The government can inflate its way out of debt

The official, on the books, on budget US government debt is troublesomely large, and growing at an unprecedented rate, but it is not intolerably large, not so large as to be unpayable, not so large as to predict ruin.  The off the books, off budget deficit is considerably larger, and no one knows how large it is or how fast it is growing, which situation may well foreshadow national insolvency.

Megan McCardle tells us You Can’t Inflate Your Way Out of Debt, which is dead wrong: Look, for example at the Wiemar republic. Burdened by a gigantic debt burden, thanks to the Kaiser’s unsuccessful attempt to plunder his way out of debt, the Wiemar republic promptly proceeded to create an even more extravagant and unsustainable debt, running up more debt than the Kaiser and reparations on such classic progressive programs as paying bums to not work. When they blew off their debt, they had gained six times the value of reparations by borrowing money they had not the will, the capability, nor the intention of ever repaying. They also gained the additional benefit of smashing the revolution prone middle class, which had been responsible for every revolution up to that time, if we count the Russian Bolshevik coup against the revolutionary middle class government as a coup, rather than revolution.

The Wiemar government made a gigantic political profit on this, gaining credit from the voters for free money, avoiding discredit for the huge debts incurred by the Kaiser, and blaming Jews and anglophones for the destruction of the middle class that the government successfully engineered. Win Win Win.

Of course, it did not work out so well in the long run, but as Keynes tells us, in the long run we are all dead.  You cannot expect democratic politicians to think too far beyond the next election.

The essential trick to inflating away debt is to blindside creditors. The government only has to fool some of the people some of the time, which is after all what democratic politicians are best at. Just get as much debt as possible into long term government debt, say ten year debt at 30% interest, and then proceed to monetize the debt. Let inflation roar at two percent a day for a couple of years, and your problem is solved.  Present inflation is about 0.01% per day if we believe the government statistics, and perhaps twice that if we believe shadowstats, so this a hundred fold increase in inflation for a couple of years – it would not completely destroy the middle class.  To successfully destroy the middle class, more drastic means would be required.  Some of the crazies in Obama’s government have thought out loud about more drastic means.  If carrying out their program, blame giant corporations, or if that fails, there is always that old favorite, the Jews. After all, we are already blaming the Jews for the failure of Obama’s program of being nice to our enemies.  The crazies in the Obama government are proposing to blame the corporations, but should that rather tired shtick fail, they will probably fall back to old favorites.