Michael Kinsley: How Do We Repay the Stimulus Spree?

Michael Kinsley writing at the WaPo discusses what the real plan may be to repay the stimulus:

But even if the stimulus is a magnificent success, the money still has to be paid back. The plan of record apparently is that we keep borrowing, spending and stimulating, faster and faster, until suddenly, on some signal from heaven or Timothy Geithner, we all stop spending and start saving in recordbreaking amounts. Oh sure, that will work.

There is another way. If it’s not the actual, secret plan, it will be an overwhelming temptation: Don’t pay the money back. So far, even as one piggy bank after another astounds us with its emptiness, there have been only the faintest whispers about the possibility of an actual default by the U.S. government. Somewhat louder whispers can be heard, though, about the gradual default known as inflation. Just three or four years of currency erosion at, say, 10 percent a year would slice the real value of our debt — public and private, U.S. bonds and jumbo mortgages — in half.

Anyone who regards the prospect of double-digit inflation with insouciance is either too young to have lived through it the last time (the late 1970s) or too old to remember. Among other problems, inflation works only as a surprise or betrayal. It can never be part of any public, official plan. Plan for 10 percent inflation, and you’ll get 20. Plan for 20 and you’ll need a wheelbarrow to pay for your morning Starbucks. But if that’s not the plan, what is?

Now that is a truly frightening concept.

What caused it?  A combination of things, from the Vietnam War where President Johnson believed we could sustain the effort there without raising taxes, to the Carter-era utopian ideals of full employment.  These two pressures combined to create what by 1980 would be 13.5% inflation and nearly 11% unemployment.

What stopped it?  And what message is being sent by history?

The message for today: Beware overly confident government officials in possession of powerful policy remedies that “everyone” supports. Samuelson’s warning is worth remembering as a new U.S. administration readies a sweeping and expensive economic recovery plan.

In the late ’70s, rising prices defied all remedies. Democratic and Republican presidents alike jawboned industry leaders and eventually imposed government controls on what companies could charge for their products. Nothing worked.

Nothing, that is, until Federal Reserve Chairman Paul Volcker turned off the monetary taps and kept them off. 

The bottom line is that for all the liquidity that has been pumped into the market, the value of things has not changed.  What has changed are the amount of American dollars vs. the acutal value of a cup of coffee, a gallon of gasoline, or a loaf of bread.

When the piper comes calling, the effects will be inflationary. 

What does all of this mean?  It means that instead of housing prices coming back down to earth, the Obama Administration is following a policy — consciously or not — of inflating the price of everything else.  

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All the while, the only thing that does not inflate is the salary of the taxpayer, whose financial obligations to the future in terms of the federal debt has just increased by over $100,000 per individual.

That’s the impact of this so-called “stimulus” package.  That, my friends, is the price of hope and change.

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