Countries would get more headroom on their debts, inflation would rise but not necessarily at an unmanageable rate. It would have the effect of hitting the reset button.
And believe it or not, it has been a topic of discussion of late.
Gavyn Davies at the FT has been talking about this idea of central banks canceling debt.
The FT also discussed it in June.
The WSJ was on the topic this week as well, and apparently at least one member of the Bank of England was forced to deny that he favors such a radical solution.
So the bottom line is that this shocking move is being talked about by influential publications, Wall Street traders, and perhaps even officials, though they’re mum on something so radical.
Because very serious persons will continue to describe this step as radical (the screams of “monetizing the debt!” would accompany any action on this front), I wouldn’t bet the ranch on it. But why exactly would it hurt anyone? I suppose you could say that the expectation of what amounts to a bailout of sovereign debt would create a moral hazard. And I would argue that, in the line of countries who deserve a debt jubilee, industrial powers like the US and UK rank low on the list. Moreover, the US and UK don’t currently have a debt problem, and until they do it would be odd to see this step taken. It makes more sense for a country where debt has become an impediment to borrowing. Surely the conservative European Central Bank would recoil at such a solution, but there are others out there who might not.