Rising prices could help cure the United States' booming debt burden while easing unemployment and boosting home values. But there's pain in that strategy, too.
It's no secret that the United States has a big, bad debt problem. The Obama administration projects the national debt will increase to 103% of gross domestic product by 2015 from 83% last year. That'll take it to nearly $20 trillion.
That's a mind-numbing number, so think of it this way: Your personal share of America's debt is expected to rise from $38,000 to more than $64,000 over the next five years.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=1fd15065-0f6e-40a3-baa6-66a56429e83b,3612d881-e6a6-4c59-9b2a-8db7c9a89fe4,762c249a-afe6-4cce-85fd-f507847398a5,d32830a7-bcb1-4518-a7d9-a8ab97e9fa18,d207782b-f51e-451b-b1f5-c0f3a4d58fd8,d8806d2a-cdee-4d0a-a007-504e1edc83dc,c91233e5-38d0-49cc-82de-35f84f54b8d1,c6e93270-61a7-4bb6-b928-59f92e7847d9,c5b391d9-a057-4f03-ba47-60ef6d439ad7", "player.fr": "iv2_en-us_money_article_Investing-MutualFunds-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=1fd15065-0f6e-40a3-baa6-66a56429e83b,3612d881-e6a6-4c59-9b2a-8db7c9a89fe4,762c249a-afe6-4cce-85fd-f507847398a5,d32830a7-bcb1-4518-a7d9-a8ab97e9fa18,d207782b-f51e-451b-b1f5-c0f3a4d58fd8,d8806d2a-cdee-4d0a-a007-504e1edc83dc,c91233e5-38d0-49cc-82de-35f84f54b8d1,c6e93270-61a7-4bb6-b928-59f92e7847d9,c5b391d9-a057-4f03-ba47-60ef6d439ad7;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4'); It gets worse. The rise in the public debt, while exacerbated by the economic turmoil of the past few years, is structural in nature. It's caused by the promises of social entitlement programs and the steady decline in the tax base as the baby boomers start to retire.
There are three obvious ways to deal with the problem and start closing the government's gaping budget deficit, which in 2009 stood at $1.4 trillion, or nearly 10% of GDP: increase taxes, cut spending, or both.
But the economy seems too weak for this tough medicine. The broadest measure of unemployment stands at nearly 17%. Long-term interest rates are on the rise. Housing remains moribund. And the risk of deflation -- falling prices -- threatens to increase the real cost of government debt.
There's another way, but it involves a question we may not want to ask: Could high inflation be good for us?
It might be just what we need, according to one line of thinking on Wall Street and in Washington these days. But it means inviting something that's been economic enemy No. 1 over the past 30 years.As you can see in the chart above, inflation has been in a relatively steady decline since the early 1980s.
Indeed, the youngest workers in the economy have never experienced a period of steadily rising prices. That may be about to change. (I'll have some ways to prepare for inflation as an investor later in this column.)Not just about government The idea is that a quick bout of higher-than-normal inflation would lower the nation's debt in real dollars, bailing the government out of the debt threat. That means we could avoid Draconian tax increases or big spending cuts, both of which would be politically unpopular and could scuttle the economic recovery. (One example of what such cuts might bring is the "Roadmap for America's Future" proposed by Paul Ryan, R-Wis., the ranking Republican member of the House Budget Committee. It envisions phasing out Medicare in favor of private health vouchers and calls for raising the Social Security retirement age, among other changes.)
But accepting higher inflation wouldn't help just the government.
How to invest to beat inflation
It would also benefit many Americans, who would see the value of their homes and retirement accounts increase. U.S. exports would become more competitive as the dollar weakened. The unemployment rate would fall, partly because real wages would decline, a less pleasant result.Yes, this strategy carries dangerous risks. But we're in an extremely serious situation.The burden we bear The entire developed world is in trouble: According to the Organisation for Economic Co-operation and Development, total industrialized country debt is expected to exceed 100% of annual GDP in 2011. That's a rare height, but just a start.
Stephen Cecchetti and his colleagues at the Bank for International Settlements, or BIS, a Swiss bank for central banks and arguably the most admired of the world's financial overseers, explored the problem of rising public debt and entitlements in a recent working paper. The authors outline a gloomy future of recession-damaged economies, aging populations and rising long-term interest rates. All would reduce tax revenue, increase expenditures and increase deficits.
The result is a scary debt explosion.
Over the next decade, the BIS researchers believe, the ratio of debt-to-GDP will exceed 300% in Japan, rise past 200% in the United Kingdom and move past 150% in the United States, Belgium, France, Ireland, Greece and Italy. Should nothing be done, the U.S. ratio would move past 400% by 2040, the researchers project.
This debt burden threatens the prosperity of our children and our grandchildren as it crowds out private borrowing and increases the interest rates that businesses and consumers pay. It could also leave the economy vulnerable to the next big economic downturn, because governments would have limited ability to engage in stimulus or rescue efforts the next time the system threatened to melt down.
Current plans to trim the budget deficit are barely a start. President Barack Obama's aim is to cut the federal deficit from 11% of GDP now to 4% by 2015. This puts us on the right path; the BIS estimates that this gradual adjustment, if continued, would limit the growth in the debt ratio to 300% over the next 30 years. Adding a freeze on age-related spending -- Social Security and Medicare, for example -- would limit it to 200%. But much more needs to be done.
