The Reality of the Debt Debate and the Claims Of "Inflationistas"


As the debt debate continues, the people continue to suffer.

While Apple hoards an unprecedented amount of cash and the 1% enjoys 93% of the gains from economic recovery, unemployment remains stubbornly high, youth unemployment is at a staggering 13.1%, and the middle class quietly slides into oblivion. Even worse, the one institution that has the power to change these conditions, the government, is being prevented from taking effective action. Its power to act is being thwarted by an obstructionist Republican House majority and the vast hoards of pundits and beltway experts making hypocritical claims about an impending debt crisis.

Their vehement commitment to preventing government intervention is truly impressive. One claim in particular stands out for its blatant non-reality: runaway inflation (even worse, hyperinflation) is right around the corner. The only way to stop this apocalyptic scenario is to cut spending. Cut, baby, cut!

The current deficit is as high as it is due to the recession. What is significant about this is that the current level of borrowing, which is required to hold the American economy together, will not be necessary after a recovery. If anything, rates will remain stable once the government no longer needs to run large deficits, thus making government debt even more attractive.

Another nail in the coffin: Because public investments (a.k.a government spending) create jobs and wealth, if there is a recovery, higher tax receipts will be expected, again making the debt/inflation doomsday scenario look even more ridiculous. Don’t forget that when more people have more money across the board, then there will be more investment as well. That would expand the demand base for government debt, especially if the global investment environment continues to be volatile. So again, why should we assume that interest rates would spike uncontrollably in the future? If anything they will continue to remain low, facilitating necessary post-recovery austerity measures.

There is yet another argument that the real reason for the looming inflation crisis is mandatory spending. That entitlements will continue to drive up debt force the government to endlessly rollover its debt obligations. Thus, cuts to discretionary spending is necessary step to addressing this problem. There is no doubt that negative consequences will ensue if rational entitlement reforms are not implemented further on down the road, but one thing that has been consistently overlooked is the fact that entitlement programs are being burdened by the toll the recession is taking. Lower government spending ensures that there will be no recovery. That in turn means high levels of unemployment, higher Medicaid rolls, higher welfare claims and less revenue for Social Security and Medicare. Clearly then, a recovery is the first step to addressing the problems arising from mandatory spending.

Lastly, another favorite argument is that the fluctuating money supply, as a consequence of rising government debt and quantitative easing will lead to fluctuating prices. Since runaway inflation/deflation has not been a consequence of current historically low interest rates, we can easily dismiss this cause of price fluctuation out of hand. Moreover, if the government intervenes to spur a recovery through public investments, there is even less of a reason to fear inflation, since the growth in employment, demand and production would do much to absorb the money created by quantitative easing. And again, greater tax receipts would do much to pay down government debt. Moreover, the expected modest inflation, that is a natural and beneficial consequence of economic growth, would reduce the real value of the government debt, making it even less of a problem and more serviceable, as well as making post-recovery austerity easier to implement as well as creating a better situation in which to deal with the problems of mandatory spending.

Forget all this reasonable nonsense, however, since according to “inflationistas” and “deficit hawks,” out of control inflation is a necessary consequence of government debt. Because this claim is quickly put down by common sense and basic logic, we should assume that they don’t even believe their own claims.

It is clear then that another motive is behind this virulent opposition to government intervention. Could it be an attempt to protect the current status quo? A status quo defined by third world levels of inequality in the richest country on earth (according to the CIA, the U.S. falls far behind countries like Nigeria, Kazakhstan, and Cambodia)? Defined by jet-setting CEOs and hungry children? Defined by radical redistribution of wealth from the bottom to the top? Defined by the corporate right to hoard and the civic expectation to suffer? To be fair, it should be assumed that the powerful and the privileged would want to protect their happy position in society and that is why the prospect of government intervention must be demonized. People should not know that the current situation could actually be changed.

So the next time a prestigious economics professor or CNBC talking head tries to convince you that the U.S. should not recover because of crazy inflation, you will have a good sense of what is actually being inflated.