Rising national debt raises prospects of eventual inflation

Oil, for example, is traded only in dollars, and in times of panic, investors always rush to the safety of the sawbuck. If investors — especially foreign investors — dump dollar-denominated investments, the U.S. will have to offer much higher interest rates to sell its debts. And that could have the economy grinding to a halt.

Worah doesn't think that's likely.

"I see zero chance of the dollar being replaced in global markets," he says. Goldstein doesn't think foreign investors are likely to dump the buck, either. "Where else are they going to go?" he says. The Japanese and Europeans are drowning in debt, too.

But as the deficits grow, the threat of inflation — with the problems that it brings — grows, too, if only because the measures the country needs to take to prevent inflation are so difficult. There are only three ways to cut the debt: raising revenue, cutting expenses or inflation.

Will the nation cure its debts by raising taxes and cutting spending?

"Sure," says Merk. "And then we will all fly to the moon." Otherwise, he says, "Inflation is the answer."

  • 1
  • |
  • 2
  • |
  • 3
Join the Discussion
blog comments powered by Disqus
You Might Also Like...