Guest Post: We Can’t Inflate Our Way Out of the Debt Crisis … So What CAN We Do?

By Washington.

As I wrote last August:

Commonly-accepted wisdom says that we can inflate our way out of our debt crisis.

***

But as I have previously noted, UBS economist Paul Donovan has demonstrated that governments can’t inflate their way out of debt traps, saying:

The problem with the idea of governments inflating their way out of a debt burden is that it does not work. Absent episodes of hyper-inflation, it is a strategy that has never worked.

Megan McArdle points out:

It is a commonplace on the right that we’re going to have enormous inflation, not because Ben Bernanke will make an error in the timing of withdrawing liquidity, but because the government is going to try to print its way out of all this debt.

Joe Weisenthal notes that it doesn’t quite work this way:

As this chart shows, instances of declining debt-to-GDP rarely coincide with periods of inflation. If it did If it did, we’d see more dots in the lower right-hand quadrant.

The bad news for central bankers is that creating currency isn’t like, say, diluting shareholders in a company. You’re always rolling your debt, and the market’s response to an inflationary strategy is (not surprisingly) higher interest rates. It’s a treadmill, and it’s extremely hard to get ahead.

Financial Week notes:

Analysis shows even a sizable hike in CPI won’t do much for companies or households that owe money.

Analysis released by Leverage World, a publication of debt research firm Garman Research, showed that companies that have issued debt at a coupon rate of 8%, as is typical for non-investment grade issuers, would have to see inflation hit 23% to inflate away the amount of debt they owe in 5.5 years. That’s the average amount of time that investors would have to hold such debt to compensate for the risk of default.

But investors would refuse to do so under such a scenario, Chris Garman, principal in the research firm, noted—not with yields on such debt currently running at 18%.

As Mr. Garman put it in the publication, inflation at that level “would crush the appeal of an 8% coupon.”

And while issuers would have to roll over their debt, they would find it impossible to do so. As he put it in an interview with Financial Week, “They’re staring down the barrel of an 18% coupon.”

Investment grade companies are in better shape. The same can’t be said for other public—or government—borrowers. Indeed, overall debt levels for the private and public sectors now run at roughly 3.5 times nominal GDP. That compares with 1.5 times from 1945 to 1980 and in the early 1920s.

To return to that level, Mr. Garman estimated that inflation would have to rise to around 12% or GDP increase by 75% over the next five years. Either scenario, he said, is hardly likely to materialize.

At a more realistic level of 3% real GDP growth and 2% inflation, Mr. Garman said, it would take 15 years before the overall U.S. debt level fell back under 1.7 times nominal GDP.

“There has been some talk of a rise in inflation as a panacea for distress and default,” he wrote in his report.

His analysis shows that such expectations vastly underestimate what’s required.

Prominent economist Michael Hudson wrote in February:

The United States cannot “inflate its way out of debt,” because this would collapse the dollar and end its dreams of global empire by forcing foreign countries to go their own way. There is too little manufacturing to make the economy more “competitive,” given its high housing costs, transportation, debt and tax overhead. The economy has hit a debt wall and is falling into Negative Equity, where it may remain for as far as the eye can see until there is a debt write-down…

The Obama-Geithner plan to restart the Bubble Economy’s debt growth so as to inflate asset prices by enough to pay off the debt overhang out of new “capital gains” cannot possibly work. But that is the only trick these ponies know…

The global economy is falling into depression, and cannot recover until debts are written down.Instead of taking steps to do this, the government is doing just the opposite. It is proposing to take bad debts onto the public-sector balance sheet, printing new Treasury bonds to give the banks – bonds whose interest charges will have to be paid by taxing labor and industry…

The economy may be dead by the time saner economic understanding penetrates the public consciousness.

In the mean time, bad private-sector debt will be shifted onto the government’s balance sheet. Interest and amortization currently owed to the banks will be replaced by obligations to the U.S. Treasury. It is paying off the gamblers and billionaires by supporting the value of bank loans, investments and derivative gambles, leaving the Treasury in debt. Taxes will be levied to make up the bad debts with which the government now is stuck. The “real” economy will pay Wall Street – and will be paying for decades.

Wolfgang Münchau writes:

What I hear more and more, both from bankers and from economists, is that the only way to end our financial crisis is through inflation. Their argument is that high inflation would reduce the real level of debt, allowing indebted households and banks to deleverage faster and with less pain…

The advocates of such a strategy are not marginal and cranky academics. They include some of the most influential US economists…

The best outcome would be a simple double-dip recession. A two-year period of moderately high inflation might reduce the real value of debt by some 10 per cent. But there is also a downside. The benefit would be reduced, or possibly eliminated, by higher interest rates payable on loans, higher default rates and a further increase in bad debts. I would be very surprised if the balance of those factors were positive.

