Friday, April 16, 2010

Why the U.S. Can't Inflate Its Way Out of Debt

Interesting post from the Motley Fool investing website.

I just met with a couple of very smart clients today who insisted that not only were interest rates going to head higher but that inflation was almost certainly around the corner. Their reasoning - just as the majority of commentators I hear - is that our government will rekindle inflationary pressures to enable to pay down our massive government debt burden without having to raise taxes or cut spending.

However, this article points out the flaw in this reasoning; namely, that as prices and interest rates move higher, so too do the fiscal obligations of the US government. Since the large majority of fiscal expenses are tied to either interest payments or to entitlement programs, higher rates of inflation and interest rates mean the fiscal deficit could get worse, not better.

Why the U.S. Can't Inflate Its Way Out of Debt

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