Friday, May 04, 2012



Right, because if you control your own currency, you can keep rolling over the debt. So it’s actually a little hard to tell the story, but it’s not impossible. You could imagine a situation in which there is a level of debt that rises to a point where you start to think the government has a real incentive to rely on seigniorage rather than future tax collection, and that leads to spiraling inflation because of fears of future runaway money printing. You probably get an economic boom along the way because you’re in a depressed economy. But then it can go out of control.

France in the 1920s is the closest example. They came out of World War I with more debt than they could pay. It was clear there would be an incentive to inflate. In the end, the markets blew them away and the franc depreciated massively and there was inflation and roughly a doubling of a price level. That brought it under control. It didn’t go into a runaway scenario. And it did lead to a strong economy, which led them to unfortunately conclude that returning to the gold standard had helped them and they kept to that in the 1930s.

Monetary economics wasn't my thing, but my understanding is that the out of control inflation problem is an incredibly easy one to solve. Certainly easier than the massive unemployment problem. It's important to distinguish between big changes in the price level and spiraling out of control inflation which can't be stopped.

Basically if you become that irresponsible government which prints money instead of collecting taxes in order to pay its bills, you can get high and rising inflation. But there's a simple solution. You print up a giant amount of money and then stop. You convince people you're no longer going to be irresponsible by having one last bender and then going cold turkey. The final bender gives you enough cash to pay your bills. You might lower the value of your currency, but it's a one time thing. Then it stops.