IMF chief says no to higher inflation to reduce debt

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