The bailouts and inflation

You have no idea how happy it makes me to hear people ask, “Where are we getting the money for all of these bailouts?” The government has several options when it wants to pay for something. In an ideal world, they would pay for things as they came up. You know, stay within their budget… In that world, if they wanted to spend more, they would have to raise taxes in order to pay for it.

As we all know, that has no relationship to our reality. Our government uses deficit spending in order to pay for damn near everything, and these bailouts are no exception. So how are we going to pay for them? Well, they could simply raise taxes and pay off the debt. Not only is that not politically viable, I believe that every man, woman, and child in this country would have to pay upwards of $400,000 each in order to erase the current debt. Not very realistic… So the government simply pays over time. In other words, they pass the payments onto future generations.

There are two other possibilities. They could simply default on the debt. Congress could decide to declare the debt null and void and that would be that, a new start! Of course there would be some really serious consequences to that action. Among other things, they would have trouble borrowing again with bad credit…

The last thing is probably the most likely. Seignorage is a time honored technique with national accounts. What is that? That is paying for things by printing money. Great! Problem solved, right? Just print more money! Well, there are some big problems in doing that. In fact, it is essentially the definition of inflation. As the government prints more and more money, the more it devalues it. In other words, it takes more money to buy the same things. The things themselves have the same value, it just takes more monetary units (dollars, riyals, etc.) to buy them.

How does this work to pay off debts? Imagine that you take out a loan for $50,000. Now imagine that hyperinflation sets in and price levels rise very quickly. Before long, you’re making $7000 an hour. Why? The price of labor is just another price. It will rise along with the inflation rate or lag just behind it. It will take no time at all for you to pay off that loan.

All of this is totally opaque to the guy on the street. Rising prices are a mystery, they have no idea that the central bank is the culprit. Because of this, it isn’t as easy to pin it on someone. People get upset, and they think something should be done about it, but they don’t know who is to blame… Because of all of this, it is the most likely avenue the government will take to pay off this incredible debt. It may be the only way to pay it off…

Precious metals have long been considered a haven for people who want to avoid their savings dropping in value (think of it as the opposite of the loan scenario above). It isn’t that gold, silver, platinum, palladium, etc. are actually worth more, but the value of the currency is dropping with inflation. Traditionally, the metals maintain their value while the currency devalues. So if the bailout continue, look into the metals!

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