Sunday, February 8, 2009

The Democrat solution, inflate our way out of debt?

This recent item from Bloomberg News caught my attention. Paul Volcker has grown increasingly frustrated over delays in setting up the economic advisory group President Barack Obama picked the former Federal Reserve chairman to lead, people familiar with the matter said. Volcker, 81, blames Obama’s National Economic Council Director Lawrence Summers for slowing down the effort to organize the panel of outside advisers, the people said. Summers isn’t regularly inviting Volcker to White House meetings and hasn’t shown interest in collaborating on policy or sharing potential solutions to the economic crisis, they said. Paul Volker was Federal Reserve Chairman during the Carter and Reagan years. He is a fiscal hawk as any Fed Chairman should be. That job, first and foremost, is to maintain the value and stability of the dollar. And he did that when inflation ran rampant in the seventies. Instead of the ill advised wage and price controls under Nixon and tepid Fed Funds and discount rate increases later, he took the bull by the horns and dramatically and mercilessly broke the back of stagflation of the Carter years by upping Fed Funds rates to 20% and holding them there. But he caused a recession and many Democrats think that caused the defeat of Carter in 1980. Inflation is a means of escaping debt, both personal and by government. But it comes at the price of a cheapened dollar. And I suspect that this is what the new administration is aiming to do. With endemic inflation, long term interest rates will climb sky high (the government can’t control them, they are market driven) slowing business growth, exacerbate inflation by upping the cost of imported goods, devastate those living on fixed incomes and kill any thought of maintaining a savings account. One only needs to look at the hyperinflation in Zimbabwe where in mid-January it issued a 100 trillion dollar note worth US $33. Yikes, at that rate we could pay off our national debt with your change from McDonalds. Democrats have traditionally been inflation friendly. In the years they controlled the House, especially in the Carter years, when inflation ran rampant (over 10% at times), they used bracket creep to raise taxes. Then at election time they magnanimously voted to "readjust" the brackets, billing it a tax cut. The cuts were all illusory. But they kept the Democrats in office. Reagan’s tax reform in the early eighties put an end to that game by indexing most tax rates. Fiscal and monetary irresponsibility will kill the dollar as an international currency. It will end our ability to sell our debt to foreign nations. It will put us in the category of Mexico, Argentina and Zimbabwe in international markets. The utter disregard of sound economic principles in the current stimulus bill is a giant step in that direction. Hang tough Paul Volker.

1 comment:

elfman2 said...

" It will end our ability to sell our debt to foreign nations."

You say that as if it's a bad thing ;^) Maybe we should not be able to easily sell our debt to foreign nations or anyone else for that matter.

We have what, 12 trillions in debt, expected to be 20 trillion in a few years, an aging workforce and many tens of trillions in unfunded liabilities on the horizon: Medicare/Obamacare, Social Security as well as state and private pension liabilities . How else does that get paid? I haven't found a serious plan for that yet, have you?

I found your site while googling "inflate our way out" and "debt". I'm 48, and trying to decide if we should refinance our mortgage over 15 or 30 years. Normally, 15 would be the clear choice. But if we have 10% inflation for 4 to 5 years, we'll be paying those last 25 years of our mortgage with that change from McDonald's.