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Over the past couple of decades debt of all kind has exponentially grown, making it nearly impossible for all of it to be paid off. However, through a tactic known as monetary inflation it becomes possible to pay off such insurmountable debts by drastically increasing amount of money put into circulation. In this paper I will first address the causes of the escalating debt crisis and how some individuals feel inflation could be a solution, followed by interpreting Americans already held fears about inflation.
Lastly, I will explain how inflation is not a viable solution to fix the debt crisis. Monetary inflation should not be used to pay off debt as it would cause economic consequences of currency being devalued and prices to skyrocket. As of now the U. S national debt has surpassed 100% of its gross domestic product (Thornton, 2012). The debt has now achieved a mind boggling 21 trillion dollars, which given the current economic situation, is practically impossible to pay off. Divided equally among Americas 300 million plus citizens, every living person in America would need to pay $63,000 in order to pay off the debt. But how can the richest country on Earth find itself in a debt crisis so large? The problem mainly comes down to the government spending to much and taxing to little (Thornton, 2012). The government taxes its citizens and then uses that money to provide services such as entitlements, such as social security, defense, and other various projects. However, when the government decides to spend more than it takes in from taxes a deficit arises. Now add in together astronomical entitlement spending along with enormous defense spending combined with numerous tax cuts over the last 37 years and you achieve a national debt of 21 trillion (Thornton, 2012).
National debts aren’t new and have plagued countries and empires since the beginning of modern times. The two main ways to pay off a debt is either by taxation or inflation. Inflation is simple a government increasing its money supply and according to economist J. H Cochrane, inflation usually follows economic difficulties. Inflation however devalues a nations currency potentially leading to a dollar only being worth a fraction of what it used to. This makes it easier to pay debts as paying with money worth half of what it used to be is essentially only paying back half the debt (Cochrane, 2011) If you have a debt of 1000 dollars, printing money to pay it off is easier than collecting the 1000 dollars. This inflation approach was taken by Germany after the second world war to pay off its 800-billion-dollar debt (Hetzel, 2002). The central bank of Germany, the Reichsbank, began to print extraordinary amounts of money to pay back war reparations. In the short run this seemed like an effective strategy, but as more and more inflation occurred, the flaws of inflation soon began to unfold. The main problem with inflation is that it devalues the currency.
The more money you print, the less that money is worth overall. Thus, as the currency becomes less and less valuable, prices of items increase to make up for the loss of monetary worth (Cochrane, 2011). Due to Germanys hyperinflation prices increased by one trillion-fold causing basic items such as bread and butter would cost upwards to hundreds of billions of German marks (Hetzel, 2002). The worst part about Germanys hyperinflation is that it is not a one-time threat but a constantly lurking problem. Even when the United states isn’t facing radical inflation, a poll conducted by the PEW research center showed that 82% of Americans feared rising prices, and 51% of Americans said rising prices was a very big problem.
These rising prices are already caused by the Federal reserves yearly inflation rates of around 1% to help keep interest rates down (Cochrane, 2011). The federal reserve is already printing more and more money causing moderate inflation, what stops it from increasing inflation. Thornton and Hetzel both write how enormous debts such as Germanys in the last century, and the United states right now can be precursors to a massive increase in inflation. Add in the fact that inflation usually follows economic downtime (Cochrane, 2011) and Americans already held fears of increase prices, an inflation apocalyptic scenario seems far to plausible of an outcome. The United States has spent much of the later part of the twentieth century and early twenty-first century spending far more than it has collected through taxes. (Thornton, 2012). Now if an economic crash hits the global economy, then debt holders to the United States will then want to be repaid making it seem like inflation is needed to help pay off the 21 trillion-dollar debt (Cochrane, 2011). This rapid increase in inflation to pay off this debt would then in turn cause prices of goods in the united states to skyrocket, and the value of the dollar would almost become worthless (Hetzel, 2002). Peoples lifetime savings would become useless as prices of good and services skyrocket to more than what someone would make in a lifetime.
There would be no hope of retirement as everyone would need to constantly be working to keep up with increased inflation. Even if the national debt is be paid off the economic turmoil that inflation would leave the United States in is far worse. For the United States inflation to pay off the debt is worse than the debt itself.
As the debt crisis grows and economist desperately look for a solution, inflation seems more and more as a viable solution. However, inflation would cause the value of currency to plummet and cause prices to skyrocket. Even more worrisome is an economic crisis could involuntary jump start inflation as well. Peoples mounting fears of monetary inflation and the numerous causes for the debt problem further prove inflation is not the solution. With a problem with so many causes there cannot possibly be only one solution. As debt rises a solution is needed; however, inflation cannot be that solution.
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