IMF chief says no to higher inflation to reduce debt

Sri Lanka's Prime Minister Ranil Wickremesinghe arrives with flowers to receive blessings at the Gangaramaya Buddhist Temple, Colombo, Sri Lanka on Wednesday 4 April 2018. On wednesday (4), Wickremesinghe survived a no-confidence motion in the Sri Lankan parliament with a 46 vote majority after a 12-hour debate with 122 MPs voted in his support while 76 MPs voting to remove the prime minister. (Photo by Tharaka Basnayaka/NurPhoto via Getty Images)

Apr 11, 2010 (LBO) – The head of the International Monetary Fund played down suggestions that inflation should be raised to slash the real value of state debt, but said future growth should be used cut the burden. Strauss-Khan said public debt in advanced economies were forecast to rise about 35 percentage points to about 110 percent of gross domestic product by 2014.

“Reversing this increase will be a tremendous challenge—let alone reducing debt below pre-crisis levels, which may be needed to leave enough fiscal space to tackle future crises,” he said.

Policy Cycle

National debt of governments rose due to ‘stimulus spending’ and banks bailouts caused from a burst bubble fired principally by the US Federal Reserve which kept interest rates abnormally low from 2001 amid a war with Iraq.

When rates were eventually raised to 5.25 percent an asset, commodity and credit bubble collapsed sending the US and the world into a ‘harder-than-expected-landing’.

Straus-Kahh said central banks started targeting low levels of inflation to re-establish credibility following the steep price rises of the 1970s.

The 1970s so-called ‘great inflation came after the US defaulted on the Bretton