INFLATING OUR WAY OUT OF DEBT

President Obama and his financial experts and to a lesser extent the other major economies of the world are playing a very dangerous game trying to spend their way out of a very deep recession. 

While the stimulus package and it's spending on massive infrastructure projects in an attempt to get people to work is admirable and even desirable as it should get projects done at a more favorable cost, it is still spending money we don‘t have. 

The timing will have to be spot on to stop the spending before inflation gets out of control to the point it will be irreversible. With the printing presses going round the clock printing the trillions of dollars required for this massive worldwide spending spree it can do nothing more than cause massive inflation. I suppose that repaying all the accumulated debt with relatively worthless inflated dollars is one way to solve the deficit problem.

Purposely attempting to try and inflate our way out of deficit is courting disaster to the point of irresponsibility. I hope it works but creating such inflation will put so much future pressure on all of us it could easily backfire and end in disaster.

Once inflation starts to rise, the debt holders will start to demand higher interest rates thereby driving inflation even higher. As inflation spirals ever higher and faster some countries will manage to eliminate their debt and others will just continue to borrow at ever higher costs. We will end up with more countries like Zimbabwe who are attempting to deal with 150,000 % inflation.

When the US dropped the gold standard and had nothing to back it’s currency it became an open invitation to print money and it has been doing so at a breakneck pace. So far the American economy, still being the largest in the world has managed to keep it’s dollar as the currency of choice in hard times. Some countries have even used it to back their own currencies and others, such as Zimbabwe, use it as default currency to keep their economy functioning while they try to rebuild their failed economies.

The US public debt of 10.8 Trillion dollars and growing, costs 250 billion dollars per year in interest. As interest rates rise which they surely will, this cost will rise as well. As the US keeps piling on more debt year after year it will at some point  become unsustainable. This is the ultimate danger of not having anything to back the currency, be it gold, oil, rice or whatever.

This leads us to the question of what to do to protect ourselves through this coming inflationary period. Unfortunately there is no textbook answer because Governments have a habit of manipulating values of assets and confiscating properties. Protecting what we have becomes a major study of it’s own and not one that can be quickly covered in one post.