Bringing home the pension bacon
The rumbling has started: why not double inflation to start reducing debt? The country is burdened with unpayable debt: mortgages, student loans, credit cards, pension benefits and everything else that’s been consumed without paying for it upfront. So do we just inflate our way out from under our obligations? That seems to be the next can’t-fail plan.
“Raising the expected rate of inflation would reduce the real burden of debt on households, corporations and governments, spurring both investment and consumption,” Profs. Chinn and Frieden write, arguing the Fed should allow inflation to run “in the 4 to 6 percent range for several years.”
The authors recognize their proposal will likely be “met with howls of indignation” from creditors, who would see a policy of intentional inflation — which would reduce the value of their bonds — as an expropriation of their assets. “To an extent, they are right,” the economists say.
But one way or another, they continue, those debts aren’t going to be repaid in full, whether it’s through inflation, default, bankruptcy or negotiated settlements. Better to do it in a way that’s quick and, because it treats all debts equally, at least relatively fair. The logic is the same as in bankruptcy proceedings, they write: “For creditors, something is better than nothing; for debtors, relief is better than default; for both, certainty is better than uncertainty.”
What could possibly go wrong?
Just as a federal bailout is probably the end game Dems governors are planning on for underfunded state employee pensions, inflation is probably the long tool to deal with our federal debt. I’ll give credit to Walt; he did say that would be the solution years ago on this blog. While we may be years away from resorting to hyperinflation to deal with out debts, it probably will happen – either intentionally or unintentionally sometime in the next 10-15 years.
CF – i meant “long term tool” rather than “long tool”
Well I thought so, but then you brought Walt into the conversation so….
Fed wants it, but cannot say they want it. Also, difficult to create when you really want it, right Japan?
You’ll have to double the amount of my food stamps if you hyperventilate!
Don’t know how they’ll be able to raise rates to eventually stop inflation, though. With total national debt at $15 Trillion and counting, each 1% increase would add a further $150 Billion and more to the deficit and debt, if my Liberal Arts math is right. 5% rates on government bonds ~ $750 Billion – yikes. The Fed might have to let that runaway freight train get away. How do you spell Weimar?
But remember the Feds would be the biggest losers because so many government benefits are linked to inflation. And if inflation’s rising, cutting cost of living increases would become a more deadly political poison than it is now.
“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.” Vladimir Lenin
Anonymous2 is right. Benefits such as social security are tied to the rate of inflation, so the govt simply changes the way inflation is calculated. They have done exactly that several times in the past. It’s also interesting that food and energy are not in that calculation.
Great, so that punishes all the savers ( especially anyone who owns directly or indirectly anything where you are promised to be paid x percent on your principal, bye bye, nest-egg) and rewards all the borrowers (look, I promised to pay back a million when it was worth a small house in Greenwich, and now it’s worth a cup of coffee + donuts).
It throws a huge monkey wrench into the economy because with all prices increasing rapidly no one knows how to price anything correctly ( salaries, cars, houses, wrenches, groceries) holding on money becomes insane, you want assets. Get a loan? hahaha. Sure except your rate now is variable so you can’t plan. Trying to sell stuff? fun when you have reprice every month/day/hour.
Is your company (or the one you are thinking of investing in ) earning more money this year because of great management, better products or cleverness, or because inflation made the same earnings look better, and the financial operations guys are playing silly bugger successfully>?
Feh.
Inflation is a disaster, every society that tried it : the ancient Romans, , Zimbabwe, ends up destroying it’s middle class, trashing it’s economy, and weakening itself.
And once you’ve done it it takes herculean efforts to stop it. Germany after WWII/Hitler had to throw away their financial system and start over ( see kopfgeld) from zero. (and they did it very cleverly on a Friday afternoon so that the US and British occupying authorities couldn’t stop it, one of the more amusing financial subterfuges of the postwar era.)
As some one wisely put it: Inflation is a measurement of the governing classes (fiscal) immorality.
Which I guess means we’re screwed.
Fed has been trying to “create” inflation for many quarters, as has the Bank of Japan. So far they have been pushing on a string- although they have been able to juice some commodity prices at certain times. The Fed will be buying treasuries for years to come, just like the BOJ. They will be able to raise rates quite easily- just stop buying government paper. We are at the brink of a major currency war- it is fiat money that will be the ultimate battleground for the forseeable future. The inflationists have been wrong for years- and will be for many more. However, the hard money vigilantes will be proven correct. Now if only we can find some truly hard currency…there is simply not enough gold to go around…
Hey – I’m no economist – but aren’t we living in a kind of “inflation” anyway?
For example – houses are worth way less than what people generally think…wages are kind of high – especially by global standards – they are going to have to go way down to get in line with reality…education is ridiculously expensive and is going to have to go through an enormous reality check, the price having risen many times over what is normal in comparison to wages. That will in turn drive everything down as well. Right? Or am I just hopelessly confused.
GG, that would be deflation, which is bad if you have large debts. So you can imagine how our Federal Government feels about letting that happen.
I took Econ 101 in college – made an A – but can’t remember anything, except supply and demand. Oh well. Good thing I have Mr. Greenwich Gal to mind the money!
Out Looking In makes a great point that recent efforts to create inflation haven’t worked to well. It’s not enough just to throw money off the back of moving trucks. The people who pick it up have to actually then go and spend it. That they won’t do if they have little confidence in their government and their future. They will hoard it against the threat of future instability. Minus increased spending there’s little upward pressure on prices, be it the price of bread or a new piece of office equipment. As I recall, that’s the mess the Japanese have faced for years now despite huge stimulus spending. Sound familiar?
Talk about inflation: Tina Pray is on Bravo tomorrow (Monday) night at 10pm.
Timely:
http://www.bnnprodown.com.edgesuite.net/2012/07/19/20120719_MS_2.mp4
Just gave this interview on Thursday.
As Out Looking In says, the Fed is trying hard to create inflation with all the Quantatative Easing and Operation Twist programs. It does help lift commodities and stocks, but is not helping residential real estate. If real estate would rise that would help heal the banks and improve consumer confidence.
Ever see a dog chase a parked car?