Obama’s Secret Plan: Inflation?

Michael Kinsley has a rather rambling column about the “upside-down economics” of the stimulus plan that’s subtitled (or, whatever one calls the SEO-driven title tag that appears at the top of the browser and in search results) “Recession Economics – How Do We Repay the Stimulus Spree?”

But even if the stimulus is a magnificent success, the money still has to be paid back. The plan of record apparently is that we keep borrowing, spending and stimulating, faster and faster, until suddenly, on some signal from heaven or Timothy Geithner, we all stop spending and start saving in recordbreaking amounts. Oh sure, that will work.

There is another way. If it’s not the actual, secret plan, it will be an overwhelming temptation: Don’t pay the money back. So far, even as one piggy bank after another astounds us with its emptiness, there have been only the faintest whispers about the possibility of an actual default by the U.S. government. Somewhat louder whispers can be heard, though, about the gradual default known as inflation. Just three or four years of currency erosion at, say, 10 percent a year would slice the real value of our debt — public and private, U.S. bonds and jumbo mortgages — in half.

Anyone who regards the prospect of double-digit inflation with insouciance is either too young to have lived through it the last time (the late 1970s) or too old to remember. Among other problems, inflation works only as a surprise or betrayal. It can never be part of any public, official plan. Plan for 10 percent inflation, and you’ll get 20. Plan for 20 and you’ll need a wheelbarrow to pay for your morning Starbucks. But if that’s not the plan, what is?

I don’t know whether this is a plan, secret or otherwise, but it’s a strong possibility.  We’re basically printing money at an extraordinary rate and spending it out of any relation to income.  Inflation is a natural consequence.

Story via Memeorandum. Image via Solicitor Bulgaria.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Steve Plunk says:

    This has been often mentioned as a plan to reduce national debt. The big losers will be those who have saved all their lives. Another betrayal by the political class.

  2. Several weeks ago here I asked whether those in power planned to ultimately repudiate the debt or devalue the currency, as those are the only two options that are effectively available to deal with the incredible levels of debt being accumulated. I guess we have an answer. I’d also note that this is just another way at a macroeconomic level to redistribute wealth, albeit with a heavy transaction cost. Anyone think that might also be part of the master plan?

  3. Joe says:

    I realize that politicians believe that they need to stimulate the economy any way they can right now. But shouldn’t we, as a nation, learn our lesson from this financial mess? I think suffering the consequences of our poor money habits and letting the recession/depression run its course is the safest way to handle this, if not the most popular.

  4. Steve Verdon says:

    If there are legitimate fears of deflation then inflationary policies are the right course. However, if those fears of deflation are unfounded you’d end up with really high inflation.

  5. Steve Verdon says:

    Also, given the 0.8% increase in the CPI and a 0.8% increase in the PPI for January such fears are probably exaggerated and if care is not taken we could end up with stagflation. High unemployment, low output, and high inflation.

    It would be a torpedo in the good ship Krazy Krugman though.

  6. Drew says:

    “I’d also note that this is just another way at a macroeconomic level to redistribute wealth, albeit with a heavy transaction cost. Anyone think that might also be part of the master plan?”

    Some would call you a cynic, Charles. I would call you insightful.

  7. legion says:

    Well, lets take a small step back from the issue for a second and look at the larger picture. It’s great if we can save some US businesses and (presumably) a bunch of US jobs, but who exactly is going to purchase the things those companies make? Average workers’ wages have been crap for years now – a lot of people have been using cheap credit to live beyond their means (or even engage in basic survival) for a long time now – and the chickens are coming home to roost. This is no longer just a US problem, it’s global – both the credit and the chickens. Does anyone really see average wages going _up_ any time soon? I sure don’t. So who’s going to buy this stuff? In a year, maybe two, all the companies that are currently getting bailed out are going to bankrupt _again_. Mark my words.

    I think the only thing that may save a lot of people’s economic lives – as opposed to saving the economy, which is a separate creature – _is_ deflation. Prices on things need to come down a _lot_. On _everything_. And that needs to start with raw materials. And _that_ will take years to phase in before price drops at the consumer front are seen. But frankly, corporations have proven that they can survive a lot longer without paying their bills than individual families can.

  8. Steve Verdon says:

    Shorter legion,

    Blah, blah, blah.

    Try looking at total compensation vs. average wages. If health care is going up faster than say the inflation rate you’d see most pay increases occurring in health care benefits and slower growth in average wages.

    Deflation discourages production. Here is how it works,

    1. Buy the inputs.
    2. Build the product.
    3. Sell at a price that in real terms is lower than what you paid for the inputs and labor.
    4. Shut down.

    Not a winning plan legion.

  9. legion says:

    Steve,
    Try reading the whole comment some time. I’m well aware that deflation can lead to a death spiral – that’s why I specifically pointed out that it would only be of benefit to anyone if it started out from basic materials, reducing the costs of overall production, and eventually lowering end cost to consumers.

    Also, how many companies have been cutting compensation (especially, but not limited to, health care), while not providing a raise in wages? How does that not count as a reduction in pay – and therefore ability to consume?

    Finally, if you’ll look up and read the very beginning of my second paragraph, you’ll see that I _don’t_ consider this a “winning plan”. I posit that it may be the only way for a great swath of the American middle class to literally survive the next few years; that we may have to choose between our corporate economy and our actual citizens’ state of existence. How about addressing that possibility, rather than flinging around half-assed insults?

  10. Bandit says:

    This guy is under some delusion that Obama has any coherent plan.

  11. tom p says:

    If health care is going up faster than say the inflation rate you’d see most pay increases occurring in health care benefits and slower growth in average wages.

    Not sure how much this adds to the discussion, but that is exactly what happened on our last 2 contracts (union carpenter). The union negotiates with the contractors on a total compenstion package (a set amount). The union is responsible for our health insurance, pension and vacation pay, and decides how the money gets divvied up. Over the life of our last 3 yr contract we got a total of 75 cents (from app $30.50/hr to 31.25)the rest went into health care (our pension is supposedly still strong) Last year, we got another 27 cents, but I don’t expect anything this year (healthcare up, work down).

    And by the way, if I don’t get back to work soon, I will lose my health care in August.

    For what ever it is worth…