Why The US Needs Inflation

On today’s show, we’re talking about why the United States needs inflation. In order to understand us we need to go back to the. Following World War II.

From 1945 until 1951 US government Debt went went from 110% of GDP to 50% of GDP. How did they do it? In 1945 US government debt as at an all time high as a result of the second world war. All wars are inflationary and WW2 was no exception. 

There was a massive liquidation of government debt. Real interest rates went to -13%. Inflation was running hot after WW2 peaking at 19% in 1947, but Fed rates were kept low around 2% from the period of 1945 until 1951. After Pearl Harbor the Fed capped the rate at 2.5 from 1943 until 1951. This was a wartime decision. The Fed was not allowed to operate independently during those years. 

It is was trick issue. You can fool the world once. Those who bought those 30 year bonds  were virtually wiped out by the time 1980 rolled around. The government made every single interest payment, but the debt got inflated away. 

Fast forward to 2023. The treasury needs to roll 5T in debt next year, plus whatever they issue in new debt. It’s unclear who will buy all of that paper. The US cannot afford its own debt.  

The only way this is solved is with negative real interest rates 

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Host: Victor Menasce