Pray for inflation?

Peter Gorenstein argues that only inflation can get us out of our Government's impending bankruptcy.

Everyone thinks the Fed's job is to fight inflation, but right now the Fed is actually doing everything it can to cause inflation.

Why?

It part to help the economy get cranking again.  Inflation provides an incentive for people to spend cash rather than saving it, because if they save it, the cash will lose value rapidly.

Inflation also helps solve another problem, though--our debt problem.  The more inflation we have, the less our dollars will be worth.  Because our debts are based on a specific number of dollars and not a specific value, the less our dollars are worth, the easier it will be for us to pay off our debts.

(Imagine owing someone 100 Zimbabwe dollars at a time when the currency is collapsing.  If you wait a week, the value of the Zimbabwe dollar will have collapsed, and you'll be able to pay off your 100 Zimbabwe-dollar debt with currency that is only worth half as much as it was the week before).

The Fed can't admit that one reason it wants high inflation is to reduce the real burden of our debt, but you can bet that that's one of its objectives.  What's more, says Nobel-winning economist Paul Krugman, inflation should be one of the Fed's objectives.  Because that's how we've gotten out from under debt burdens in the past.

And certainly rapid inflation is the likely scenario because it meets our political and economic power elites short term needs.  I mean no one is going to lose an election trying to cut senior benefits or seriously trim our bloated, unionized public sector.  And the bankers will make a fortune on the arbitrage:  the more volatility and chaos, the more opportunities for them to profit from their privileged 'heads I win, tails you lose' regulatory position.

The problem with this is that the promises that we have made to ourselves that cannot be paid extend out for 50 years or more and have gotten much larger due to the heedless profligacy of the last two administrations.  We will be unable to pay our bills in 15 to 20 short years, maybe sooner if world markets lose confidence in our economic management.  At that point we will no longer be able to fool the markets into accepting our paper at risk free rates and our promises will hit the wall of our means.  Just in time for my generation's retirement.

It will be a sad day for America but a catastrophe for the world's poor.  For when the hegemon goes bankrupt, the world burns.

Short the greenback.