Euro On the Brink
“Today, the world is no longer threatened by the debts of banks but by the debts of governments, including debts which were run up rescuing banks just a year ago. The banking crisis has turned into a crisis of entire nations, and the subprime mortgage bubble into a government debt bubble.”
Especially interesting is this article’s exploration of the inflation “solution”:
“US President Barack Obama, in particular, is likely to be very tempted to fire up the money printing presses and, by devaluing the currency, to reduce the real burden of liabilities the United States has accumulated. Because foreign investors in China and Japan hold a large share of America’s debts, they would be more adversely affected by depreciation than the Americans themselves.
Inflation has other advantages from the government’s perspective. When prices rise, the government collects more revenue. This improves its ability to repay its debt, because the value of the debt also declines daily. For this reason, Paul Krugman, winner of the Nobel Prize in Economics, advised the president to try using the tool of inflation before raising taxes or cutting spending. His recipe for the crisis consists of ‘vigorous growth and moderate inflation.’ “