In any case, this is not the most likely scenario. A policy to raise inflation could, if successful, trigger serious problems in the bond markets. Inflation is a transfer of wealth from creditors to debtors – essentially from China to the US. A rise in US inflation could easily lead to a pull-out of global investors from US bond markets. This would almost certainly trigger a crash in the dollar’s real effective exchange rate, which in turn would add further inflationary pressure…

The central bank would eventually have to raise nominal rates aggressively to bring back stability. It would end up with the very opposite of what the advocates of a high inflation policy hope for. Real interest rates would not be significantly negative, but extremely positive…

Stimulating inflation is another dirty, quick-fix strategy, like so many of the bank rescue packages currently in operation … it would solve no problems and create new ones.

And Mike “Mish” Shedlock argues:

Inflationists make two mistakes when it comes to government debt. The first is in assuming government debt is more important than consumer debt. (It will be after consumer debt is defaulted away, but it’s not right now.) The second is that it’s not so easy to inflate government debt away either…

Inflationists act as if unfunded liability costs and interest on the national debt stay constant. Also ignored is the loss of jobs and rising defaults that will occur while this “inflating away” takes place. Tax receipts will not rise enough to cover rising interest given a state of rampant overcapacity and global wage arbitrage.

Yet in spite of these obvious difficulties, the mantra is repeated day in and day out.

Inflating debt away only stands a chance in an environment where there is a sustainable ability and willingness of consumers and businesses to take on debt, asset prices rise, government spending is controlled, and interest on accumulated debt is not onerous. Those conditions are now severely lacking on every front.

CNN Money sounded a similar theme yesterday:

Some have suggested that the country could just “inflate its way” out of its fiscal ditch.
The idea: Pursue policies that boost prices and wages and erode the value of the currency.

The United States would owe the same amount of actual dollars to its creditors — but the debt becomes easier to pay off because the dollar becomes less valuable.

That’s hardly a good plan, say a bevy of debt experts and economists.

“Many countries have tried this and they’ve all failed,” said Mark Zandi, chief economist at Moody’s Economy.com.

It’s true that inflation could reduce a small portion of U.S. debt. The International Monetary Fund (IMF) estimates that in advanced economies less than a quarter of the anticipated growth in the debt-to-GDP ratio would be reduced by inflation.

But the mother lode of the country’s looming debt burden would remain and the negative effects of inflation could create a whole new set of problems.

For starters, a lot of government spending is tied to inflation. So when inflation rises, so do government obligations, said Donald Marron, a former acting director of the Congressional Budget Office (CBO), in testimony before the Senate Budget Committee.

“[W]e have an enormous number of spending programs, Social Security being the most obvious, that are indexed. If inflation goes up, there’s a one-for-one increase in our spending. And that’s also true in many of the payment rates in Medicare and other programs,” he said.

Inflation would also make future U.S. debt more expensive, because inflation tends to push up interest rates. And the Treasury will have to refinance $5 trillion worth of short-term debt between now and 2015.

“[The debt’s] value could go down for a couple of years because of surprise inflation. But then … the market’s going to charge you a premium interest rate and say ‘you fooled us once but this time we’re going to charge you a much higher rate on your three-year bonds,'” Marron said.

The Treasury is increasing the average term of its debt issuance so it can lock in rates for a longer time and reduce the risk of a sudden spike in borrowing costs. But moving that average higher won’t happen overnight. And, in any case, short-term debt will always be part of the mix.

Another potential concern: Treasury inflation-protected securities (TIPS), which have maturities of 5, 10 and 20 years. They make up less than 10% of U.S. debt outstanding currently, but the Government Accountability Office has recommended Treasury offer more TIPS as part of its strategy to lengthen the average maturity on U.S. debt.

The higher inflation goes, of course, the more the Treasury will owe on its TIPS.

Just last week, the CBO noted that interest paid on U.S. debt had risen 39% during the first five months of this fiscal year relative to the same period a year ago. “That increase is largely a result of adjustments for inflation to indexed securities, which were negative early last year,” according to the agency’s monthly budget review.

