiped away from the national debt without fuss, without debate and seemingly without cost or pain. A quarter of the deficit. And that's with inflation at record lows. If inflation were 5%, it would wipe out $715 billion; at 10%, nearly the entire projected annual increase in the national debt, even at its current record high of $1.6 trillion.
Of course, it would also wipe out people's savings at the same rapid clip. Anyone who lived through the inflation of 1979-81 knows that there are noxious social effects as well. To say that inflation, at 2.7%, has "climbed closer to healthy levels" is insane.
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