Inflate it Away ?

Robert Waldmann

Michael Kinsley suspects that the US government might decide to inflate its debt away.

“Just three or four years of currency erosion at, say, 10 percent a year would slice the real value of our debt — public and private, U.S. bonds and jumbo mortgages — in half.”

Notice how “log(2)/log(1.1) = 7.25 becomes “three or four”. To cut real debt in half the price level has to double not increase by 50%. OK maybe he meant the real value would be multiplied by 0.9 in a year (not the price level multiplied by 1.1) then the calculation is “log(0.5)/log(0.9) = 6.58 years.

Kevin Drum wonders if this is possible as expected inflation should be incorporated in interest rates.

It depends on the date of maturity of outstanding debt.

An increase in interest rates is a decline in the price of bonds, including those that have already been sold. The rest of the world would lose massively if the US inflated. The point is that the price of outstanding bonds is a problem for their owners not for the treasury. The amount that can be effectively defaulted via inflation depends on the maturity of the outstanding debt. If all US debt were 1 month t-bills only inflation over one month would necessarily be a problem for holders of current debt. Kinsley’s calculation implicitly assumes that no debt will mature in the next “three or four” or 7.25 years. That is very far from true.

Some details after the jump.
update: absolutely humiliating innumeracy after the jump corrected thanks to anonymous in comments.

As of January the US Treasury owed $ 1,792,889 million on T-bills which, when issued mature within a year. There are also $ 516,209 million in inflation protected securities. The only way to default on them is to default openly or to fiddle with the price indices (nella gloriosa tradizione italiana non attuale). There are also $ 2,825,174 million in Treasury notes (mature 2 to 10 years after issue) some of which are nearing maturity. The holders of Treasury bonds (10 or 30 years) are trusting the treasury with a mere $ 591,890 million.

There is much detail on outstanding by maturity date. For those willing to do some calculations, the data are also available in excel format.

My calculations (don’t trust them) are that there are 591,833 million in notes payable in 5 or more years sum(r199..r218) plus $ 594,641 million of Treasury bonds which won’t mature within 5 years (means I don’t understand how they code as they seem to rename bonds payable in less than 5 years notes or something). So little more than a mere trillion vulnerable to Kinsley’s scheme.

However 10% inflation is for pikers. We collectively owe $ 2,145,201 thousands maturing in more than 2 years. Now that is tempting.