Can we inflate our way out of debt?

I touch on this in my column today but it is well worth a closer look.  There have been times in our history where high inflation has essentially acted like a large scale reduction in public debt.    Essentially, during periods of high inflation, the real value of public debt is in decline.

Between 1947 and 1951 overall prices in Canada increased by an average of 8% per year.  From 1973-1982, prices increased by an average of 9.6% per year.

 

If you had a billion dollars in debt in 1973 by 1982 it would only be worth about $400 million – in real terms.

However, since 1993, the annual inflation rate has only averaged 1.9%.

As a result, in the last 10 years, if you had a billion dollars in debt in 2002 it would still be worth $830 million – in real terms – in 2011.

There are economists that suggest a big round of inflation is on the way which will dramatically cut the value of outstanding public debt.

Trouble is it cuts the value of everything else too – in real terms.

So, I don’t expect any large scale inflation in the coming years.  There will be few short cuts to eliminating deficits and curbing debt growth.

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2 Responses to Can we inflate our way out of debt?

  1. If inflation goes up, interest rates will climb as well. Debts that are currently sustainnable at just a few percent will become unmanageable should consumer rates hit 10 or 12 percent.

  2. Interest rates on Triple A government debt were well below inflation for most of the high inflation years in Canada, the US and the UK.

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