How an Economy Grows and Why It Crashes

TAKEAWAY
TAKEAWAY

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For political leaders, default can be rather embarrassing, 
as it amounts to an offi cial acknowledgment of insolvency. 
To avoid this, many opt to simply print money to pay debts, 
effectively repudiating their obligations by infl ating them 
away. Since infl ation is usually the easiest choice to make, it 
is often the most likely. But while it may seem easy at fi rst, it 
ultimately exacts the harshest toll.
Infl ation allows governments to avoid hard choices 
and dispose of their debt on the sly. By printing money 
governments can nominally pay back all that they owe, but 
they do so by diluting their currency. Creditors get paid, but 
what they get isn’t worth much, and if infl ation turns into 
hyperinfl ation, it’s worth nothing.
Infl ation is simply a means to transfer wealth from anyone 
who has savings in a particular currency to anyone who has 
debt in the same currency. With hyperinfl ation, the value 
of savings gets completely wiped out and the burden of debt 
is removed. (Those who own hard assets do okay, because, 
unlike savings in currency, assets will rise in nominal value 
when infl ation fl ares up.)
It has happened many times before: France in the 1790s, 
the Confederate States of America in the 1860s, Germany 
in the 1920s, Hungary in the 1940s, Argentina and Brazil 
in the 1970s and 1980s, and Zimbabwe today. In all 
of these instances the circumstances that led up to the 
hyperinfl ation, and the economic devastation that followed, 
were remarkably similar. The countries satisfi ed staggering 
debt by wiping out the value of their currencies. As a result, 
their own populations were thrown into abject poverty.