What’s more, the knock-on effects of inflation are not pretty. A recent report from the IMF outlined some of them: reduced economic growth, increased social and political stress and added strain on the poor — whose incomes aren’t likely to keep pace with the increase in food prices and other basics. That, in turn, could increase pressure on the government to provide aid — aid which would need to keep pace with inflation.

If We Can’t Inflate Our Way Out of the Problem, What CAN We Do?

So if we can’t inflate our way out of this mess, what should we do?

The above-quoted CNN article says:

So where does that leave lawmakers? Facing tough choices.

Deficit hawks and market experts have been calling on lawmakers to come up with a strategy to stabilize the growth in U.S. debt, which would be implemented only after the economy recovers more fully.

The idea is to signal to the markets that the country is serious about getting its longer term debt under control so that the burden of paying it back doesn’t consume an ever-increasing share of the federal budget.

The recommended exit strategies are pretty basic, if unpopular: tax increases and spending cuts.

But why raise taxes and cut essential services when we can stop unnecessary wars and unnecessary interest costs instead?

As I recently pointed out:

Why aren’t our government “leaders” talking about slashing the military-industrial complex, which is ruining our economy with unnecessary imperial adventures?

And why aren’t any of our leaders talking about stopping the permanent bailouts for the financial giants who got us into this mess? And see this.

And why aren’t they taking away the power to create credit from the private banking giants – which is costing our economy trillions of dollars (and is leading to a decrease in loans to the little guy) – and give it back to the states?

If we did these things, we wouldn’t have to raise taxes or cut core services to the American people.

Stopping all wars which are not absolutely essential for the protection of the United States from massive and imminent attack is crucial.

And abolishing the central bank (or putting it within the Treasury department) and taking over the money and credit creation functions from the private banks may be an important part of the solution to our debt trap. See this, this, this, this, this and this.

Print Friendly
Tweet about this on TwitterDigg thisShare on Reddit0Share on StumbleUpon0Share on Facebook0Share on LinkedIn0Share on Google+0Buffer this pageEmail this to someone
This entry was posted in Guest Post on by .

About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander… http://www.washingtonsblog.com

72 comments

    1. abelenkpe

      Wasn’t there an article recently stating that new rocket technology could get us to Mars in 40 days? :)

  1. MyLessThanPrimeBeef

    They say, following Big Bang, the universe as a whole, at a rate faster than the speed of light, hyperinflated.

    That is our heritage, our orginal sin.

    Even now, the universe is inflating.

    We have always lived in a bubble – that’s my personal pessimistic take.

    1. LB

      beef,
      you should check out the new web-bot report out today.
      you’d really appreciate clif’s take on bubbles.

      (brilliant insight btw and much less pessimistic than you may think, if you learn to love to ride the long wave that is)

    2. Fifi

      NearlySubprimeBeef,

      Oh, and you are barely broaching the subject. Theoretical physicists are more and more inclined to believe that our own Universe is just one little bubble in the Multiverse.

      Bubbles in bubbles in bubbles. Bubbles all the way down! And it’s even worse!

      It would seem that the whole purpose of the Multiverse is to increase entropy by creating new Universes out of quantum fluctuations in the great gray empty mush of timeless, entropy-maximized nothingness into which all Universes must eventually turn, our own included…

      Bubbles that spawn bubbles that beget more bubbles …

      http://www.ted.com/talks/sean_carroll_on_the_arrow_of_time.html

      Maybe Blankfein is correct after all, when he says Goldman Sachs is “God’s work”. He’s just trying to maximize entropy in his own little corner of our Universe. Good boy !

      1. fresno dan

        OMG …bubbles, bubbles, bubbles. We can’t fight the bubbles!
        OK, I’m taking a bubble bath with my Mr. Bubble, and drinking champagne! If you can’t beat em, join em!

  2. Mogden

    That is a great idea! Let’s also do away with wasteful education subsidies, agricultural supports, and in fact all of the numerous unconstitutional expenditures our illegal and immoral government performs 365 days a year.

  3. Tim Ingham

    Just because inflating our way out of debt won’t work doesn’t mean they won’t try it.

    Wolfgang Münchau lays out our future accurately:
    “A policy to raise inflation could, if successful, trigger serious problems in the bond markets. Inflation is a transfer of wealth from creditors to debtors – essentially from China to the US. A rise in US inflation could easily lead to a pull-out of global investors from US bond markets. This would almost certainly trigger a crash in the dollar’s real effective exchange rate, which in turn would add further inflationary pressure…

    The central bank would eventually have to raise nominal rates aggressively to bring back stability. It would end up with the very opposite of what the advocates of a high inflation policy hope for. Real interest rates would not be significantly negative, but extremely positive…”

    It is our destiny. Inflation first. High rates and debt crash second. Cutting governmental goods and services last.

