Inflation--Making the Deficit Go Away

A year ago I was saying that the only possible way America could cover its massive debts was by employing massive inflation. After all, a trillion doesn’t look so huge when its value is only about the equivalent of a million or so today.
A government can pay that off relatively easily—in fact it can pay off several trillions at that rate. It’s the only imaginable way that we can pay off the foreseeable government shortfalls without crippling tax increases or Draconian cuts in programs like Social Security.
Enough inflation to bring the debt down to manageable repayment schedules involves, of course, what we call hyper inflation. We saw a real life example of that in Austria and Germany after World War I. They paid workers in wheelbarrows full of cash that could barely cover a week’s groceries. People raced to the stores before more inflation became less food.
This kind of inflation gets rid of debt—like bankruptcy—but it has other pernicious consequences. For one thing, it cannot be controlled, however much officials may fool themselves into thinking they can turn it on and turn it off.
It also wipes out the middle class. You’ve worked hard and saved diligently all your life. You’ve accumulated a comfortable retirement nest egg of say, a million. Good on you. Except that with the kind of inflation our government is going to need, suddenly that million barely represents a single year’s expenses.
With serious (hyper) inflation, that million drops to a point where it covers little more than a gallon of milk, a loaf of bread and some eggs. A lifetime of sensible saving and investing will now feed you for a few days. Period.
Inflation frightens (or outrages) creditors. To keep the Chinese, for instance, buying and holding dollar based treasury bonds, initially you need to raise interest rates. Huge tax increases become immediately necessary in order to pay the new rate of interest.
The need to use government revenues for interest payments stops or cripples all sorts of programs. The taxes needed cripple business investment and hiring. We see an example of this in England between the two world wars.
She came out of World War I so burdened with debt that it took nearly half of all government revenues just to service the debt. One reason she did not arm to stop Hitler in the 1930s is that she couldn’t afford to. (What happens to our “war on terror” or defense against it?)
Finally an international panic sets in and foreign banks, investors and governments began to dump the dollar—hoping to get a few more cents today than a dollar might bring tomorrow. With its credibility destroyed, the dollar becomes the paper it really is.
That’s when hyper inflation sets in—no one knows how long it will run or how low it will go. It takes on a life of its own, fueled by panic. The effects of German inflation were only eased when Hitler came to power and put people to work building munitions. He put a lot of the unemployed in the Wehrmacht and gave them jobs in Poland, France and Russia.
This week Bloomberg “Business Week” quotes a group of economists out in California who just wrote a research paper titled, “Using Inflation to Erode the U.S. Public Debt”.
“Business Week” warns, “As the [2008] financial crisis demonstrated, things can go to hell in a hurry” if, for example, calculated inflation doesn’t work out quite as planned. The magazine doesn’t say the notion is impossible, just that it might be worrisome. (Feb. 15, p 16)
But try to think of an alternative.