The Sting
The Sting: “
The Japanese are thinking of selling off some U.S. debt, but may not, knowing that it would devalue the debt that they already have. The Chinese have warned that we not spend so much and they’re the major consumer of U. S. debt, which was, until these ginormous spending bills, considered to be one of the safest places in the world to invest money. Because they know that likely way out of this box is the Latin American option, which is inflating the currency to pay back debt with devalued dollars.
A very useful tool is Tom’s Inflation Calculator. Using it you find that if you bought a house in 1975 with a 30-year mortgage, the last dollar that you paid, in 2005, was worth 26¢ of the dollar that you borrowed in 1975. And with the exception of the Carter years, economically there were some good years here. What if the Fed deliberately inflates the currency to a 15% inflation rate? Any debt with a 30-year maturity at an inflation rate would be paid back with a dollar worth 1.31¢ of a dollar today. At a 10% inflation rate it’s 5¢. This would surely make paying back enormous public debt easier, but it would make it damned near impossible to sell any more public debt and would destroy the faith and credibility of the United States, at a time when the world needs her most, now that Europe is sinking into a quagmire of a declining, aging population demanding its nanny-state protections and without the confidence to protect its culture or even police things in its own backyard.
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(Via Jessica’s Well.)