    If the last was done first the first two would never happen. We had the world on a string with the dollar as the reserve currency of the world as the spoils of WWII, and we literally squandered it.

    1. Nathan Aschbacher

      Well, this is a statement from Bernanke saying that they won’t try:

      “With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.”

      From here: http://www.washingtontimes.com/news/2010/feb/25/bernanke-delivers-warning-on-us-debt/

      To me that’s actually a serious cause for concern, because it means that the Fed is signaling we’ll only deal with our debt using deflationary measures, which have the nasty effect of being really painful domestically, while being exceedingly friendly to foreign investors.

      1. Tim Ingham

        Excellent response Nathan Aschbacher!

        So the question is:
        A. Is he bluffing Congress into doing the right thing? (Cutting Spending)

        or

        B. Did he really learn from the $300 Billion Dollar Quantitative Easing experiment that buying up your own debt turns into a circle jerk real fast, blowing his helecopter speech thesis to pieces? (Fed started to become the only buyer when they stepped into the treasury market visibly; rates moved up in the face of their efforts instead of down as expected because investors sold their T-Bills they would have kept otherwise to the Fed).

        I’ll stick with “A” for now. Barnarke has consistently said one thing would happen and the opposite has happened, whether in reference to his own future actions or the markets. It’s an audacious opinion, I know, but you can’t prove it wrong yet!

  4. bob goodwin`

    I libertarian deflationista! My kind of writer. Thanks in particular for filling in the details. It is a complex subject.

    1. Greg

      Yeah, liquidate, liquidate, liquidate!

      Its interesting that those at the top feel they have the right to liquidate the country, as if they OWN it……..ALL of it.

      Yeah, deflations not a bad thing. Not bad for those who will have some money left. They can swoop in at the end and buy up the rubble for pennies on the dollar, concentrating ownership into even fewer and fewer hands. Wow I cant wait to see what America looks like after that, a libertarians paradise, something akin to Somalia.

  5. PJ

    If government keeps increasing the money supply (or if we allow “state”, banks to do the same thing) there will be high or hyper inflation. We have never in history seen the amount of sovereign debt worldwide that we see today and we have never in history seen the increase in all major currencies that we are seeing today. The G20 nations will average debt loads of 118% GDP in just a few years. Debts will be defaulted on (as Iceland and Dubai have already commenced to do). Or hyper inflation will set in so quickly interest rates and wages will never cone near catching up with it. Look for new and improved currencies to be coming to a nation near you soon.

    1. George Washington Post author

      PJ:

      You might be right. However, Ellen Brown argues that state banks only create the amount of credit that can be productively used in the form of goods and services, it won’t create inflation.

      1. jake chase

        You are dead wrong to think the debt overhang cannot be validated by inflation. Moreover, it cannot be dealt with in any other way that avoids chaos. The trick is figuring out how the inflation will be transmitted. In the Seventies it was through the oil monopoly and wage inflation in unionized manufacturing. This time it is likely to be the equity market, which means winners will be those willing to hold their noses and plunge in at prices which already feel uncomfortably high. As for the idea that investor expectations determine interest rates, that is nonsense. Bond investors are price takers. If they insist upon buying debt they must take what the market offers. Moreover, China holds the interest rate trump card. It’s objectives are not financial but geopolitical. How would withdrawing from the Treasury market advance China’s political dreams? It wouldn’t. What China needs (the only thing it needs) is continuing acquisition of US technology. It already has natural resources, manpower, a collectivist society easily manipulated toward global goals. Ten or fifteen years from now (if climate change gives us that long) the situation may be different. For now, we can expect one asset bubble after another, commodity inflation, and continual posturing by the Fed about controlling inflation by defining it out of existence. All they have to do is keep manipulating the price indexes, which they have been doing for at least 30 years.

    2. Hal Horvath

      The previous U.S. default (most nations have defaulted at one time or another I believe) was when gold was revalued from $20 to $35.

      Such a partial default is a very general model.

      Argentina has had a partial default, for instance.

      I think Argentina is actually a better analogy for the U.S. than Japan, and in the worst case that is plausible (hyperinflation isn’t plausible for us), we’ll do something somewhat like Argentina, just a straightforward partial default, all at once. Bondholders would be left holding 70-90 cents on the dollar, so to speak.

