Justin Fox at Time considers the possibility. He believes that the government’s decision to increase its issuance of inflation-protected Treasuries could prevent it from inflating away its debt, though he has some doubts. So do I.
On one hand, Fox’s logic can’t really be disputed:
With the total U.S. government debt held by the public at $7.8 trillion as of last week, $600 billion is still small beans. But if the TIPS share grows, it will get harder and harder for our U.S. government to inflate its way out of its burgeoning debt burden. That is, if all a country debt is in fixed rate bonds (as was the case for the U.S. before 1997), inflation shrinks the size of that debt relative to the overall economy and, more to the point, tax revenue. If all the debt were in inflation-linked bonds, inflation wouldn’t reduce the debt load at all.
But, as Fox notes, there’s a big “if” in there. Right now TIPS are still a relatively minor portion of total outstanding debt. It would likely take quite a few years and a significant change in the portion of inflation-protected debt issued for this point to matter. Unless the TIPS portion of outstanding debt grows much larger, then the government would still benefit from allowing inflation to devalue the rest of its unprotected debt. So, in the near-term (read: next 3-5 years) I don’t really see TIPS acting as a major barrier to inflation, if that’s really what the government has in mind.
And as Fox also touches on, the TIPS obstacle could be an easy one to get past for the government anyway. After all, it defines the inflation rate that TIPS’ yield depends on. If Washington was really motivated to use inflation as a tool, it would make sure that whoever was running the Bureau of Labor Statistics provided a consumer price index calculation that skewed the official inflation reading in its favor.
With that said, I don’t think a conspiracy of such proportions is likely. The best way for the U.S. to get itself into a whole lot of trouble would be for it to render its debt worthless with extreme tactics like this. Surely, policymakers realize that. So the real fear — that of hyperinflation — is probably exaggerated, with or without TIPS. If policymakers are willing to alienate investors to that extent, they’ll just stop buying U.S. debt. And the prospect of the U.S. going into default would be far worse than feeling forced to actually keep up with its debt obligations.
