Thursday, May 26, 2022

A Little More Inflation Math: $5 Trillion Deficits and a $100 Trillion National Debt in 25 Years

Click here to read the original Cautious Optimism Facebook post with comments

A little more inflation math from the Cautious Economics Correspondent for Economic Affairs and Other Egghead Stuff.

Suppose for a moment inflation remains sustained at 8.5% for a year.

At last check the national debt was $30.47 trillion.

So after one year the real value of the national debt is reduced by 7.8% (inverse of +8.5%) and the federal government has been absolved of $2.38 trillion in obligations—all through inflation—with holders of U.S. dollars forced to donate the difference.

And that’s just one year. 

With each additional year of dollar devaluation the government’s obligations are further watered down. 

With a lower 3.5% inflation rate over a trillion dollars of debt is wiped off the books, year after year.

Throw in economic growth and the numbers really start to add up.

If the real economy grows by 2.5% and the Federal Reserve produces an even lower 2.5% price inflation atop it the federal government can run a $1.54 trillion annual deficit with absolutely no change in the federal debt-to-GDP ratio.

The following year it can run a $1.62 trillion deficit. Then $1.70 trillion. Then $1.79 trillion. The federal debt-to-GDP ratio still never changes.

25 years from now the federal government can run annual $5 trillion deficits (yes, $5 trillion a year). That's deficits for 25 years straight, never once a surplus or a balanced budget, and a $100 trillion national debt.

And the debt-to-GDP ratio will still be the same as it is today. All thanks to growth and inflation, the latter being paid out of the pockets of savers via the stealth tax.

The Treasury, CBO, and most career members of Congress have already baked these expectations into their future deficit spending plans, spending they are counting on to secure the votes they’ll need to stay in office.

So the U.S. Treasury sends heartfelt thanks to the Federal Reserve for its assistance, as does Congress which is now able to borrow and spend even more in the coming years. And when the inflation bill comes due both can deflect blame onto “corporate greed” and "price gouging" which half of America is economically uninformed enough to believe.

The trick is nothing new. Adam Smith noted this sleight-of-hand in 1776 when he wrote in The Wealth of Nations that:

“When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid.”

“The raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment”.

“The honour of a state is surely very poorly provided for, when, in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at the same time so extremely pernicious." (Book 5, Chapter 3)

Governments love inflation.

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