Inflation on the horizon (and why it matters)
Lately I’ve become very interested in the subject of monetary inflation. It’s well worth boning up on the subject today, because it sounds like inflation will be coming back with a vengeance, starting sometime in the next year or two.
Last week’s article “Inflation Nation” in the New York Times, by financial historian Allan Meltzer, is one of the best I’ve seen on the subject. (Thanks to Greg Feirman for e-mailing the link.)
Here are a few choice paragraphs:
It doesn’t help that the administration’s stimulus program is an obstacle to sound policy. It will create jobs at the cost of an enormous increase in the government debt that has to be financed. And it does very little to increase productivity, which is the main engine of economic growth.
Indeed, big, heavily subsidized programs are rarely good for productivity. Better health care adds to the public’s sense of well-being, but it adds only a little to productivity. Subsidizing cleaner energy projects can produce jobs, but it doesn’t add much to national productivity. Meanwhile, higher carbon tax rates increase production costs and prices but do not increase productivity. All these actions can slow productive investment and the economy’s underlying growth rate, which, in turn, increases the inflation rate.
Some of my fellow economists, including many at the Fed, say that the big monetary goal is to avoid deflation. They point to the less than 1 percent decline in the consumer price index for the year ending in March as evidence that deflation is a threat. But this statistic is misleading: unstable food and energy prices may lower the price index for a few months, but deflation (or inflation) refers to the sustained rate of change of prices, not the price level. We should look instead at a less volatile price index, the gross domestic product deflator. In this year’s first quarter, it rose 2.9 percent - a sure sign of inflation.
Besides, no country facing enormous budget deficits, rapid growth in the money supply and the prospect of a sustained currency devaluation as we are has ever experienced deflation. These factors are harbingers of inflation.
Meltzer is rather polite in his conclusions, but the picture he paints is of a train-wreck in the making, given how much federal debt we’re accumulating, how much money the Fed is pumping into the economy, and how unlikely it is that any of the parties involved (Obama, Bernanke, etc.) will change course.
The strongest argument I’ve seen for the inevitability of significant rates of inflation, however, came in the April 2009 issue of Porter Stansberry’s “Investment Advisory” newsletter. Stansberry adds up the U.S. government’s outstanding obligations that it must pay over the next ten years:
It’s impossible to know the government’s real liabilities right now, thanks to all of the off-balance sheet items and quasi-governmental insurance groups. But you can make a rough estimate...
Let’s say $20 trillion for the on-balance sheet OBAMA! spending. Another roughly $50 trillion is coming for unfunded entitlement programs, and probably another $10 trillion for all of the various guarantees to PBGC, FDIC, and Fannie/Freddie. That gets us to something around $80 trillion by 2019 - and my estimate is likely too conservative by a large percentage because it assumes tax revenues can grow substantially.
There are roughly 100 million families in America. How many families do you know can afford to add another $80,000 in debt [actually, if you do the math, it is $800,000 per family, not $80,000] to their balance sheets? That’s how much money we’ll owe, per family, by 2019 - and that’s just for the federal government’s debt. That doesn’t include state or local governments, and it doesn’t include any personal or corporate debt.
Since there are around 300 million individuals in the United States, that works out to around $266,000 for every man, woman, and child in the country.
There is nowhere for the U.S. government to get that kind of money - no how, no way - but to fire up the printing presses, in one form or another. They certainly can’t get any of it by “raising taxes on the rich,” no matter how much they try.
It’s also worth considering what countries like China, which has 1.9 trillion U.S. dollars in reserves, will do with those dollars when they see massive inflation becoming a reality. Their dollars will soon be chasing many of the same assets our dollars are chasing - driving up prices further.
The results would not be pretty, especially for the poor, middle class, and elderly - anyone living on a more fixed income. And when you combine that kind of inflation with an already-depressed economy, the results are especially disastrous. It could make the inflationary troubles of the 1970s look good, by comparison.
The T-shirt graphic shown below could soon be a lot less funny than it is today.
Originally published at Mudita Journal. Please leave any comments there.