Inflating out of debt
Date posted: September 30, 2011
Most people think that inflation is a bad thing, but some economists are not so fast to condemn inflation. In fact, they say a little more inflation is exactly what today’s economy needs. N.C. State University examines the controversy.
“Most people would think inflation is bad. But today one of the big problems in our economy is debt — not just the federal debt but, but consumer debt. And debt is denominated in specific amounts of dollars. So, for example, if you’ve borrowed $100,000 to buy a house, and you’ve got a $100,000 mortgage, you’ve got that denominated in $100,000.
“If we have inflation — and what inflation does is effectively reduce the value of a dollar — then down the road that $100,000, although it will still stay on the books, those dollars are now worth less. So, effectively, inflation reduces the purchasing power if you will, or the real value of that debt. And the same would go with the national debt.
“So, that’s why some economists — I’m not necessarily endorsing this — but economist say really what the economy needs is a heavy dose of inflation.
“And … we’ve sort of seen this in the Federal Reserve’s policy. In fact, a year ago what our Federal Reserve managers headed by Ben Bernanke, I think, were really worried about was deflation in the economy, which would obviously do the opposite — would make debt more expensive.
“And some say that’s one reason why they printed a lot of money — to push up the inflation rate. So again, this goes against, I think, the conventional wisdom and the logic many people have. But it is something to think about — how inflation can actually help people who are in debt.”
Category: Economic Perspective