Inflation And Debt

I find that the debt crisis in Europe illustrates how debt and inflation are actually different manifestations of the same thing, that being the inability of a country to live and function within it's means. The two are very interchangeable.

My interpretation of this crisis is that certain countries have been in the habit of paying down some of their debt by simply printing more money, and accepting the resulting moderate level of inflation. When European countries gave up their former currencies and joined the euro, they gained many advantages. However, one price that they paid was giving up the ability to print their own money. The euro is printed by the European Central Bank.

Since joining the euro, those countries cannot print more money to pay down national debt. They have essentially traded inflation for debt. That is why the debt of some European countrties today seems to be such an issue. It's not that it wasn't there, at least to some degree, previously. It's just that it can no longer be exchanged at will for inflation.

Nowadays, with the vast majority of financial transactions being done electronically, we could eliminate inflation fairly easily. All that we would have to do is to time-stamp every input of money, such as an investment or bank deposit, and maintain a central index of inflation. This would not cover paper currency, but most people and businesses only hold paper money for a very limited time. I know that paper money leaves my wallet really quickly.

It is often said that "The past is another country". When one goes from one country to another, currency can be readily exchanged. Time-stamping transactions would operate on the same principle, by determining the "exchange rate" between a time in the past, and the present. It would work so that one might be told "You deposited a thousand dollars (euros, pounds, rupees, etc.) on December 13, 2009, so, according to the inflation index, that would give you $1,087.23 today". This would effectively eliminate inflation.

The reason that we do not do this is obvious. Eliminating inflation would make debt even more glaring. Governments would lose the ability to accept a little bit of inflation to pay off some debt. Inflation actually is a form of tax because it spreads the burden to everyone of the government printing more money for it's coffers. Instead of the government raising your taxes, they just take some of the value of your money by decreasing it's purchasing power.

A low percentage of annual inflation is usually acceptable, as long as it does not increase to destructive levels. Debt and inflation are opposite sides of the same coin, and until a country can live and operate within it's means the best approach to the resulting bill is a sensible mix of debt and inflation. At least there is not any interest on inflation, like there is on debt. Inflation also decreases the amount of real money that the government owes on it's remaining debt.

The countries using the euro had to give up this option when they joined the common currency. The reason that we do not eliminate inflation by time-stamping is that it is actually useful, at least to a certain extent, as an alternative to debt.