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(email exchange – in response to previous email)

 
>   
>   On Thu, Jan 15, 2009 at 5:09 PM, Martin Wolf wrote:
>   
>   
>   Inflation is default.
>   

I respectfully do not agree.

Default is failure to make payment as agreed.

There is no zero inflation contract.

In fact, most every currency has inflation most years.

>   
>   Surely that is obvious to everybody.
>   

Credit default contracts don’t include inflation, nor does any other default provision.

>   
>   When the economy finally recovers, the government will end up with a very large debt.
>   

It will be some % of GDP that you may consider ‘very large’.

>   
>   Such debt is owed to bond-holders and serviced by taxpayers.
>   

In the first instance it is serviced by crediting accounts on the Fed’s own spread sheet.

If aggregate demand is deemed too high at that time future governments may opt to raise taxes.

If future govts desire to alter the distribution of real output to those then alive they will be free to do that via the usual fiscal and monetary measures.

>   
>   Politicians who are elected by the latter will want to default on liabilities to the former
>   (particularly if many of them are foreigners) and provide taxpayers with goodies, instead.
>   

Very possible!

>   
>   A burst of inflation is how they have always done it.
>   

Yes.

>   
>   End of story.
>   

As above. If you mean to say deficits will cause inflation, then do that.
Default is the wrong word for an international financial column.
Surely that’s obvious to everyone.

>   
>   I suggest you study the history of Argentina or indeed of the post-first-world-war inflations.
>   

And you can study what the ratings agencies have considered to be defaults.

 
All the best,
Warren

>   
>   Martin Wolf
>   

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