But is inflation a realistic debt-reducing tool in the modern economy? Inflation rates are very low, particularly when considering the debt load. We could quite simply increase the target inflation rate from 2% to 4% inflation, but this would only affect the servicing of the current loans, and the next round to refinancing will correspondingly increase the borrowing rates.
There's still the matter of principal. The US government, for instance, could absolve itself of almost all debt liability by going into high-inflation mode, erasing the burden of most T-bills. Again though, this is a one-shot thing. It could eliminate most of the current debt, but would do nothing about the deficits. As long as large deficits remain (and are politically intractable), it doesn't seem workable in any meaningful sense.
The working quantity of cash out there is also fairly small. The entire point of a bank is that it minimizes the cash in the system by balancing deposits against loans. That means that changing the cash supply will affect the price levels more violently than what would otherwise be expected. That just means that there's less cushion to absorb large amounts of new cash that government issues, again, kind of reducing the benefit of "free" money.
There's still the matter of principal. The US government, for instance, could absolve itself of almost all debt liability by going into high-inflation mode, erasing the burden of most T-bills. Again though, this is a one-shot thing. It could eliminate most of the current debt, but would do nothing about the deficits. As long as large deficits remain (and are politically intractable), it doesn't seem workable in any meaningful sense.
The working quantity of cash out there is also fairly small. The entire point of a bank is that it minimizes the cash in the system by balancing deposits against loans. That means that changing the cash supply will affect the price levels more violently than what would otherwise be expected. That just means that there's less cushion to absorb large amounts of new cash that government issues, again, kind of reducing the benefit of "free" money.