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To: Amy J who wrote (25738)	12/9/2004 1:41:55 AM
From: GraceZ	Respond to of 306849

If their debt was so low, why did they spiral into inflation? Inflation isn't caused by debt. Inflation is the loss of value of a currency. Even commodity based money systems suffered inflation if there was a sudden windfall of that commodity. I thought inflation was a govt's "cure" for out of control deficits. The preferred method to deal with debt and deficits isn't inflation but to grow the economy so the debt shrinks on a relative basis. A small bit of inflation has always been the preferred over deflation but no government wants any more than a small amount. Inflation has a way of getting out of control and out of control inflation topples governments. If you look at the history of the US you can't make a historical correlation between rising deficits and rising inflation rates. Our deficits rose steadily through the first half of the 1980s while the rate of inflation continued to fall for 20 years from it's high mark in 1981. Also, Argentine debt wasn't low. I said their government deficit at the time when the currency crisis and default occurred was lower than ours is now, as a percentage of GDP. If they now have debt at 128% of GDP today and GDP has dropped 17% from 1998, then their debt as a percentage of GDP was quite high at the time of the default, plus interest rates were quite a bit higher back then for an emerging market. The thing you have to remember almost no government ever pays off principle on their debt, they pay interest and roll over principle. The US Treasury is still paying interest on debt that was acquired during the Civil War. Monetary inflation and the growth in our GDP made the debts acquired during earlier wars easier to service. The problems with debt occur when the economy stops growing fast enough to service the debt at current rates or when debt holders demand a higher interest rate because your credit quality falls. Both of these happened to Argentina at once. They had a three year recession followed by the devaluation of the currency of their closest trade competitor, Brazil. Because they were pegged to the dollar they lacked the flexibility to devalue without causing a crisis in confidence which raised their interest rates far beyond the point where they could service the debt.