Could inflation be a good thing for indebted governments? : NPR

For all the pain it causes, inflation makes it easier to pay off old debts. A hope for countries burdened by pandemic debt? It might be. But if history is any guide, that glow may be short-lived.


Here’s a fact about inflation – it lowers the real value of debt. So, in these times of historic high inflation, our colleagues Adrian Ma and Wailin Wong of The Indicator From Planet Money wanted to explore whether inflation can be a good thing for borrowers, specifically large borrowers, national governments .

WAILIN WONG, BYLINE: Ricardo Reis is a professor at the London School of Economics.

RICARDO REIS: Imagine you borrowed $1,000 from a friend of yours 20 years ago. That debt is still $1,000 today. That’s how much you promised to pay him 20 years later.

ADRIAN MA, BYLINE: Yes, but the value of a dollar two decades ago is really more than $0.62 in today’s money.

KINGS: And as a result, those thousand dollars, which were such a big deal then, are now a very small deal to you.

WONG: So inflation can be good for people with car payments, mortgages, student loans. But it might also be good for some of the biggest borrowers – national governments? Rising inflation is making it a little easier for governments to pay off the debt that many of them have built up during the pandemic. Ricardo Reis says that might sound good on the surface.

KINGS: Yes. However, if it is coming through inflation, there is a difficult trade-off between the present and the future.

MA: That’s because the people who lend to the government – you know, the bondholders – see inflation reducing the returns they should be getting on their government bonds. And they say, well, okay, it’s too late for the old titles, but next time…

REIS: They will start asking the US government higher and higher interest rates. As the government pays these higher interest rates, the government finds that today’s earnings are eroded by having to pay higher interest rates to compensate investors for their expected loss in value – so no, it’s not a thing. good in itself.

WONG: OK, so inflation can make paying off old debt easier, but it also makes new debt more expensive. In short, Ricardo says that a country cannot inflate its debt outflow without some pretty serious consequences.

MA: Yes. An example of this happened in France after the Second World War. For a few years, it saw annual inflation in excess of 50%, and before long, its war debt basically melted away. So inflation was great at paying off your debt, but, you know, it was also great at paying off a lot of ordinary people’s savings.

WONG: And Ricardo says the strategy of inflating your debt could have even worse consequences. If everyone – investors, companies, workers – expects higher inflation, it can lead to an inflationary spiral.

MA: I don’t think I need to say this, but to sum it up, trying to inflate debt is risky. It’s also worth mentioning that this strategy hurts people who can least afford it, such as people whose wealth is mostly cash in the bank or their wallet rather than stocks, bonds, or real estate.

WONG: So the shrinking pandemic debt may seem like a silver lining in the cloud of inflation. But if history is any guide, it’s not a silver bullet for government debt.

MA: Adrian Ma.

WONG: Wailin Wong, NPR News.


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