      1. Greg

        Comparing our situation to Argentina is ridiculous. Argentina had a currency that was PEGGED! Ours is free floating. Two completely different species of animal.

        We never HAVE to default. If we do it would be a decision to not because we dont have the money to pay. Argentina actually ran out of money because they tied their currency issuance to the ability to acquire dollars, which they lost the ability to do at the rate they needed.

  6. Mark

    “It is a commonplace on the right that we’re going to have enormous inflation”

    Yes, and this is the one thing to me that has always raised a big huge red flag. The prediction of inflation seems to be ideologically motivated (or more accurately motivated by an aversion to big government), rather than a cold assessment of how markets and financial systems behave in reality.

  7. tyaresun

    Thanks for a good compilation. Reducing the size of the military-industrial complex should be priority number one for deficit reduction.

  8. nowhereman

    So now we know what needs to be done, what happens when you have a government incapable and/or unwilling to do it. That is the real question.
    How do you get your country back?

  9. PJ

    “You might be right. However, Ellen Brown argues that state banks only create the amount of credit that can be productively used in the form of goods and services, it won’t create inflation.”

    The states and Federal Government have been spending foolishly for several decades. Will they be more careful with “free” money issued by banks they control? The Fed is the USA State Bank does it “only create the amount of credit that can be productively used in the form of goods and services”?

    1. joebhed

      Maybe you weren’t looking but over the past 20 years, another group called the shadow bankers were responsible for creating out of their unregulated power to do so, what both Paulson AND Bernanke said was over half, or the majority, of ALL money created in this country.
      First: what is money?

      1. Greg

        What is money?

        That is the best question, the one that needs answering.

        I see money as a policy tool, something which gives value to everything else but holds little intrinsic value outside of its currency space. Money is NOT AN INVESTMENT but that which all investments are denominated in.

  10. rootless cosmopolitan

    I refer to the last link advertised by Washington.

    To believe the consequences of the dynamics of capitalist economy (like the boom/bust-cycle) could be eliminated and the United States could economically survive in a highly competitive world economy under conditions where credit creation by banks is outlawed is pure lunacy. Credit is the fuel of capitalist economy; without former latter would have collapsed a long time ago. The ones who want an economic collapse of the US should let Washington and the likes at the government. I actually don’t care insofar US isn’t my favorite country. I am not a patriot. I would have to find another country (again) for myself and my partner where we can have a good life anyway, though.

    rc

    1. George Washington Post author

      RC,

      Of course we need credit. Individuals and small businesses are getting killed by the current lack of available credit.

      I’m only talking about cutting out the private Federal Reserve banking system as the middle man, and letting governments (federal, state or local) create credit in the best interests of its citizens. That’s what the Founding Fathers WANTED (read Web of Debt of the Lost Science of Money).

      1. rootless cosmopolitan

        You want to eliminate the private banking industry (no credit creation by private banks allowed => no banking industry), whether the Fed is “private” or not isn’t really relevant for this. Do you think any country in the world economy that doesn’t have a private banking industry, or where the state banks (e.g., China) don’t do exactly the same as private banks, i.e., wildly creating credit, will be able to economically compete against the others?

        What some “founding fathers” wanted isn’t relevant for the functioning of the economy.

        rc

          1. rootless cosmopolitan

            I actually don’t know what exactly you want me to read, since you have given neither a specific reference, nor any link.

            But there might be a reason for that.

            rc

      2. Fed Up

        GW said: “Of course we need credit. Individuals and small businesses are getting killed by the current lack of available credit.”

        Isn’t small businesses #1 problem lack of sales?

        Don’t most lower and middle class individuals already have too much debt?

        IMO, individuals are “getting killed” be negative real earnings growth. Should individuals experiencing negative real earnings growth be borrowing to keep spending?

        Do people at goldman sachs need credit? I doubt it. They just buy things with currency or its equivalent.

        Maybe more econmists should concentrate on the budgets of the lower and middle class?

        1. RagingDebate

          You are 100% correct, Small Businesses do not need credit. The country faces a balance sheet recession and heavy debt loads.

          To stimulate the middle class, what needed to happen was two-fold:

          Spending Reduction:
          1) Reduction in entitlements outside of food stamps.
          2) Reduction in the Military Industrial Complex
          3) RICO for Health Insurance Industry (create competition).

