Mujagic puts it in a 20-30 year perspective, as inflation is already gigantic at the moment. “At the time, inflation was between zero and two percent, but if you let inflation rise to three to four percent and you don’t do much to slow it down, it helps bring the debt mountain down a bit.” “, Mujagic explains.
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He also sees that it has already happened. “After World War II, the United States and the West did this to skim high debt.” The skimming works in such a way that the debts are not expressed in absolute numbers, but in percentages of the nominal value of the economy. ‘This is the value of what we all do in a year, multiplied by what we have done. This includes inflation. So when prices go up, the value of your nominal economy increases enormously. If debts are then expressed as a percentage of that nominal value, this means: the higher the inflation, the lower the debts”, says the economist.
It’s an “easy route,” Mujagic says. “You didn’t have to solve anything yourself.” It has been around for some time, a professor has discovered. ‘In nearly 140 countries and in nearly 400 cases where debts have declined, he looked at how often inflation played a significant role. His conclusion is that he played a role in about half of the cases ».
“Not the case this year”
But this year is different, Mujagic sees. ‘One might think that this is also the case with high inflation, but that is not the case. With very high inflation like now, interest rates also go up sharply. Since nominal economic growth is higher, you again lose on the interest cost side, because they are also rising. This professor also says that inflation can play a significant role under certain circumstances. That mix consists of moderate inflation of three to four percent combined with financial economic repression, in which interest rates are kept lower.’
Regulations that make government bonds attractive to pension funds should also help. “We’re here now. Everyone assumes that we will have an inflation rate of between two and four percent in the coming years. We are also dealing with financial repression, such as the ECB saying that buying government bonds is one of its standard tools. Other central banks openly say they keep long-term interest rates low. And the regulations of recent years mean that the purchase of government bonds is becoming attractive for insurers and pension funds. This also pushes interest rates down,’ says Mujagic.
‘ideal environment’
He then draws the following conclusion: ‘You also see the ideal environment that is needed to slowly reduce debts through the easy way out. The flip side is that it affects all of us, because we have to take into account the fact that we will see prices go up much faster than we are used to in recent decades.’