The gamble of trying to inflate away debt

SPEAKER_1 (0:01)

N-P-R.

Wailin Wong (0:06)

This is The Indicator from Planet Money. I'm Wayland Wong.

Darian Woods (0:09)

And I'm Paddy Hirsch. And today, we're here to talk about the national debt.

Wailin Wong (0:13)

A debt that right now is running at more than 40 trillion dollars. That's more than $100,000 per person in the US.

Darian Woods (0:22)

It's a potential crisis in the making. But don't worry, because I have a plan. A plan so cunning, you could put a tail on it and call it a weasel.

My plan is to erode the national debt with inflation.

Wailin Wong (0:37)

You are sounding positively presidential, Paddy.

Darian Woods (0:40)

I'll take it.

Wailin Wong (0:41)

Because this is, of course, an idea espoused recently by none other than President Trump. In an interview with Time Magazine, he suggested we might be able to inflate our way out of debt.

Darian Woods (0:55)

So on today's show, inflation is a tool of debt reduction, a cunning plan, or a lot of hot air. That's coming up after the break.

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Darian Woods (2:27)

The idea of using inflation to erode a nation's debt is not a new one.

Ricardo Reis (2:32)

There's an old history of countries paying their debt that way, of paying the right word to use it.

Darian Woods (2:37)

This is Ricardo Reis. He's a professor of economics at the London School of Economics in the UK. He's also the co-author of a paper entitled Inflating Away the Public Debt.

Wailin Wong (2:47)

So he's the guy.

Darian Woods (2:49)

He is the man. And he says that this concept is pretty simple on the face of it.

Ricardo Reis (2:53)

When I promise to pay you $1,000, say, a year from now, those $1,000 are going to be worth a lot less if inflation turns out to be really, really high over the next 12 months.

Darian Woods (3:05)

So you see how this works. If I lend Ricardo a grand today and he promises to repay it in a year, he still has to pay me $1,000. But if inflation gets really high, if the price of everything rises sharply over the year, then that $1,000 is worth a lot less than it was when he borrowed it.

Ricardo Reis (3:23)

Since a debt is but a promise to pay you a certain amount in dollars, the higher is inflation, the less those dollars will be worth by the time I pay you back.

Wailin Wong (3:31)

The dollars are worth less. The real value of the money has fallen, which means the debt has been eroded. And this can and does happen, quite recently, in fact.

Ricardo Reis (3:42)

If you look at the recent history of the United States, we did a very big inflating of the debt in 2021 and 22

Darian Woods (3:48)

That's during COVID, he's talking about, in case you forgot.

Ricardo Reis (3:50)

Inflation between 21 and 23 was approximately 20% cumulative over this year.

Wailin Wong (3:56)

And just prior to then, interest rates and government debt were super low, less than 2% on 10-year treasuries. So after that two-year bout of inflation, the government's real obligation was, okay, back of the envelope math here, 16% lower. It was real. Inflation really did erode the debt.

Ricardo Reis (4:14)

So we did inflate a lot of the debt in 2021 and 22 And that helped pay for a lot of the extra spending of COVID.

Darian Woods (4:20)

Well, a cunning plan indeed. Except that it wasn't planned.

Ricardo Reis (4:26)

Inflating away the debt, it requires unexpected inflation. So you don't just inflate the debt, you have to surprise inflate the debt.