Paying off creditors the right way
“Blessed are the young,” Herbert Hoover quipped, “for they shall inherit the national debt.” With the national debt approaching $14 trillion, however, policymakers are looking to deal with the debt sooner rather than later. As the global economy recovers, they may decide to depreciate the dollar in order to lower the burden of America’s national debt. While seemingly an attractive option, the policy offers as much peril as possibility. Debt repayment through dollar devaluation would pose a serious threat to American foreign policy.
The Debt Dilemma
America’s huge debt is often seen as a problem that only concerns America itself. But as Jeffery Frieden, professor of government at Harvard, told the HPR, America’s creditors should really be the ones to worry. Said Frieden, “When you have loans that are as large as they are now, they are a problem both for those who have to pay them back and those who want to get paid back.” Frieden continued, “Given that every penny we pay back is a cost to us and a benefit to them, and every penny we don’t pay back is a benefit to us and a cost to them, there’s going to be conflict.”
In particular, the United States enjoys the advantage that its debt is owed in U.S. dollars, which allows the government to ultimately determine the debt’s real value. As Frieden noted, “We can do a variety of things to reduce the real burden of the debt, but everything we do to reduce the real burden of the debt, reduces the real value of it to our creditors.” Frieden points to the ability of inflationary policies to reduce the real burden of the debt, decreasing the value of the dollar and effectively paying off less than was lent.
Such a solution to our debt problem would have political implications, though. As Frieden said, “Many would argue that the United States takes advantage of its unique position to get treated in ways that no one else gets treated.”
A Mixed Picture
Ultimately, America’s debt dilemma boils down to a question of priorities. As Frieden explained, “If America’s main concern is managing the money it owes the rest of the world, then the nation should orient relations and policy toward reducing the burden of the debt” through inflationary policies. If, on the other hand, the United States wants to create opportunities for investors overseas, then it should “concern itself with opening new markets and improving relations with other nations,” which currency devaluation would make more difficult.
The two goals may be mutually exclusive. Any attempt to effectively inflate away America’s debt could devastate relationships with the rest of the world. So the United States may soon face a crucial choice. America’s debt poses serious problems, but paying it off the wrong way might curtail America’s continued effectiveness on the world stage.
Aditi Ghai ’14 is a Staff Writer.
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