Don't Raise the Ceiling, Lower the Floor

I've been waiting for this. It has been obvious for some time now that the only way out of the federal debt crisis is to inflate the currency. Now Paul Krugman has brought it out into the open. His proposal, only partly tongue in cheek, is for Treasury to mint a trillion dollar platinum coin, deposit it at the Federal Reserve, and spend that. No need to bother with the messy politics of raising the debt ceiling. Apparently the Secretary of the Treasury has the authority to mint platinum coins in any denomination he chooses. It's meant for commemorative purposes but the language isn't restrictive.

I doubt the secretary would do anything quite so transparent or frivolous but there isn't a doubt in my mind we are in for a round inflation, and it will be wild. Democrats want    huge tax increases. Republicans aren't going to let that happen. Republicans want draconian spending cuts. Democrats aren't going to let that happen. The middle ground isn't acceptable to either party. With no leadership from the White House what's left?  

We've never had truly ruinous inflation in this country but we may be about to see something close. If we are to avoid it it might be worth reflecting on what it could be like. One people who have experienced it, with whom we may be ably to relate, are the Germans. A major reason Germans are so fiscally responsible today isn't that it is their nature. It is that they have a deep national memory of what can go terribly wrong.

In 1922 French and Belgian troops invaded the Ruhr Valley and took over Germany's most important factories in response to a default on reparations from WWI. The government called a general strike and printed a staggering volume of paper marks to compensate for lost wages. The result was hyperinflation. By 1923 Germans would take wheel barrows loaded with marks to the bakery to buy bread.

The German middle class was destroyed. When the Great Depression came Germany had no reserves. They were the hardest hit of all. Conditions became ripe for the rise of Hitler and his Nazis. Jews were convenient scapegoats. The rest as they say is history.

I don't expect things to get quite that bad but they could. I do think things will be bad. Interest rates have to go up sooner or later and that will have an impact on the housing market. I wouldn't be surprised to see a relapse into recession this year. Economic stagnation could last a while.

The poor will be hit hardest as they always are, and there will be a lot more of them. There already are. The middle class will be hit too. I think the long term unemployed are in for serious trouble. So are the elderly on fixed incomes. Social Security may be indexed to inflation but most retirement plans are not. Bond yields will go up but values will fall on bonds not held to maturity. Only the rich will escape most of the damage. They can always park excess assets in gold. If all else fails they can follow Gerard Depardieu to Russia.

It's probably too late to avoid this entirely but there are some things we can do. Entitlement spending probably can't be reined in completely but it can be tweaked. Some of the worst boondoggles have to stop. We can no longer afford farm subsidies, wind credits, solar loan guarantees to Obama campaign contributors, or ethanol mandates. We have to do some things to get the economy moving. That means opening federal lands to energy extraction, taking down trade barriers, and restraining regulators.

Paul Krugman is talking about trillion dollar coins. It's time to get serious.