The impact of debt/deficits is complex. If debt/deficits lead to debt monetization / currency devaluation then the impact is inflationary. However, the answer is not so simple. Note that China and Japan have vast debts (over 200% relative to GDP) with little or no inflation in sight. Indeed, in some countries debt/deficits can actually b…
The impact of debt/deficits is complex. If debt/deficits lead to debt monetization / currency devaluation then the impact is inflationary. However, the answer is not so simple. Note that China and Japan have vast debts (over 200% relative to GDP) with little or no inflation in sight. Indeed, in some countries debt/deficits can actually be deflationary. In some countries, debt/deficits can lead to overvalued currencies in the short and/or medium term. Overvalued currencies are associated with lower inflation, not higher inflation.
This is no hypothetical point. Between 1980 and 1985 Reagan’s deficits raised the value of the dollar a lot. Of course, import prices (and goods competitive with imports) fell. So I would argue that Reagan’s deficits were substantively deflationary. The same argument can be made for Argentina before the crash around 2001.
By the way, Rogoff’s book (‘This Time is Different’) is quite dull. However, the argument is important. Government go broke all the time and have for a very long time.
The impact of debt/deficits is complex. If debt/deficits lead to debt monetization / currency devaluation then the impact is inflationary. However, the answer is not so simple. Note that China and Japan have vast debts (over 200% relative to GDP) with little or no inflation in sight. Indeed, in some countries debt/deficits can actually be deflationary. In some countries, debt/deficits can lead to overvalued currencies in the short and/or medium term. Overvalued currencies are associated with lower inflation, not higher inflation.
This is no hypothetical point. Between 1980 and 1985 Reagan’s deficits raised the value of the dollar a lot. Of course, import prices (and goods competitive with imports) fell. So I would argue that Reagan’s deficits were substantively deflationary. The same argument can be made for Argentina before the crash around 2001.
By the way, Rogoff’s book (‘This Time is Different’) is quite dull. However, the argument is important. Government go broke all the time and have for a very long time.