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Will people suffer from government’s plan to use inflation to ease burden of national debt?

*The Wall Street Journal, by Michael S. Derby, October 4, 2012

”A U.S. central-bank official said Thursday that using inflation to ease the burden created by high debt levels is a bad idea, in remarks that highlighted an expectation of continued progress in lowering high levels of unemployment.

Federal Reserve Bank of St. Louis President James Bullard also said the European Central Bank is making a mistake with its latest effort to stem the financial crisis, threatening the economic and political future of that region.

Saying there is ‘no free lunch,’ Mr. Bullard observed that ‘inflation is sometimes seen as a way to partially default’ on existing levels of debt.  The official allowed that there is too much debt in the U.S. economy, but he said any bid to use higher inflation to make debts easier to pay back is in effect a ‘partial default’ on those debts.

Mr. Bullard said that ‘a partial default today through higher inflation would be paid for via higher inflation premiums in future borrowing.’  He explained ‘creditors would want to protect themselves against the unpredictable central bank that might surprise them with a burst of inflation.’

‘That type of policy choice would likely impair U.S. credit markets into the distant future,’ Mr. Bullard said.

Higher inflation devalues the dollar and makes paying back existing loans easier in real terms.  Meanwhile, savers and lenders suffer in such an environment.”


*This information is solely a highlight of the opinion of a third-party publication and is incomplete.  Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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