From: bucknerb@bnr.ca (Brent Buckner)
Subject: Re: A NEW WAY TO REDUCE THE PUBLIC DEBT
Organization: Bell-Northern Research, Ontario, Canada
Distribution: usa
Date: Fri, 2 Oct 1992 17:26:46 GMT

In article <8239@lee.SEAS.UCLA.EDU> khanh@curtiss.seas.ucla.edu (Khanh V. Nguyen) writes:
>This is the answer to the criticisms of my proposed plan to reduce the 
>public debt thru inflation:
>
>A continuous public debt is not unusual, but America's debt has reached
>a point that it is no longer manageable. The govt. has to borrow more
>and more to pay the interest. This pyramid game sooner or later will 
>explode. The only thing to do then is to declare the bankrupcy of the
>United States and to auction America. My plan is painful, but it is
>a kind of Shock Therapy. As soon as the debt has been devalued to a 
>certain point, a new currency will be established to eliminate the high
>inflation.
           [further comments deleted]
>
It is nice to see discussion and a proposal on this topic.

Now, on to the issue.
Why bother creating a new currency?  According to your plan, the
inflation will really be a one-time price rise (let's use your
doubling of the price level).  For this discussion, I will
omit discussion of how you would cause the expansion of the
money supply (although this is a major issue for your plan).

You still have to improve the government budget
because real interest rates will be high.  Only if the present
value of your future borrowing is low enough can you
possibly come out ahead.  Let's look at the results in 1992 dollars.

Does anyone have the numbers handy?  As I recall, the 1992 deficit 
projection is $350 billion, and interest payments are somewhere
around $300 billion.  Now, assuming that your plan works, this
would transform into $150 billion (in 1992 dollars) as the
value of the debt (in 1992 dollars) is halved.
This still leaves a $200 billion dollar deficit.

Since many pensioners have lost a great deal of their
real assets (and thus real incomes) 
I would assume that you'll allow entitlement payments to rise
(Aside:  pensions with cost of living allowances will 
transfer the hit from pensioners to those presently working).
Also, some amount of those interest payments were recovered
through taxes.  Let's say 10%.

So, being generous, there's still a $225 billion dollar deficit.
Be aware that the real price of borrowing will have increased.
Further, there are other costs of the uncertainty unleashed.

Inflating the debt away will not be sufficient on its own. 
Growing out of the debt will also be insufficient (the
economy would do well to grow at 5%; the debt is growing
faster).

Depending upon where the U.S. sits on the Laffer Curve
(to oversimplify), increasing taxes alone may not be sufficient. 
Depending upon the value of the
Keynesian Multiplier (to oversimplify again), cutting spending
alone may not be sufficient (the debt-to-GDP ratio may rise
as a consequence).

The situation is bad enough that no one measure is likely to
fix it.  And, as you note, it is just getting worse.

-- 
at Bell-Northern Research
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