          Spending Increase:

          The trillions in printing were an attempt to retain the status quo which meant reducing losses for the already wealthy. Trillions should have been printed for the USA to become near energy independent within a decade, creating millions of decent paying jobs. After a couple of years, then conduct the reinflation attempt to reduce the deficit. Fiscal policies are on the back-burner. Monetary policy cannot solve the scope of these problems.

          Instead of what was suggested, the biggest banks will be looking down from the towers on tent cities and continue investing in what they can overseas. The population will not permit this to continue and it will lead to massive civil unrest and political change. The USA will go bankrupt and a second American Republic born or war will intensify, nuclear weapons used and the world starts over.

          I am long mankind. Short living a peaceful life for 99% of the population over the next decade.

      3. Greg

        Credit is as available as ever its just EXPENSIVE!!

        Banks dont need to HAVE money to lend, they need credit worthy customers to lend to. Their is a dearth of those these days since everyone is fearful of losing their jobs because of the loss of aggregate demand.

    2. Fed Up

      rc said: “Credit is the fuel of capitalist economy; without former latter would have collapsed a long time ago.”

      IMO, credit is the fuel of the crony capitalist, spoil the rich/spoil the rich bankers economy.

    3. joebhed

      Looking back in history, the noted, assembled economists looked at this question of eliminating the boom-bust cycle through their comprehensive proposal laid out in the Chicago Plan for Monetary Reform(1933).
      Of course Ellen Brown is correct that the creation of money by government agencies to support (provide a means of exchange for) productive goods and services is by definition not inflationary.
      But, the Chicago Plan solution, and its latter day incarnation at the American Monetary Institute in the proposed American Monetary Act, provides the only real way out of this DEBT-money caused financial calamity.
      It should be getting much more copy as the day of reckoning arrives.
      http://www.monetary.org

  11. MikeNY

    Tim Ingham, I agree with you except for one thing: COLA increases can be capped, and medical benefits will be reduced. The American populace will be repriced down, via inflation. Government services WILL be reduced, but gradually, by inflation, not immediately (and politically impossibly painfully — sorry for the adverb chain) by depression.

    You’re an Austrian; some Americans are until their job is on the line — then ALL are Keynesians.

  12. Allen C

    “Inflating debt away only stands a chance in an environment where there is a sustainable ability and willingness of consumers and businesses to take on debt,”

    The government has assumed the debt creation role.

    1. joebhed

      The problem is laid out in Fed Credit Manager Robert Hemphill’s famous statement that we are in peril because we lack a PERMANENT money system.
      ALL money is created as a debt, and that money is extinguished upon repayment – thus we are dependent upon the bankers making a loan in order to have a money supply.
      That ain’t working too good today.
      Yes, the government MUST create the money.
      But there is no reason to create the money as a debt.
      http://www.monetary.org

  13. Nathan Aschbacher

    I don’t think the interpretation of the graph is accurate.

    “Change in government debt:GDP (as a % of GDP) over 1 year” is the wrong measurement, because GDP is a variable, and we’d be interested in the real value of the debt, not just the nominal value relative to GDP.

    What you need to use on the y-axis, for that to be a useful indicator of inflation vs. debt, is the total debt, adjusted for yearly deficits. That way you isolate the debt and the inflation into appropriate constants.

    As it stands that graph is useless without also knowing the correlating change in GDP number for each represented point; no?

  14. AP

    What our oligarchs need is a major catastrophic event. Perfect backdrop for defaulting on all debt, or propelling the world into a new arms race and power struggle. Seems to me like that’s the US’s best hand to play…

  15. ZA

    There are only 4 options to make good on our debt: grow, tax, conquer or print.

    Printing has always been the path of least resistance.

    As far as ending the wars, while I agree, I don’t think that will happen right now: even the Caesars knew better than to bring a hardened army back to a restive populace.

  16. bsmith

    The post is not really helpful without a definition of inflation and deflation according to each of the bloggers. I know from reading their blogs that they do in fact differ.

    Is inflation the creation of credit that reaches the street, with a symptom of that being a rise in prices for consumers? Or is inflation a rise in prices for consumers?

    If credit is not reaching the street, why is oil at $82 and gold at $1100?

  17. Fu

    Another problem with going down the inflation route is that spikes in inflation are associated with drops in real consumer spending, at least in the US.

    1. Adam

      Inflationists are wishful thinkers! Creating inflation (even if it could be easy) isn’t necessarily going to work. Debt deflation becomes a problem not when “prices” deflate but when wages deflate. And while price inflation in theory would reduce debts, there is not guarantee that price inflation will translate into wage inflation (or spending). Think 2007 and gas prices. It would end up tanking the economy, killing any inflation and bringing on more default (which we need I just wish we could figure out how to do it in a controlled fashion) as real wages fell under the initial inflation spike.

