We Can NOT Inflate Our Way Out of The Debt Trap → Washingtons Blog
We Can NOT Inflate Our Way Out of The Debt Trap - Washingtons Blog

Thursday, August 6, 2009

We Can NOT Inflate Our Way Out of The Debt Trap

UBS economist Paul Donovan shows that governments can't inflate their way out of debt traps:

Inflation pessimists cling resolutely to the belief that inflation will inevitably return. “Fiscal deficits are rising dramatically” goes the argument. “Governments will have to create inflation to reduce debt: GDP ratios, as they have done in the past.”

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. Government debt: GDP burdens tend to be positively correlated with inflation. Market mythology has created the idea that inflation will help reduce government debt ratios. The facts do not support the myth. [G]overnment debt rises as inflation rises. Meaningful reductions in government debt will require a low inflation future...

The higher debt service cost becomes a problem for a government that is pursuing an inflation strategy because government debt does have to be rolled over. Unless a government is willing to pursue hyper-inflation as a strategy, raising inflation will not reduce the government debt burden. Indeed, history indicates that the reverse result will be achieved.
So if inflation isn't the ticket out of the debt trap, what is?

According to Ellen Brown, even countries which are so deep in debt that they are bankrupt have regained prosperity by taking over the money and credit creation functions from private banks. See this and this.

Abolishing the Fed and the other private central banks and reclaiming the sovereign power to create money may be the only way out of the debt trap.


  1. Like I commented on the article concerning -Giant Banks- "[...]the size of the target put out for incompetents whose altruism is best measured by gauging their desire to stand upon what is otherwise a rubbish heap of purported economic genius."

    World War III has already begun.

    These towl-snapping and fame-hungry howlers want to yodel in three octaves about their plans to hack, expose and depose the fed?


    The fed is on the front lines of this new war.

    These grimacing Libertarian growlers will not even get the attention of the fed, -except as they might play a small part as a pawn used to distract the world from what the next move might be -in this -ongoing, global, high-stakes- game of chess.

    The article isn't even logical given its own erroneous assumptions. And it surely doesn't exhaust even a small fractional glimpse of the spectrum of possibilities.

    Mark these words.

    We will see gasoline at $1.20 a gallon within a year.

    We will see gold at under $300 an ounce.

    We will see the current unrest in China blossom into a revolution that will make Mao and his rural gang look like Boy Scouts.

    The CIA fights BOTH sides of every war and every revolution too.

    I have yet to read anything -anywhere in the public sphere- concerning what might be a possible, hypothetical -back-room discussion between the fed and the CIA.

    At such a round table meeting, we can imagine the expression on the faces of Barack Obama and Rahm Emmanuel, were they even to be included in the discussion. This is unlikely. Loose lips sink ships.

    Those of us in the blogosphere -as it has been so-named-, -we are being led by blind men -blind men who have never left the muddy paths that lead, -winding between our small villages.

  2. Yes, we should abolish the Fed and replace it with the policy generally named Monetary Reform. The central point is to no longer have money created by banks (including the pinnacle banksters' bank - the Federal Reserve) as debt to us, but directly by government for the direct payment of public goods and services. This must be done with ABSOLUTE ACCOUNTABILITY. As long as the money supply stays consistant with economic growth and population, inflation is managed. Among the historical quotes of support in my brief "The Heart of Economics" (click on my name):

    “As you know, I am entirely sympathetic with the objectives of your Monetary Reform Act…You deserve a great deal of credit for carrying through so thoroughly on your own conception…I am impressed by your persistence and attention to detail.” – Milton Friedman, Nobel Prize Laureate in Economics and Senior Fellow at the Hoover Institute in his letter to the producer of The Money Masters (undated) – www.themoneymasters.com .

    “Government-issued fiat money, on the other hand, is not a sovereign debt but a sovereign credit instrument, backed by government acceptance of it for payment of taxes….Credit drives the economy, not debt. Debt is the mirror reflection of credit. Even the most accurate mirror does violence to the symmetry of its reflection. Why does a mirror turn an image right to left and not upside down as the lens of a camera does? The scientific answer is that a mirror image transforms front to back rather than left to right as commonly assumed. Yet we often accept this aberrant mirror distortion as uncolored truth and we unthinkingly consider the distorted reflection in the mirror as a perfect representation. Mirror, mirror on the wall, who is the fairest of them all? The answer is: your backside.
    If fiat money is not sovereign debt, then the entire financial architecture of fiat money capitalism is subject to reordering, just as physics was subject to reordering when man’s world view changed with the realization that the earth is not stationary nor is it the center of the universe.”
    - Henry C.K. Liu, professor of urban and regional development at UCLA, Harvard, and Columbia University in The Coming Trade War: Part II: Dollar Hegemony Against Sovereign Credit. AToL, 6-24, 2005.

