Jubilee Prosperity

These sheer size of these IOUs dwarfs the ability to repay, let alone service these debts. As posted here prior, interest on Treasury Debt is the fourth or third largest 2010 budget item after entitlements and defense, depending on whether we aggregate entitlements and mandatory expenses.

http://en.wikipedia.org/wiki/2010_United_States_federal_budget

Five months ago Mr Buffett quoted Lord Keynes in The Greenback Effect :

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

While the majority may expect Uncle Sam to inflate his way out of the debt mess, the contrary corollary is that deflation may be the narrower gate that many miss.

Most have not thought through the real consequences of continued inflation, namely the disappearance of the middle class that was the backbone driver of the American economy. Rich people can only eat one meal or wear one hat at a time. Government can only spend what it can borrow or tax.

Deliberately reducing the value of the dollar means higher prices for imports and either greater budget and trade deficits, or lowered demand. This may mean a weaker economy, exactly the opposite of what most armchair economists who conflate inflation with prosperity expect.

The painful reality is our cost of living is currently inflating at real rates approaching +10%, while businesses, employment, houses, pensions and wages are still deflating.

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This entry was posted on Thursday, January 21st, 2010 at 6:18 pm and is filed under Market Psychology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.