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2010-09-29 17:16:46

Inflation Will not go Away Soon but can it Reduce Debt Problem?

<p>Slowly the ordinary American is beginning  to realize that the debt of the nation is not going to go away soon – the  process will be long drawn and hard. Some have suggested that if the legislators  are failing to chalk out a plan, why cannot America “inflate its way” out of  the <a href="">financial</a> morass? The basic idea is to push up prices together with wages  and cause the value of the dollar to be eroded.</p>
<p>If this takes place in the country, the creditors  would be holding the same amount of <a href="">loan</a> but the debt would be easier to pay  off because of a fall in its value. But a whole swath of experts and economists  do not think it is a good plan.</p>
<p>Mark Zandi of Moody’s Economy said, “Many  countries have tried this and they’ve all failed”.</p>
<p>Undoubtedly inflation would bring down a  small part of the national debt. According to the estimates of IMF in developed  countries only a quarter or even less of the predicted growth in the ration of  debt-to-GDP would be brought down by inflation. But the basic load of the  looming debt of the country would remain. Moreover the negative side of the  inflation would start off an entire set of fresh problems.</p>
<p>A good amount of spending by the <a href="">government</a> is linked with inflation. Thus if inflation increase so too will the  commitments of the government opined Donald Marron previously of the  Congressional Budget Office while testifying in front of the Senate Budget  Committee. He said that pending with the government is “enormous number of  spending programs”. Of these Social Security comes first among the indexed  ones. He explained, “If inflation goes up, there’s a one-for-one increase in  our spending. And that’s also true in many of the payment rates in Medicare and  other programs”.</p>
<p>Another stumbling block is that inflation  would cause future debts of USA to be more costly because interest rates are  pushed up by inflation. The Treasury would get involved in refinancing $5  trillion short-term debts from today till 2015. Marron further explained that  the value of the debts would fall for few years because of sudden inflation.  But then <a href="">market</a> will descend with a “premium interest rate”.</p>
<p>Another area of trouble is Treasury  inflation-protected- securities or TIPS. The treasury will owe more on the TIPS  in proportion to the increasing inflation.</p>

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