John Maynard Keynes once observed that “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” As the spectre of higher inflation looks set to become more than transient, policymakers should beware.

Keynes first made this observation in the context of European governments’ high indebtedness after World War I. It has always been tempting for governments to erode the value of their borrowings through inflation, rather than to swallow the bitter medicine of spending cuts or higher taxation. The British economist noted that inflation represents a form of arbitrary confiscation by governments of their citizens’ wealth.

Indeed, high inflation reduces the real spending power of both wage-earning workers and those with large amounts of cash savings. Nevertheless, it can also enrich those with large asset holdings, who see the value of those assets soar. Throughout human history, rapid rises in inequality have tended to lead to conflict.

Since the 2008 global financial crisis, central banks around the world have engaged in quantitative easing and extraordinary low-interest rates in an attempt to stimulate economic growth. Alongside this, wealth and income inequality have surged. Monetary and fiscal stimulae in response to the COVID-19 pandemic have thrown further fuel on the fire. Recent policy steps have merely exacerbated pre-existing trends, however. Coupled with technological advances driving industrial automation and outsourcing, increasingly regressive fiscal policies and less rigorous antitrust enforcement driven by the tilt towards free-market ideology in the 1980s had seen huge rises in wealth for some, while the wages of many ordinary workers in the developed West stagnated. Meanwhile, market-oriented reforms in China helped lift millions out of abject poverty but, even there, slowing growth and sharply rising wealth disparities have lately been elevating social tensions.

Of course, Keynes himself railed against excessively tight monetary policies during the interwar period, arguing also that, in the face of economic stagnation, governments needed to increase spending to “pump prime” the economy. Certainly, through swift and large-scale monetary actions under Ben Bernanke, the U.S. Federal Reserve avoided even more calamitous global economic turmoil in 2008. However, with political gridlock inhibiting the use of fiscal levers, the American recovery became over-reliant on loose monetary policy.

COVID-19 has forced governments to unleash massive fiscal stimulus on top of unprecedented monetary measures by central banks. However, unlike the global financial crisis, which hit consumption demand, the pandemic has largely impacted the supply of goods and services. Stimulating demand through loose fiscal and monetary policies at a time when global supply chains have been disrupted is likely simply to fuel price inflation, as more money chases a restricted supply of goods. As economies emerge from the pandemic, policymakers are now caught in an impossible bind.

Prolonged loose monetary policies have encouraged huge borrowing. U.S. government debt-to-GDP reached an all-time high of 136 percent in mid-2021. Tightening monetary policy will inevitably cause a fall in asset prices, particularly in fixed-income securities such as government debt. Given that U.S. Treasuries are the primary asset used as collateral in financial markets, this could lead to a cascade of deleveraging that would precipitate a collapse in activity in the real economy. It would further cause a surge in debt servicing costs for the U.S. government and, while America is in the privileged position to be able to simply print more dollars to meet its obligations, this would likely also spark an inflationary spiral.

Policymakers will need to walk a tightrope to cut the debt burden without strangling economic growth.

In the deleveraging phase of the credit cycle, there are four paths that policymakers can pursue. First, they can cut spending. The problem is that, when overall consumption and investment fall, this can further drag down economic activity and make it even more difficult to service borrowings. Second, they can default. In the case of the U.S. government though, a default would lead to global financial chaos that would inevitably harm the U.S. itself. Third, they can pursue wealth redistribution by raising taxes.

Although like the first two options, raising taxes simply to repay debts would precipitate a fall in economic activity, taxation is not always a zero-sum game. Where excess savings are hoarded or put to unproductive uses, raising taxes to invest in infrastructure, scientific research and education could actually elevate long-term economic growth. Fourth, they can print more money. However, as the experience of hyperinflation in Germany in the 1920s showed, this can be highly destabilising and have catastrophic social and political repercussions.

U.S. policymakers have some difficult decisions ahead of them. One key consideration will be the role of the dollar. The dollar-centric global monetary system that has persisted since the 1940s has inflated international demand for dollars, impeding the U.S. currency from depreciating in response to higher relative productivity gains in other countries. This has singularly contributed to an erosion in American industrial competitiveness and sapped economic vitality. Given worldwide dependence on the dollar, changes will be complicated. Nevertheless, any serious attempt to address contemporary economic and financial challenges must confront long-overdue reforms to our global monetary system.

James Fok is the author of the forthcoming book, Financial Cold War, published by Wiley.