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The Great Inflation, Take II

The FInancial Time has a must-read on the coming inflation:

Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America’s ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years.


To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth – probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.

The whole thing is worth a read.  Inflation is, perhaps, the scariest aspect of the massive debt Bush and now Obama have and are piling up.  It has historically been how governments have weaseled their way out of debt.  It has a crippling effect on the prudent (those whose savings crumble), the retired (who are on fixed incomes) and, in this case, the banks (who have trillions of dollars in mortgages at low interest rates).  It would also be a colossal middle finger to those who have so patiently financed our recent spending binges.  It is the cruelest kind of tax hike but the easiest to get passed.  And I fear is too complex and hidden for Barack Obama to bother with.

Most Americans are too young to remember the awful inflation of the 1970’s.  Hell, I barely remember it myself.  I do remember the intense early-80’s recession—the hangover that resulted when Volker ended the party.  I have no desire to relive those times.

Posted by Hal_10000 on 05/30/09 at 10:09 PM in Politics Law, & Economics • Permalink


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