Gross debt hit 101 percent of GDP at the end of 2013, the highest since the immediate postwar years. And despite the improved outlook for the next few years, the Congressional Budget Office has consistently argued that, in the long term, debt will continue to grow relative to GDP, leaving elected officials with the difficult tasks of raising taxes and cutting benefits. Noting that both of these options are things that elected officials are loathe to contemplate, some suggest that a third option is far more likely: the Fed will use expansionary monetary policy to produce inflation as a means of lowering the real debt over time. In an interesting new analysis, Ricardo Reis, Jens Hilscher, and Alon Raviv (VoxEU) conclude that there is really no way to inflate our way to fiscal stability:
One way or another, budget constraints will always hold. This is true as much for a household or a firm as it is for the central bank or the government as a whole. If the US government is to pay its debt, then it must either raise fiscal surpluses or hope for higher economic growth; the former is painful and the latter is hard to depend on. It is therefore tempting to yield to the mystique of central banking and believe in a seemingly feasible and reliable alternative: expansionary monetary policy and higher inflation.Crunching through the numbers we find that this alternative is not really there.
Bottom line: there is no easy way out of debt. If the analysis is correct, this only leaves us with difficult choices—precisely the kinds of choices that we seem incapable of making.