I must question the motives of politicians and pundits who wave potential inflation in our faces, like it’s the lantern in Paul Revere’s Old North Church steeple. If inflation returns, we just might be able to regain the illusion of prosperity, which was evident during the Greenspan Fed’s push behind more “irrational exuberance.”
The corollary to inflation for these Chicken Little’s is, of course, public debt. If there is so much concern, why are Republicans, including Newt Gingrich and Senator John Cornyn of Texas, floating a method for states to be allowed to declare bankruptcy? Why? So states can ditch pensions; that’s why! Unions are wounded and down, so why not finish them off?
States cannot operate if they cannot borrow. We’re going to learn this lesson the hard way in Colorado sooner or later. Of course, tax increases MUST be resisted, it is said, only because those most able to pay would pay most of them.
Those who complain most about government “spending” should do a little data mining. It turns out that there is now one government worker (at all levels) for every 13.96 persons in the USA, the lowest share of population in nearly twenty-five years.
Make no mistake, debt is still high. US household debt equals 100 per cent of Gross Domestic Product (GDP); throw in government and the non-financial corporate sector, and we have just over 250% of GDP, the same as the Eurozone. There go the French Fries, again. In the UK the total load is 280% of GDP, while in Japan it’s 370%. Australia’s ratio of household debt to disposable income is 156%, highest among major economies. But Australia’s economy is growing at a rate north of four per cent, and its unemployment rate is descending toward four per cent. Some in the bond-rating game who three years ago couldn’t find an issue or issuer they did not love, have lately focused on debt ratios to revenue. Well, that’s easy to fix (see “those most able to pay,” above).
Reducing the ratio of debt to GDP requires a growth rate including inflation higher than the interest rate on that debt. Starting to see that inflation may actually help, if it isn’t wildly excessive? A significant part of US Treasury debt is short-term, making the value of that part of the debt less sensitive to inflation. Ben Bernanke truly may know more than the rest of us!
Throughout most of the period 1998 – 2007 US personal consumer expenditures generally grew more quickly than did the personal saving rate. Personal debt will constrain any return to those high-growth days and ways. I can see only one way back to real and lasting growth: higher wages. That would reduce some of the (trash) tax-talk and revive some consumption. For the long term we might even goose benign investment through saving. But first, American households need to have something to save FROM.