Inflation isn’t usually thought of this way, but it actually plays a big role in a system with a lot of debt.
What inflation does is quietly reshape things. You’ll notice that government debt is often in the currency they use, and that doesn’t get adjusted for inflation. So, if a government owes a certain amount, and inflation is at 15% a year, that debt effectively goes down by 15%. In other words, the debtor ends up paying back their creditor with money that’s lost some of its value.
This whole setup is way easier for governments than jacking up taxes or cutting back on spending to manage their debt.
And once they’ve got this figured out, those governments often want to borrow even more, piling on more debt.
Given that inflation is kind of a silent partner for these indebted governments, could we end up in a scenario where they don’t really do much with their fiscal policies to control inflation?
How inflation benefits heavily indebted governments
3 replies 322 views
You're missing one key part of the equation. This setup can be offset by loss of trust in the currency of that country, unless it is carefully managed and it has limits. It's a very dangerous game to play as well, because it can become a runaway reaction which can be hard to stop. If trust is lost, then the currency is less desirable and gets dumped. This has the side effect of making imports more expensive and that can cause demand to collapse, leading towards recession unless it is handled. Every central bank usually aims for a manageable amount of inflation which is usually around 3%. Deflation can be equally damaging but is comparatively rare.
In today modern economic era, this method is nearly impossible to practice. Globalization and open capital market make global investor smart and easily pull out investment , then without trust from investor local currency can sharply depreciate, capital outflow increase and big possibility will triggering a large fiscal crisis. Trust is basic fondation on capital market. Beside that foreign debt usually under USD which not eroded by domestic inflation.
Politically, i think government will think saveral time to use this method to reduce debt because inflation can bring political instability due to social polarization & economic gap enlargement between asset owner and working class, instability happen due to wages increase can not chasing inflation, if its happen continuously, society will loose trust to governmental system, which mean riot and chaos can be happenend anytime.
hodler_ha5hFull Member
Posts: 57 · Reputation: 315
#4Aug 11, 2020, 02:43 AM
Our government looks at these inflations as if it's the burden of the citizens. You know what they're doing? because of the high debt that we've got, they're raising the taxes and doesn't choose to underspend with the budget of the national agencies that have been given with so much budget. The income of the government is even not enough to cover the yearly budget for all of the operation of the government and so, they're going to borrow again in several banks, WB, IMF and others that are known in lending. And that results to a higher inflation we citizens are going to deal with while paying the debt they've borrowed trying to endure the high cost of everything with minimum salary.
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