This would be an opportune time for governments to issue more inflation indexed debt, to begin issuing it, or to issue nominal GDP linked debt, which is analogous to it.

Fifth, debt burdens that cannot be eased by growth, savings, or inflation must be rendered sustainable through orderly debt restructuring, debt reduction, and conversion of debt into equity.

The gain in inflation credibility was offset by weak debt credibility. If the European periphery countries had their own currencies, it is likely that debt problems would morph right back into elevated inflation.

For Greece, with an overall deficit of 4.1 of GDP and a debt GDP ratio of 170 , the debt ratio would fall if the combination of inflation and real (inflation adjusted) GDP growth exceeded 2.4 .

So raising inflation is no cure for the government s current debt or future deficits.

Deflation increases the real (inflation adjusted) debt burden, as well as the real interest rate.

America fears deflation Europe driven by its largest economy, Germany fears national debt and inflation.

Otherwise, China might already have experienced its own localized sovereign debt crisis and, perhaps, hyper inflation.

The resulting higher interest payments add to the national debt, offsetting the erosion of the real value of the existing debt caused by the higher inflation.

This requires consistent macroeconomic policies focused on economic integration, food self sufficiency, low inflation, and reduced debt.

German inflation worries have pushed the government into a much harsher stance on debt relief in Europe.

Higher inflation would cause the interest rate on new debt to rise in a way that prevents the erosion of the real value of the total debt.

That money must come from higher taxes, from eroding the real value of money balances and government debt through inflation, or from outright default and debt restructuring.

In the eurozone, the problem is member countries sovereign debt in China, the problem is borrowing linked to local governments.

That way, wage income, not debt and asset price inflation, can again provide the engine of demand growth.

Still more of the relationship comes from countries where inflation rates are higher when government debt is higher.

Fifth, debt burdens that cannot be eased by growth, savings, or inflation must be rendered sustainable through orderly debt restructuring, debt reduction, and conversion of debt into equity. This needs to be carried out for insolvent governments, households, and financial institutions alike.

A formula for this could be linked to the debt GDP ratio a scheme with advantages that transcend the Greek case.

In addition to tempering debt problems, a short burst of moderate inflation would reduce the real (inflation adjusted) value of residential real estate, making it easier for that market to stabilize.

Their sound financial systems, strong fiscal frameworks, low public debt, and strict adherence to inflation targets give them credibility.

Weak labor markets, low inflation, and debt overhang suggest that a fundamental re ordering of priorities is in order.

The government might be tempted to rely on rapid inflation to try to reduce the real value of its debt.

Its relatively good economic health allows it to finance its debt at less than the rate of inflation, while other European states finance theirs at rates that are three points higher than inflation.

In countries that borrow in their own currency and can monetize the public debt, a sovereign debt crisis is unlikely, but monetization of fiscal deficits can eventually lead to high inflation.

That is because an increase in the inflation rate causes interest rates on new debt to rise by an equal amount.

Later, some investors feared that governments would unleash inflation to ease the burden of soaring public debt and address persistent unemployment.

Despite their economic costs, restructuring public debt or eroding all public and private liabilities through inflation can be less detrimental options.

And a higher debt America is one in which savers and lenders would have a justified greater fear that the government would resort to inflation in order to repudiate part of its outstanding debt.

The massive wall of liquidity that has resulted has triggered inflation, sent real estate prices soaring, and fueled a sharp rise in debt.

The fact that countries can resort to double digit inflation rates and print their way out of a debt crisis is hardly reassuring.

Once any major country develops a market for GDP linked debt, the concept will be established, making it much easier for other countries to join in.

Inflation and deflation of debts produce very different outcomes. Inflation reduces the value of debt, which for many people and companies feels like slowly sipping champagne, producing a nice buzz of light headed excitement as they are unburdened.

The supposed threat posed by government debt levels hasn t hurt these markets, at least in the relatively few countries that have inflation indexed bonds.

The similarities are large trade deficits, manufacturing job loss, asset price inflation, rising debt to income ratios, and detachment of wages from productivity growth.

And deficits can lead to inflation if central banks monetize the government debt, a serious concern in financial markets, as China has warned America.

Both arrangements will eventually become untenable, because they will generate either an intolerable rate of inflation or an unsustainable burden of public sector debt.

In the current situation, the US cannot reduce the real value of its government debt significantly by indulging in a bout of inflation, because the average maturity on existing debt is very short only about four years.

It took a long time, but the contagion of a sound financial idea has been unmistakable. GDP linked bonds would also allow hedging the risk of inflation, plus respond to GDP growth.

It is sobering to note that almost half of high debt episodes since 1800 are associated with low or normal real (inflation adjusted) interest rates.

The inflation pessimists worry that the government will actually choose a policy of faster price growth to reduce the real value of the government debt.

LONDON Have stimulus packages brought the world s traumatized economies back to life? Or have they set the scene for inflation and big future debt burdens?

Debt and inflation will reappear as medium term problems, so it is critical that the fiscal ammunition used helps long term productivity, growth, and sustainability.

In the face of downward nominal wage rigidity, higher inflation would facilitate sectoral adjustment and achieve a small but useful impact on reducing debt burdens.

Indeed, the menace that now confronts us is not public debt or inflation, but a downward economic spiral that will be increasingly difficult to reverse.

Such an approach would reduce the risk of debt deflation, while capping inflation expectations to prevent a damaging surge in prices as recovery takes hold.