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Why do people suggest inflating away debt rather than just defaulting on it? I'd guess that the debt markets would punish the two options equally, because bonds

Why do people suggest inflating away debt rather than just defaulting on it? I'd guess that the debt markets would punish the two options equally, because bonds would lose the same amount of real value either way. But inflation also screws up your economy as a side effect.

heisenbit 2y ago
Default impact is spread more unevenly compared with inflation.
dragontamer 2y ago
Because defaulting means that Social Security Trust Fund fails to get paid. A huge amount of debt is to Americans, American institutions and the states.
randerson 2y ago
Defaulting on debt is the fastest way to turn the US into a third world country. Banks would fail, since they invest our deposits in long-term assets including treasuries. Companies typically store their cash in treasuries and money markets, so companies would go under (or have to issue more shares under duress), crashing the stock market. Retirees would stop receiving Social Security payments, and retirees' nest eggs are normally mostly bonds. The US would piss off other countries who lent us money, who'd come knocking with a country-scale baseball bat demanding their money. But two thirds of that $35T is owed to Americans. There'd be a good chance of either a civil war or global war. We'd likely lose our status as the world's reserve currency, devaluing the dollar and leading to inflation. Nobody would trust the government enough to lend them money, so they'd have no choice but to print money to pay expenses at this point. So, we'd have inflation either way.
- ianhawes 2y ago
  Sounds promising, let's do it.
deleted 2y ago
[deleted]
quickthrowman 2y ago
> Why do people suggest inflating away debt rather than just defaulting on it? I'd guess that the debt markets would punish the two options equally, because bonds would lose the same amount of real value either way. But inflation also screws up your economy as a side effect. Defaulting would impact the value of Treasurys far more than inflation, a bond’s price is merely the sum of its future cash flows, pricing in a default would push yields waaay higher than they would from inflation alone. There would also be massive liquidity problems since banks and companies hold a ton of Treasurys along with pensions and retirees. There’s far more negative impacts from a debt default that sibling comments already elaborated on. There are very few black swan scenarios that would cause me to liquidate the assets in my retirement accounts for cash, but a US sovereign default would be one of them.
x-complexity 2y ago
> Why do people suggest inflating away debt rather than just defaulting on it? Because one ultimately still keeps the debt obligation in place, whilst the latter causes debt confidence collapses & the destruction of faith in repayments from the government. Would you rather take a 2% value loss via inflation, or a 90-100% value loss as the government declares default? Most people would take the former rather than the latter, as the impact of one is much softer than the other.
- ilyagr 2y ago
  2% inflation per year is a healthy amount. To inflate away 90% of debt, I imagine 1000% of inflation would be needed over some amount of time (and this amount of time better be short enough that you don't accumulate significant debt during it).
greyface- 2y ago
A default on US debt would be unconstitutional, per section 4 of the 14th amendment. Inflation, on the other hand, is not unconstitutional.
- AlgorithmicTime 2y ago
  [dead]

heisenbit 2y ago

Default impact is spread more unevenly compared with inflation.

dragontamer 2y ago

Because defaulting means that Social Security Trust Fund fails to get paid. A huge amount of debt is to Americans, American institutions and the states.

randerson 2y ago

Defaulting on debt is the fastest way to turn the US into a third world country. Banks would fail, since they invest our deposits in long-term assets including treasuries. Companies typically store their cash in treasuries and money markets, so companies would go under (or have to issue more shares under duress), crashing the stock market. Retirees would stop receiving Social Security payments, and retirees' nest eggs are normally mostly bonds. The US would piss off other countries who lent us money, who'd come knocking with a country-scale baseball bat demanding their money. But two thirds of that $35T is owed to Americans. There'd be a good chance of either a civil war or global war. We'd likely lose our status as the world's reserve currency, devaluing the dollar and leading to inflation. Nobody would trust the government enough to lend them money, so they'd have no choice but to print money to pay expenses at this point. So, we'd have inflation either way.

ianhawes 2y ago
Sounds promising, let's do it.

deleted 2y ago

[deleted]

quickthrowman 2y ago

> Why do people suggest inflating away debt rather than just defaulting on it? I'd guess that the debt markets would punish the two options equally, because bonds would lose the same amount of real value either way. But inflation also screws up your economy as a side effect. Defaulting would impact the value of Treasurys far more than inflation, a bond’s price is merely the sum of its future cash flows, pricing in a default would push yields waaay higher than they would from inflation alone. There would also be massive liquidity problems since banks and companies hold a ton of Treasurys along with pensions and retirees. There’s far more negative impacts from a debt default that sibling comments already elaborated on. There are very few black swan scenarios that would cause me to liquidate the assets in my retirement accounts for cash, but a US sovereign default would be one of them.

x-complexity 2y ago

> Why do people suggest inflating away debt rather than just defaulting on it? Because one ultimately still keeps the debt obligation in place, whilst the latter causes debt confidence collapses & the destruction of faith in repayments from the government. Would you rather take a 2% value loss via inflation, or a 90-100% value loss as the government declares default? Most people would take the former rather than the latter, as the impact of one is much softer than the other.

ilyagr 2y ago
2% inflation per year is a healthy amount. To inflate away 90% of debt, I imagine 1000% of inflation would be needed over some amount of time (and this amount of time better be short enough that you don't accumulate significant debt during it).

greyface- 2y ago

A default on US debt would be unconstitutional, per section 4 of the 14th amendment. Inflation, on the other hand, is not unconstitutional.

AlgorithmicTime 2y ago
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