    “It's (Federal Reserve) an immoral institution, because we have delivered to a secretive body the privilege of creating money out of thin air; if you or I did it, we'd be called counterfeiters, so why have we legalized counterfeiting? But the economic reasons are overwhelming: the Federal Reserve is the creature that destroys value…Since the Fed has been in existence, the dollar has lost about 97% of its value. You're supposed to encourage savings, but if something loses its value, why save dollars? There's no encouragement whatsoever.” – Congressman Ron Paul, CNBC debate with Faiz Shakir, March 20, 2008: http://www.youtube.com/watch?v=k94VWPjUQSM )

  3. "Yes, we should abolish the fed and replace it with the policy generally named monetary reform. The central point is to no longer have money created by banks (including the pinnacle banksters' bank - the Federal Reserve) as debt to us, but directed by government for the direct payment of public goods and services. This must be done with ABSOLUTE ACCOUNTABILITY. As long as the money supply stays consistent with economic growth and population, inflation is managed."

    The last time there was "absolute accountability" would have been when man lived in a cave and carried a club to enforce such accountability.

    All these theorists are pragmatic hacks, -whether Shorty here on GW's blog -or- Ben Bernanke doing the government hot-shot circuit making speeches about economic recovery in an effort to see some of his predictions come true on the wings of a hope and a prayer -that he can fool enough of the people enough of the time.

    Pragmatism is Cash for Clunkers and Tax Credits for housing purchases, -both of which are disproportionately deflationary incendiary bombs. They both spell crash-and-burn economies coming on their heels.

    Pragmatism only goes so far, -and generally exactly so far as the end of the theorists' long, pointy, Pinochio noses.

    Any theorist worth his salt knows the failure points of his own particular theoretical approach. That slop in the mental mechanism is what has delivered us again to this precipice.

    This is nothing new, except the magnitude of it.

    AND IN FACT, all theorists are just the best liars to date. Their theories only work -at best- slightly better than previous theories. The history of pragmatic approaches to real problems show this succinctly without exception.

    If there is anything true about all these economic theories, it is that they have all been proved wrong by the long history of one theorist knocking down the theory of the previous theorist, -repeatedly proving their predecessor a rank liar.

    Well Toto, we're in Texas right up to our boot handles again, and it smell just like bullshit to me.

    THIS is what the problem has chased up out of the bushes before the hounds of pragmatism, -that our theories are going to lead only to calamity, and all too often because of human nature, -BOTH the human nature of the theorists, and the human nature of the targets of the theorists.


    You're talking about giving the printing presses to Charlie Rangel and Chuckie Schumer.

    Them two teenage girls won't get pregnant!


  4. Ben Bernanke and his buddies don’t understand or don’t care to understand and admit that monetary manipulations will not bring back demand. We are now experiencing a DEMAND DEFLATION in everything. The sub-prime real estate buyers are not coming back to market, and the credit worthy borrowers are not going to get into debt any time soon to support the speculative bubble blowing any longer. We don’t need to “unfreeze lending” if nobody wants to borrow (while assets are depreciating). Mr. Bernanke somehow believes that he can magically circumvent creating economic product, which is always based on labor and goods it produces, by just hitting a button on his computer to add a few zeros to FED’s account in a coup of counterfeiting. This illegal act does not provide employment to anyone except Mr. Bernanke and does not result in any economic product on the other end of this labor intensive operation. His academic theories, being tested on live human beings, will be proven wrong and disastrous soon enough. The prices will go where they naturally want to go. All FED can do is slow the process of decline, not arrest it – and that will only prolong this recession that has all the underpinnings of becoming another Great Depression.

    National Deflation Association wholeheartedly and vigorously endorses deflation and the benefits of lower prices that it brings to the common person.

    - NDA executive committee.



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