By Antonio Argandoña
The most heavily indebted governments have always resorted to the same strategy: inflation. Suppose you owe 100 euros that you need to repay in one year at an interest rate of 3%. When the time comes, if inflation is 5%, you will repay 103 euros with a purchasing power of only 98 euros.
The lender will have lost two euros. You cannot induce inflation, but your government or the central bank of your country can. And they will try.
If they fail to do so, they will implement the latest fad in monetary policy: quantitative easing and forward guidance. In other words, they buy public debt in great quantities in order to decrease the interest rate and they demonstrate their desire to keep interest rates low for a long period of time.
With this approach, they achieve two things: stimulate domestic demand and make borrowing more affordable. They will maintain this course of action until inflation increases once again, in other words, until they can implement the old, above-mentioned strategy.
From the point of view of consequentialism, this appears to be a good solution. People’s savings suffer losses, but lenders come out winning and the country is able to quickly resolve its problems.
There are more winners than losers, so this must be a good approach, right? Yet, from a more objective ethical standpoint, the result is not so clear:
- Among the winners we find financial institutions, who back in the day created excess debt and who have been rescued thanks to citizens’ funds.
- And among the losers are savers like the families that have attempted to set money aside for their retirement.