George Rebane

Inflation, perhaps hyper-inflation of the Weimar variety, is in our future.  It seems that daily another economist, tallying up the fed’s unfunded liabilities, adds to it another handful of trillions (that is not a typo).  To keep things in perspective, our country’s current GDP is about $14 trillion, and the fed vacuums up about 20+% of that annually from us.  Then it goes on to borrow another 10 to 20% from people still silly enough to keep lending to us.  So the current estimate of the country’s unfunded liabilities has now climbed over the $100 trillion mark.

This sum is beyond rational thought, so our rational(?) reaction to it is that we don’t think about it.  Do you?  Of course not.

But, dear Reader, if you were to think about it, you’d know that there is no way on this earth that those anticipating the receipt of these monies, with anywhere near the buying power of today’s dollar, will get what our government continues to promise them.

Art Laffer, the economist much maligned by the tax and spend crowd, just wrote a warning piece – ‘Get Ready for Inflation and Higher Interest Rates’ – in the 10jun09 WSJ.  There he sets up the problem as –

With the crisis, the ill-conceived government reactions, and the ensuing economic downturn, the unfunded liabilities of federal programs — such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid — are over the $100 trillion mark. With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.

We have to remember that inflation is always the result of government mediated monetary policies – it is not due to businesses raising prices out of greed as our socialist friends want us to believe.  Laffer again –

The Fed controls the monetary base 100% and does so by purchasing and selling assets (like Treasuries, bank reserves, Mortgage Backed Securities, …) in the open market.

Inflation is simply a tax on your fiat money denominated assets – CDs, money market funds, corporate bonds, munis.  In this case, there is only one way that the feds can pay off the liabilities that its politicians ran up in order to buy our votes.  And that is in the utter destruction of the US dollar.  It may be done in the manner of today’s Zimbabwe, or in the manner of Weimar in 1923, or its 1948 ‘currency reform’ sequel when the German government, under US occupation, suddenly told us all that we had 48 hours to turn in our old paper money for new paper money with fewer zeros on them.  (I had just started collecting stamps, and those stamps were denominated in thousands of Deutschmarks that it cost to send a letter.)  Guess who lost in that currency reform, but it had to be done.

Today the Fed needs to contract the monetary base by at least a trillion dollars by the only way it can, selling its existing Treasuries.  But that would put it in competition with the Treasury Department that also needs to sell new Treasuries to borrow the money to pay for our deficit funded nanny state.  So we’re between a rock and a hard place, and the only result is inflation, as new fiat money keeps flowing out of the banks making loans based on their pumped up lavish reserves tucked away with the Fed.  So what’s the Fed to do?  Laffer observes –

It’s difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed’s actions because, frankly, we haven’t ever seen anything like this in the U.S. To date what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn’t a pretty picture.

And, of course, the current picture is many times worse, as can be seen from the nearby graphic of our money supply exploding at historical rates.  The number of purposely perpetrated unknowns (nationalized banks, car companies, healthcare, …) by our federal and state (yes, like California’s AB32) governments is guaranteed to more than double our debts at all levels in addition to the unfunded liabilities coming due.

I hope that RR readers will not be among those caught up and hurt in this maelstrom.  (My record on these matters is available in the ‘Investing’ and ‘Our Country’ departments of RR)  However, there are still some happy bloggers out there who ask why some of us keep looking at the glass being half empty instead of half full.  Well, because it’s already less than half full and draining rapidly.  We’re all going where we’ve never been before.