Why inflation is seen as the solution to debt….

Is inflation the solution to the issue of high national debt? When debt is high and requires more debt to keep the economic system going then the situation is critical.

What could happen? The set of choices, without being alarmist, include austerity, war, revolution, major economic reset, high inflation or more debt.

Kick the can down the road with more debt

Most of the time, the least impacting choice in the short term is more debt. More debt does not cure debt but it does delay other more painful options. One day, however debt option will no longer be viable when creditors lose confidence and other options are forced on society. These creditors need not be directly the providers of loans but any group or nation that currently accepts the national currency.

Let’s try Inflation as well

The next least painful option is inflation. To work, the rate of inflation has to be higher than the interest rate to make the real interest negative. Inflation would need to be also high enough to overcome the additional debt burden that is continued to be added to keep the system going. Practically speaking consider an example of nominal interest rates at 1% then inflation should be 6-10% (or higher) to reduce the debt at a meaningful rate. Of course, someone’s debt is someone else’s asset so high inflation will reduce the asset value of such debt so this inflation should be done in secret or quickly enough before asset owners demand higher interest.

Hide the inflation so it can actually take hold

Looks like the secret option is currently being pursued as with the CPI calculation being so debated…. The issue with this ‘hidden’ inflation is that real wages decline, which for has a bonus of improving productivity (yea!) – at least until workers can’t meet their basic needs in life like eating, clothing and shelter. Lower real wages also reduces consumption related demand thus reducing prices and putting downward pressure on inflation. So raising hidden inflation actually results in lowering real inflation…..This interesting contradiction is enabled as the inflation is focused sectors and industries such as housing, health, education and energy and these are under-represented in the inflation calculations. Low inflation items (imported goods, technology improved items) are used to obfuscate the real inflation.

Hidden inflation is not working, open it up!

The hidden inflation has been underway for years ad this is shown in energy prices, housing, health, equities, etc. The debt in the meantime continues to accelerate.

However readers may question the existence of current inflation if Gold, the archetypal hedge, has not seen price increases. Precisely because of its special nature as an inflation barometer that the Gold price has been kept down to keep the inflation hidden.

Decreasing real wages means more workers can no longer meet their needs with their income and more drastic action is required. Government action will be to give more money to workers (e.g. tax cuts) and openly acknowledge inflation which will also drive wage claims to kick off inflation cycle. Other actions like system reset, martial law, austerity, real war or even revolution all seem extreme in comparison but all remain on the table.

Next stop: big time inflation

So open inflation appears to be the next best answer to address the debt issue. However how can inflation remain higher than debt if debt increases exponentially....without the people rebelling?