  18. Evelyn Sinclair

    I SO agree with the sentiments expressed in the “what to do” section of this article – from “But why raise taxes and cut essential services when we can stop unnecessary wars and unnecessary interest costs instead?” on. And I found the arguments against inflation of great interest, as it’s a concern of mine – I’m trying to see if I can live on a small amount of saved “sitting duck” cash.

    What I don’t see addressed is the big ugly factor of the derivatives bubble, which was not created by the government, only subsidized afterwards by feeding “real” (value-based?) money into honoring the gambling-debt economy of big financial institutions.

    If I understand correctly, when a wager is made, such as a credit default swap, it amounts to a promise to pay, which is equivalent to credit. This “creates money” in exactly the same sense that a mortgage loan does by becoming an “asset” over here and a debt over there. I understand that the creation of new derivatives is still going on because it is still immensely profitable to spin money out of thin air. In the process “money” is “created.”

    So yes the Fed/Treasury team might officially put some kind of brake on inflation. But they don’t prevent the creation of debt money in massive quantities by the exact same people who created the debt-Hindenburg we’ve just stabilized by wrecking the real (non casino) economy.

    Please tell me if I’m missing something.

    If a pile of money is created as derivatives, I don’t think there’s any way to stop it from doing its inflationary harm. Its not like we did anything to reinstate regulations….

    Won’t we be called upon soon to try to bail out the next big “surprise” crash, when the banks are suddenly going into massive deleveraging shock and need blood-donors???

  19. chas

    “And abolishing the central bank and taking over the money and credit creation functions from the private banks may be an important part of the solution to our debt trap.”

    Finally somebody is starting to make sense. Halleluiah.

    1. Greg

      Time to abandon fiat currencies?? And replace them with what?

      If you recommend a gold backed currency for all you are in effect advocating for a one world currency……………..insane.

      NO currency ever created in a well functioning society has been anything other than fiat. Even commodity backed currencies had the exchange rate determined BY FIAT of some authority. Having a fixed rate determined by fiat is no better than just having the exchange rate float.

  20. Allen C

    Many of us remember the GD era folks’ total lack of trust in the banking system. For good reason. The necessary trust was destroyed.

    The entire credit system depends on the trust of savers believing in fiat money over saving commodities (i.e. true stores of value). I suspect that this trust takes a while to destroy and clearly takes a while to restore.

    1. RagingDebate

      Correct. My Grandmother did not buy stocks again after the 1929 crash until 1962. And when she did, it was in oil. She told me to “never trust a banker, they love foreclosures”. I never understood why until 2002-2003 when I began studying economics and how governments get in bed with banking, market manipulations and the boom-bust cycle.

  21. Trainwreck

    Buy beans, learn to speak a foreign language, and oh buy bullets because the committee of intellectual correctness will eventuallly come after you.

  22. Paul Tioxon

    The Navy’s plans don’t include a carrier maintenance facility, and no refueling of the ship’s nuclear reactors would be done in the harbor.

    “Aircraft carrier maintenance and repairs would not be done on Guam,” the report states. However, repair teams would travel to Guam for unscheduled, emergent repairs or emergency maintenance when needed.

    The plans are part of a broader expansion of military forces in the Mariana Islands, including:

    • The shift of 8,600 Marines with III Marine Expeditionary Force and 9,000 family members from Okinawa, along with the addition of 1,800 Defense Department civilian workers.

    • The construction of expeditionary training ranges on Tinian, a sparsely populated small island 100 miles north of Guam.

    • The establishment of an Army Air and Missile Defense Task Force, including 600 soldiers and 900 family members, and construction of munitions storage and other facilities.

    The moves are expected to cost $13 billion by the time they are completed in 2020, with the government of Japan providing up to $6 billion under an existing cost-sharing arrangement.

    The plan would more than double the military presence on Guam, whose population of 178,000 includes an existing military population that would grow from 15,000 to 39,000 by 2020, according to Government Accountability Office estimates.

