How to Pay What We Owe

Reprinted from

Inflation. Pure and simple.

Inflating the national currency is the tried-and-true way that governments have used for centuries and millennium to get their way out of budget problems caused by excessive debt.

But it is a dangerous bet and one that would not be necessary had we been responsible adults about our budgets and not run much debt, or any at all, over the past 40 years.

No budget deficits, no national debt. No need to borrow…from anyone. Case closed.

Inflation hit the stratospheric level of 12% per year in 1980-81. Interest rates spiked up to 21%. President Jimmy Carter’s anti-inflation policies were an abysmal, absolute, abject and total failure.

Ronald Reagan ran the electoral table against President Carter in the 1980 election as a result of both high inflation and interest rates by 489 votes to 49. His was the largest margin of victory until Reagan swamped poor old Walter Mondale in 1984 by the score of 525-13 which was the highest margin of victory in the electoral college ever recorded since George Washington was elected unanimously.

Dan Ackroyd of ‘Saturday Night Live’ had a memorable spoof of President Carter’s anti-inflation speech where he was ‘quoted’ as saying: ‘Last week, I delivered a message on inflation. Since then, the dollar has dropped in value, the stock market has sustained record losses, and the whole sow price index increased 0.9%. In other words, our economic system is screwed, blued and tattooed!

We just have to face the fact that there is simply no way to fight inflation in a capitally-intensive, highly-technological, conflict-riddled, anything-for-a-thrill world of today.

Inflation is not our friend. Inflation is about the most destructive force of nature any democracy can ever be hit with far exceeding the damage any Hurricane Sandy or Oklahoma tornado can exact on any community.

Inflation destroys purchasing power, especially for the poor and the elderly on fixed incomes. It limits trade exports to other nations. It drives business people nuts because they don’t know if they will have to buy something for 2 times what it cost last week or 10 times.

Inflation is only the friend of the debt-payor. Not the debt-holder. The higher the inflation, the cheaper the future dollars will be that will be used to pay off the past debt obligations of any government or company or household.

After a month of ‘secrecy’ and nefarious deeds emanating out of Washington under the Obama Administration, do you think there may be a ‘secret’ way to pay with inflation all the debt that has been accumulated over these past 4 years? We just don’t know, do we?

We have had several people, people we respect in the business world who have been on regional Federal Reserve Boards or working in the Federal Reserve itself, say the same thing over and over again for the past 4 years: ‘Ben Bernanke knows what he is doing and he is the right man at the right time in the right position to make sure inflation doesn’t spiral out of control’.

Well, we certainly hope so. Alluding to Mr. Bernanke’s Jewish faith, we have to believe that if he is successful in guiding us through this period of American history without explosive inflation rates, he will become the second Jew to ‘walk on water’, Jesus being the first

However, we think it is important to show the downside of what we are facing today in order to help everyone understand what could happen if inflation gets out of control. It may spur you on to take action such as contacting your congressman or senator and telling them in no uncertain terms to act like a national leader now and get our economic and budgetary houses in order and not act like a squeamish infant hiding in the corner sucking his/her thumb.

Let’s take a look at how this would play out in real-time if it were allowed to happen: Failure to control federal spending means Congress has to do 1 or 2 things or both to pay for it: 1) raise taxes and/or 2) borrow more money.

Raising taxes is painful enough. Those who do pay them feels it every time they write out a higher tax check to send to the government to be spent most likely in less than optimal ways.

Borrowing more money has become problematic since the Chinese and other sovereign nations have near about stopped borrowing money without some inflation kicker added onto the premium in order to protect them, the Chinese, from the value of their bond investments in the United States from going down due to inflation. (The value of bonds go down as interest rates rise and interest rates rise when inflation expectations ramp up)

So the Federal Reserve has adopted what we call the ‘Robbing Peter to Pay Paul’ policy of ‘expanding the Federal Reserve balance sheet’. What that means in its simplest form is that the Fed just makes money up out of thin air, declares it ‘federal tender’ in some legalistic way, and then uses those funds to pay for the overage of federal spending beyond what can be paid for by current tax revenues.

The Fed has been pretty transparent about their policy to ‘buy’ $80 billion of US bonds this way on the market every single month. That is close to the entire debt being issued this year when you add it up, isn’t it?

Whenever you hear the term ‘expanding the balance sheet’, just think of you being able to increase your credit card limit whenever you want to!  No pre-authorization from American Express; no annoying pre-qualification from Visa or your local bank.

You want to buy a Rolls-Royce? ‘Go right ahead, we’ll expand your credit limit by $150,000 today right now and expand your balance sheet! You can pay us back later.  We know you are good for it!’ says your friendly underwriter at your credit card company.

That is what the expansion of the federal balance sheet is like at the US Federal Reserve. We are ‘trusting’ and ‘hoping’ that Ben Bernanke and the others at the Fed know what they are doing because if they are wrong, we might see a colossal mess that will make the ‘colossal mess’ created by Jimmy Carter and his guys in 1978-81 look like a garden party.

What happens if economic activity picks up and the demand for money and credit starts to go up, as it appears to be doing slowly but surely today in many places in America? When demand for anything goes ‘up’, so does its ‘price’, in this case the interest to be paid for the loan or credit you want.

If there are way more dollars sloshing around in the American economy due to the creation of all these new dollars by the Fed to buy federal debt, there is a chance that they may be chasing scarce resources and driving up the prices of everything from homes to food to gasoline to dental services.

When and if the inflation mentality starts to roll unabated in the economic mindset of this nation, watch out.  Because that is exactly what happened when Dan Ackroyd’s ‘Jimmy Cahta’ said we were ‘screwed, blued and tattooed’ in 1978.

Inflation is not our friend or yours or anyone else’s friend. That is why you should contact your elected representatives to tell them to take solid action now and not tempt Fate when it comes to unleashing the Hounds from Inflation Hell.

Editor’s Note: Frank Hill is the Director of the Institute for the Public Trust in Charlotte, NC. He is former chief of staff to Congressman Alex McMillan of NC and also served on the staffs of former U.S. Senator Elizabeth Dole and the House Budget Committee.