Civil War, Part II

[kandrathe]

... but you feel secure assuming that estimates of long-run deficits will be off by a multiple of two or three? I'm not sure I understand your reasoning behind multiplying predicted government expenditures by over 150%. They might spend more than they say they will, but that would be a huge jump.

I was assuming that demands for government services would rise in proportion to the unemployment rate and the foreclosure rates. Remember that in order for the government to hand out a dollar, they need to spend something like $1.50. Also, SSI is deducted from payrolls. With dropping payrolls, the government loses not only tax income, but also the receipts shoring up Social Security (which are used on the budget anyway). So Social Security and Medicare will become insolvent faster here as well.

Aside from fixing the banking system, Deflation is the urgent issue, which is why I'm with Krugman in wondering why people are getting worked up about hyperinflation when you currently have the opposite problem. The Fed can rein things in if inflation gets high, but they can't do anything if nominal interest rates are flatlined, yet prices are falling. Nobody should be hoping for another great depression, but that's what long-run deflation would mean.

I agree wholeheartedly with you that things are not rosy. Hard times are here, for quite some time to come. Where I disagree with you is in whether it will necessarily force the US government into massive inflation.

The risk of hyperinflation would occur after the Treasury has monetized a significant amount of debt, and then if we get a recovery. Once demand for commodities and labor rebounds, dollars being worth less, would cause prices to climb in relation to the new value of the dollar.

The taxation powers of the US government are far from exhausted, and while nobody likes tax increases, a moderate tax hike combined with moderate inflation would be a much better solution to covering shortfalls than keeping taxes low, and printing tons of money. There is a political argument about whether a tax hike is popular enough to pass, but Obama will (in all likelihood) have a filibuster-proof Senate, so the government will have its options open.

Well, in my way of thinking (Austrian), you would just be sucking air from a deflating bag. The more you suck, the more the bag deflates. Less income, less growth, begetting even less income. You can prop up the government temporarily by sapping the wealth of the nation, but if you rob the people of the means by which they can recover, the recovery will not happen. Eventually, the props will fail, and we suffer economic collapse (depression). Consider also the churn is some States, where government is the largest employer. Dwindling economy results in lower tax receipts, which results in government trimming jobs, which results in lower tax receipts and more demand on services.