Of Course We’re Going To Inflate Our Way Out Of This Debt


Does anyone seriously doubt that the US will inflate our way out of the mountains of debt we’re building? From the mortgage bailout to all the government spending, there’s no real way we–as homeowners or taxpayers–can afford all this debt without a plan to inflate it away. A dramatic shift to savings, the only other route, would throw us right back into the great depression, so that’s no in the cards any time soon.

Here’s Mike Kinsley on the secret plan to erase our debt with double digit inflation:

The plan of record apparently is that we keep borrowing, spending and stimulating, faster and faster, until suddenly, on some signal from heaven or Timothy Geithner, we all stop spending and start saving in recordbreaking amounts. Oh sure, that will work.

There is another way. If it’s not the actual, secret plan, it will be an overwhelming temptation: Don’t pay the money back. So far, even as one piggy bank after another astounds us with its emptiness, there have been only the faintest whispers about the possibility of an actual default by the U.S. government. Somewhat louder whispers can be heard, though, about the gradual default known as inflation. Just three or four years of currency erosion at, say, 10 per cent a year would slice the real value of our debt — public and private, U.S. bonds and jumbo mortgages — in half.

Anyone who regards the prospect of double-digit inflation with insouciance is either too young to have lived through it the last time (the late 1970s) or too old to remember. Among other problems, inflation works only as a surprise or betrayal. It can never be part of any public, official plan. Plan for 10 per cent inflation, and you’ll get 20. Plan for 20 and you’ll need a wheelbarrow to pay for your morning Starbucks. But if that’s not the plan, what is?

It’s a bit abstract to talk about double digit inflation. So let’s examine what that would mean. The clearest way is to ask your grandparents about what things costs when they were young. Gasoline for nickels, bread for dimes, whiskey shots for pennies. Now imagine that one day you are going to be your grandparents, but even more so. You’ll be telling the young folk about back when you could buy your groceries for $50 instead of $500, and how a pair of jeans didn’t cost four digits.

One question: since the inflation plan is so widely publicized, can it work? That is, can it really stimulate the economy if everyone knows that the government is threatening to wipe out any savings or investments denominated in dollars?