Theory vs. History
By Arnold Kling
If it prints money and is not in a recession, or has inflation, then that is a problem. Printing money will make inflation worse, and that’s a problem. But it’s a negative feedback problem. The inflation will lower the real value of the existing debt, making it easier to pay off.
That is fine in theory. But things are messier in practice. By the way, thanks to Mark Thoma for the pointer. Thoma also points to an article by Nouriel Roubini in which he makes a similar claim as an aside.
In my article on the history of U.S. post-war debt, I pointed out that we did not grow our way out of debt. The data make an even stronger case that we did not inflate our way out of debt. The inflation surprises of the 1960’s and 1970’s were severely punished by the Bond Market Vigilantes of the 1980’s.
Suppose that for a few years the real interest rate turns out to be low because of unexpected inflation. Rowe writes as if the correction will consist of a return to “normal” real interest rates. In fact, in the historical episode I just described, our real interest rates overshot “normal” by a large amount for a long time. If that were to happen again, then trying to print money to reduce our debt would backfire.