    Source:Navy Times, December 13, 2009;Image: Flickr, January 14, 2009

    Related articles

    * Pacific: Guam group feels dredging of Apra Harbor isn’t necessary
    * Guam’s Defense Department (USA) plans to build a deep draft wharf
    * US Navy might need alternative east coast port for aircraft carriers
    * Chinese eager to speed up construction of super deepwater harbor

    NOTICE WHAT THE CHINESE ARE SPENDING ON PORT FACILITIES VS WHAT WE ARE SPENDING. THE JAPANESE ARE KICKING US OUT OF OKINAWA. THIS IS A HISTORIC SHIFT IN GEO POLITICS AND JAPANESE US RELATIONS. THE JAPANESE HAVE ABSOLUTELY REFUSED TO REPLACE FACILITIES ON OKINAWA WITH ANOTHER JAPANESE LOCATION, HENCE ENDING THE CLIENT STATE RELATIONSHIP. MONIES FOR THE MOVE ARE COMING FROM THEM BUT COSTS OVERUNS AND ONGOING COSTS FOR GUAM? THIS WILL HARBINGER THE END OF WWII MILITARY PAYMENTS FOR OUR OCCUPATION ON THEIR SOIL.

    SO WHY ARE WE IN GUAM, A US TERRITORY? FORCE PROJECTION, PLEASE!

  23. kevinearick

    (EEs)

    this is none of my business, but you may find it useful:

    If you want a market, you are going to have to build it yourselves. The nation/state system is locked up and running a simulated economy because the promises are due on all the old social contracts, and they cannot be paid. The least path of resistance for capital is community development, where the nexus is receding, and where you can enter enforcable one-page contracts, paid in several front-loaded stages. You want to take a look at increasing return to unprotected labor / decreasing asset prices because that will tell you where small capital is most motivated.

    From the perspective of an enterprise architect, you may want to look at dynamic and scalable layering, in each direction, for 50 million to 9 billion, relative to community density and global community distribution, that provides for independent basic local services, independent access to the communication stream, and surplus trade, with a high level, physics based language, so the programmers do not inadvertantly overload circuits, and a feedback loop so something new is learned about physics each time there is a crash, to the end of interoperability of diverse sub-markets, as they coalesce around productive economic applications.

    The physical infrastructure will be replaced and removed continuously, as we move beyond the present limitations of surface development.

    2 cents

    (bigger and bigger engines driving inverted pyramids of code, full of patches, within “secret” black boxes, hasn’t worked out too well, and it’s becoming transparent, but that happens when finance is the imperative.)

    1. kevinearick

      making chicken soup from chicken s— can be quite profitable, but swimming in a cesspool all the time is not so fun.

      1. kevinearick

        the self-sustaining model will more than compensate for losses to retirees from the transfer system in a demographically balanced community, but it will not work anywhere else.

        the cartels will always lure poeple to the big cities, promising something for nothing; there will always be a need to make chicken soup.

        1. kevinearick

          what the real economic NPV window comes down to is the priority of effective education in the home.

    2. RagingDebate

      You are a highly intelligent individual. But if you invest into such undertaking do it big, get investors together for a network of self-sustaining cities. In-between, no harm in getting involved in your local community, politics and helping the needy. Many of them would someday become employees. The homeless re no longer the crowd of the mental ill or drug addicted. Lot of underutilized talent around town.

  24. Oz

    Never quote Joe. He can only ride with the waves of puplic opinion. We all know how well that advice works out.

  25. bold'un

    We’ve seen how corporations deal with problems: they restate the past. That’s what we have to do with inflation: basically declare that property inflation was miscounted in 2002-6, while now, since property is falling and private borrowing is down, we have no inflation: so interest rates should have been higher in the past (sorry, savers!) but they are correct now.
    A restatement would be a bonanza for TIPS owners unless the government can find some fine print to wriggle out from…

  26. Daniel Victor

    Michael Hudson seems to be overlooking the fact that nearly ALL major economies seem to be taking part in the current round of money-printing.That includes the Euro,the Yen and the Pound.The only important exception is,perhaps,the Chinese Yuan or Renminbi.However,China has been indulging in some stimulus itself,and seems anxious not to allow its currency to appreciate too quickly against the US dollar.
    Given that,it appears that foreign countries are not choosing to go their own way.Instead,they are choosing to go the same way – paying the interest on their expanding debts with printed money.

  27. David Dimmer

    “For starters, a lot of government spending is tied to inflation.” your quote CNN Money.

    This is the often given reason why inflation will not work.
    WRONG! Have you forgotten the it is the government that sets what the CPI figure will be? What make anyone think that future CPI numbers will reflect anything close to actual inflation? Do you really think TIPS or Social Security payments will be increased in step with real inflation?

Comments are closed.