To stabilize the government's debt-to-GDP ratio over the next 10 years, the budget balance would have to swing from an 11% deficit to an average surplus of 4.3% of GDP. That's a national crash diet that seems politically impossible. Tax hikes cause outrage. The right wouldn't tolerate a cut in defense outlays with a rising China and a resurgent Russia. The left is already upset that unemployment benefits haven't been extended indefinitely. And senior citizens, the most powerful voting bloc in America, are very protective of Social Security and Medicare.
Yes, President Bill Clinton managed to take a 4.7% deficit and turn it into a 2.4% surplus over eight years, but that coincided with one of the greatest economic expansions in history. These are harder times.
Continued: Visions of Weimar GermanyMore from MSN Money
Inflation won't be invisible for longWhat happened to $2,000 gold?The dollar's down decadeInflation warning etched in steelWhy this is a rich man's recovery1 | 2 | 3 | next >
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Doesnt the approach of inflating and exporting your way out of debt only work if you are the only country doing it. If all of your trading partners do the same thing, what is the result? Stalemate?
ReplyReport Abuseicc1 #3Tuesday, April 13, 2010 11:46:58 PMIt has been tried all over the world across the history and none worked instead ended in revolutions to begin new lives.
The process is definitely too painful.
ReplyReport Abuse1 - 3 of 3PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/MutualFunds/why-inflation-would-be-good-for-us.aspx?page=2&','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*There are three obvious ways to deal with the problem and start closing the government's gaping budget deficit, which in 2009 stood at $1.4 trillion, or nearly 10% of GDP: increase taxes, cut spending, or both.
But the economy seems too weak for this tough medicine. The broadest measure of unemployment stands at nearly 17%. Long-term interest rates are on the rise. Housing remains moribund. And the risk of deflation -- falling prices -- threatens to increase the real cost of government debt.
There's another way, but it involves a question we may not want to ask: Could high inflation be good for us?
It might be just what we need, according to one line of thinking on Wall Street and in Washington these days. But it means inviting something that's been economic enemy No. 1 over the past 30 years.As you can see in the chart above, inflation has been in a relatively steady decline since the early 1980s.
Indeed, the youngest workers in the economy have never experienced a period of steadily rising prices. That may be about to change. (I'll have some ways to prepare for inflation as an investor later in this column.)Not just about government The idea is that a quick bout of higher-than-normal inflation would lower the nation's debt in real dollars, bailing the government out of the debt threat. That means we could avoid Draconian tax increases or big spending cuts, both of which would be politically unpopular and could scuttle the economic recovery. (One example of what such cuts might bring is the "Roadmap for America's Future" proposed by Paul Ryan, R-Wis., the ranking Republican member of the House Budget Committee. It envisions phasing out Medicare in favor of private health vouchers and calls for raising the Social Security retirement age, among other changes.)
But accepting higher inflation wouldn't help just the government.
How to invest to beat inflation
Yes, this strategy carries dangerous risks. But we're in an extremely serious situation.The burden we bear The entire developed world is in trouble: According to the Organisation for Economic Co-operation and Development, total industrialized country debt is expected to exceed 100% of annual GDP in 2011. That's a rare height, but just a start.
Stephen Cecchetti and his colleagues at the Bank for International Settlements, or BIS, a Swiss bank for central banks and arguably the most admired of the world's financial overseers, explored the problem of rising public debt and entitlements in a recent working paper. The authors outline a gloomy future of recession-damaged economies, aging populations and rising long-term interest rates. All would reduce tax revenue, increase expenditures and increase deficits.
The result is a scary debt explosion.
Over the next decade, the BIS researchers believe, the ratio of debt-to-GDP will exceed 300% in Japan, rise past 200% in the United Kingdom and move past 150% in the United States, Belgium, France, Ireland, Greece and Italy. Should nothing be done, the U.S. ratio would move past 400% by 2040, the researchers project.
This debt burden threatens the prosperity of our children and our grandchildren as it crowds out private borrowing and increases the interest rates that businesses and consumers pay. It could also leave the economy vulnerable to the next big economic downturn, because governments would have limited ability to engage in stimulus or rescue efforts the next time the system threatened to melt down.
Current plans to trim the budget deficit are barely a start. President Barack Obama's aim is to cut the federal deficit from 11% of GDP now to 4% by 2015. This puts us on the right path; the BIS estimates that this gradual adjustment, if continued, would limit the growth in the debt ratio to 300% over the next 30 years. Adding a freeze on age-related spending -- Social Security and Medicare, for example -- would limit it to 200%. But much more needs to be done.
To stabilize the government's debt-to-GDP ratio over the next 10 years, the budget balance would have to swing from an 11% deficit to an average surplus of 4.3% of GDP. That's a national crash diet that seems politically impossible. Tax hikes cause outrage. The right wouldn't tolerate a cut in defense outlays with a rising China and a resurgent Russia. The left is already upset that unemployment benefits haven't been extended indefinitely. And senior citizens, the most powerful voting bloc in America, are very protective of Social Security and Medicare.
Yes, President Bill Clinton managed to take a 4.7% deficit and turn it into a 2.4% surplus over eight years, but that coincided with one of the greatest economic expansions in history. These are harder times.
Continued: Visions of Weimar GermanyMore from MSN Money
1 | 2 | 3 | next >
Anthony,
Doesnt the approach of inflating and exporting your way out of debt only work if you are the only country doing it. If all of your trading partners do the same thing, what is the result? Stalemate?
It has been tried all over the world across the history and none worked instead ended in revolutions to begin new lives.
The process is definitely too painful.
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