Discuss Question 5
5. FISCAL KNOWLEDGE: Allowing significant additional inflation is an appropriate and effective means to reduce our nation’s long-term debt burdens.
ANSWER: False – Inflating our way out is unacceptable. Inflation is a hidden tax and arguably the cruelest tax of all. History has taught us that high-levels of inflation and hyperinflation can destroy the fabric of society, decimate savings, and provide no long term benefit to a country that decides to use the printing press instead of logic. It also tends to harm the most vulnerable in our society the greatest. Importantly, the real threat to our fiscal future relates to Medicare and Social Security obligations which grow faster than inflation and faster than the economy, according to the Bureau of Labor Statistics.
This is the historical way by which governments do it. Borrow good dollars and pay back with inflated dollars in future years. Your stance seems a value proposition rather than an understanding (however cynical) of how the world works.
Inflation is not a “cruel tax” at all, provided that wages and property values inflate to keep the same relative values.
This false answer ignores the impact of inflation on earnings and economic growth, and particularly the relationship to interest rates. The artificially low levels of interest rates being maintained by the Fed currently penalizes savers/investors, particularly retirees, who could be contributing more to the economy with reasonable investment returns. These subsidies to the financial institution cost of funds needs to end.
Inflation is not what I believe to be a palatable way to reduce debt, but that was not the question. The question did not suggest hyperinflation either – it merely asked if it is appropriate and effective. “Appropriate” is a negative, but it will reduce the debt burden along with fiscal intelligence in Washington. Inflation at 4% (slightly more than the 30-year Treasury) would help the value of homes and other hard assets, while contributing to an easier to pay debt burden.
This question is inappropriately labeled/answered in a number of ways. First, it should definitely be under the “Fiscal Wisdom” rather than “Fiscal Knowledge” category, as it is clearly opinion based. Second, “appropriate and effective” are very vague terms that must be specified. Third, the answer is arguably wrong: we’re overcompensated for our work in America, and a healthy dose of inflation (while, yes, it would be more beneficial to those who can pay to avoid the “tax” that it causes than the middle-class investors that would be stuck earning negative real interest) would bring our compensation for our labor more in line with that in other countries around the world, as well as solve our budget problems.
Inflation can be a component of paying off debt. How much is up for debate.
trick question, if the debt was frozen at its current level and inflation in subsequent years ensued, the dollars required to pay off the current debt would be worth less than their current value, hence a ”reduction” in debt.
Some additional inflation would reduce private debt burdens, and allow lower real interest rates. Stable inflation at 4%, the same as the Reagan years, could help, and that is hardly hyperinflation.