The Corner

Nicole Gelinas in the Ditch

Nicole writes, “It is unclear how a ‘permanent monetary expansion,’ which Ramesh and Professor Beckworth suggest, would help people to address this debt burden. . . .” Really? It seems pretty clear to me. More nominal income makes it easier to repay nominal debts. How could it not?

She continues: “. . . unless ‘permanent monetary expansion’ is a delicate way of saying that the Fed should inflate away this debt in a roundabout fashion by trying to inflate the nation’s income and spending. But why should the Fed do that? Inflation is a gain for borrowers (sometimes). But it’s a loss for lenders (and for investors in debt).”

No. Higher nominal growth yields higher interest rates, which makes lenders better off. It’s true that to the extent higher nominal income takes the form of inflation, it reduces the value of old debts to creditors. But it’s not improper for governments to undertake policies that have this effect. When people contract debts, the terms reflect implicit expectations about future inflation (and economic growth). An unexpected rise in inflation makes the terms better for debtors and worse for creditors. But an unexpected fall in inflation, such as the one we had during the recent crisis, has the reverse effect. What we ought to have is a policy that keeps the long-term path of nominal spending on a stable trendline and thus creates a relatively predictable backdrop against which people can mutually beneficial transactions. I have nothing against Gelinas’s preferred route of workouts, but I think we’d need them less with the right monetary policy.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.


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