Deflationists often cite the fact that some government liabilities are inflation-indexed (Social Security literally and Medicare practically) as an argument that the government can't inflate its way out of debt. The alternative, assuming we don't get magic hopey unicorn GDP growth, is default.
I disagree on the inflation-indexed issue. Social Security can and will be modified, certainly by raising the retirement age and possibly by means-testing it (cutting it off for the rich). Government CPI fudging is another tool that's already been used to some extent to cut Social Security costs. And Medicare? One word: "rationing." It's inevitable, as it is in every government run health care system around the world.
But the main thing deflationists are missing is that the U.S. government is now backstopping the entire U.S. housing market via Timmy the Tax Cheat's unlimited bailouts of Fannie and Freddie, and the FHA's ridiculous 3%-down subprime home gambler loans. If we don't get inflation to bail out the housing market, the government suddenly has hundreds of billions if not trillions more in bad loan losses. Not to mention the economic and tax receipt consequences of a such a real estate apocalypse.
The only thing standing in the way of inflation via direct monetization of Treasury debt? The Federal Reserve's "independence." BWAHAHAHAHAHAHAHAHA!!!
5.25.2010
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