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10A048
Turbulence Ahead
by Jim Davies, 10/20/2010
In yesterday's ZGBlog I noted that the recent frenzy of money printing has suprisingly not resulted in much change to the total supply of money (M3) and so there is currently no significant inflation, nor is any likely through 2011. It also pointed out that when government evaporates several years later it will take its money-printer with it, making inflation into an historical curiosity and allowing each of us to make rational plans for our futures. What, though, of the medium term, say the decade following 2011? There's no shortage of doomsayers, who correctly point out that the FedGov's total debt is shown in the clock below (for which, thanks to zFacts.com, though they mistakenly call it the National Debt. It's the debt of the government, not the nation.) They say that since this nearly $14T debt is around four times the total the Feds receive in revenues each year, it is impossible to pay it off (even a 10% tax hike would pay only the interest on that $14T principal, leaving it unaffected) so quite soon there must be either "sovereign default" or else massive inflation.
Why the latter? - because if someone owes a large sum, it's much to his advantage if the value of the "money" owed is reduced. Say he mortgaged a home for $300,000 but that within a few years inflation tripled his nominal salary (though not its purchasing power, of course.) It would then be much easier to pay off the $300K, using these low-value dollars. Inflation always favors debtors over creditors, which is why governments can get public support for it. However, can governments pull this trick? - I'm not so sure. Perhaps they can if they own and operate their own central bank, but in America "money" is created by the flimflam of selling an IOU to the Federal Reserve. The Fed holds nearly half of that $14T total debt, as a result. So if for example the FedGov created a fresh $1.5 trillion to pay off Chinese creditors (so increasing the money supply by that amount and stimulating a 12.5% inflation rate) it would simultaneously add $1.5T to its debt to the Fed. The total debt would therefore not change. Because of the peculiar arrangement of the Federal Reserve, the above option of massive inflation does not seem to me available. (It may happen anyway, but it won't help the government reduce its debts.) So that leaves the other option: "sovereign default." The FedGov would at some time admit it's in over its head and declare that it will not honor its obligations. Nobody will get paid; not the Chinese, not the pension-fund operators who depend on it for your retirement pay, not other real investors, and not the Fed. The chaos would be unprecedented. It's one consequence of allowing government to exist. |
 
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