Saturday, January 2, 2010

Zimbabwe Ben's Stalking Horse?

"Since the start of 2007, the financial crisis has triggered $1.62 trillion of write-downs and credit losses at US financial institutions, sending the American economy into its deepest recession since the Great Depression and the global economy into its first recession since World War II. ... Many observers worry that the debt-to-GDP ratios projected over the nerxt ten years are unsustainable. Assuming deficits can be reined in, how might the debt/GDP ratio be reduced? ... In a recent paper (Aizenman and Marion 2009), we examine the role of inflation in reducing the Federal government's debt burden. We conclude that an inflation of 6% over four years could reduce the debt/GDP ratio by a significant 20%. ... A government that has lots of nominal debt denomiated in its own currency has an incentive to try to inflate away to decrease the debt burden. If foreign creditors hold a significant share of the debt, the temptation to use inflation is greater, since they will bear some of the inflation tax. Shorter average debt maturities and inflation-indexed debt limit the government's ability to reduce its debt burden though inflation", Joshua Aizenman and Nancy Marion (A&M) at Voxeu, 18 December 2009, link:

A&M are economics professors at UC Santa Cruz and Dartmouth respectively. Professors, 20% won't cut it. See my 4 July 2008 post: Did Zimbabwe Ben encourage A&M to write this to see what reaction the public might have to it?

1 comment:

Anonymous said...

From your July 4th(!) '08th post:

...A 20% spread, like in Argentina, would reduce the real value of Unc's debts by about 84% after a decade; now that's more like it!...

This is why President Obama looks so terrified these days... (it's not from some silly arab with a bomb in his underwear)...

His choices:

1. Inflate away the debt
2. Haircut or default on the debt
3. Audit the Fed/expose where all the vig is going
4. Reduce entitlement payments
5. Raise taxes

Well. It's easy to imagine this President choosing door number 1... especially as his special pals from Goldman Sachs assure him how little it will hurt the "people"...

Of course Bernanke, Geithner and Summers' staffs have modeled all the scenarios...

It's a painless solution... is it?