It’s a time honoured escape for governments with large debts. Inflate them away.
Unfortunately, it’s not actually all that easy in the modern world.
At the same time, the consultancy claimed the UK is the least well-placed of seven major developed economies – including the US, Germany, Japan and France – to take advantage of soaring prices because a fifth of all Government debt is inflation-indexed.
With welfare payments also linked to prices, high inflation makes it more difficult to cut the budget deficit.
There’re two different parts to this.
Firstly, people who have lent to the government before have learned a lesson: that it is indeed very tempting for a government to inflate their way out of such debts. So some portion of them invest in inflation protected gilts rather than non-inflation protected ones. This makes inflation not a way of escaping the debts.
The second is that everything else that the government owes in the future is now a great deal more inflation protected than it used to be. It’s not just the welfare payments mentioned there. Pensions have automatic cost of living adjustments: both the State pension and the pensions offered to former state workers.
The net effect of these two (and note that those future pensions and welfare payments are vastly larger than what we commonly call the “national debt”) is that inflation isn’t any longer a get out of jail free card for governments with lots of debt.
It helps, yes, especially if you can keep the interest rate below the inflation rate, but not as much as it used to.
Originally published at Forbes.