Hussman Funds - Weekly Market Comment: Simple Arithmetic

... it's precisely that short average maturity that makes the debt problematic from a long-run perspective, because it can't be inflated away easily. In the event of sustained inflation, the debt would have to be constantly refinanced at higher and higher yields. Contrary to the assertion that the U.S. can easily inflate its debts away, it is clear that sustained inflation would create enormous risks to our long-run fiscal condition by driving interest costs to an intolerable share of revenues. At that point, any shortfall in GDP growth or government revenues would result in a rapid spike in debt-to-GDP (as Greece and other peripheral European nations are experiencing now). Prior to embarking on an inflationary course, the first thing a government would want to do is dramatically lengthen the maturity of its debts.

For Greece, and increasingly for Portugal and Italy, our view continues to be "certain default, but not yet." For the U.S., our view is that, barring significant restructuring of mortgage obligations, our debt problems are more likely to take the form of sluggish economic growth for an extended period of time. I continue to believe that the main window of inflation risk will begin in the back-half of this decade - not yet. Even so, we are already observing a sustained shift away from fiat currencies toward alternatives like gold.