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Hope and Change and Doom and Gloom

April 6th, 2011 - 1:10 pm

Inflation sucks. We know this. Inflation destroys savings, and without savings there can be no investments. No investments means no new jobs or economic growth. It also means no new productivity gains, which makes everyone richer in real terms.

There’s one other tiny little detail: Inflation makes you poorer, in very real terms. Six dollar gas, eight dollar milk, hundred dollar Levi’s 501s — they might be closer than you think. They might also be a short pause on the road to jillion dollar shoes.

Voters usually deal harshly with politicians who can’t or won’t tame it — look at what happened to Jimmy Carter in 1980, or to Sacramento after the inflation-inspired Tax Revolt of the year before.

These are my happy thoughts when I look at the mess Congress and the Fed have made of our finances. As I argued last week, only the weak job market seems to be keeping a lid on wage inflation. Its absence is about the only thing keeping 2011 from being worse — far worse — than 1979.

A crippling bout of stagflation may be on the way, perhaps as soon as this summer. It seems likely that the Fed will raise interest rates and launch the Good Ship QE3, in an attempt to disinflate consumer prices while re-inflating housing prices and maintaining inflation in equities. You read that right: I fully expect the Fed to try and disinflate, re-inflate and continue inflation all at once.

This is madness.

You can feel confusion and panic at the Fed, and the denial on Capitol Hill is, well, undeniable. And we happy taxpayers, as always, will be the ones to pay for it.

Today, however, there might be a new kind of madness, and not just in Washington. As I said above, consumers hate inflation and vote accordingly. But today, almost one in four home mortgages is underwater. That is, people owe more on their home than it is worth. But a nice round of 10-15% inflation for a couple of years would put them back above water.

That’s 11 million American households with a vested interest in inflating away their biggest debt. How many voters is that? 20 million? More? It’s a better-than-even to trade a weaker paycheck for oodles of home equity.

Your savings might be destroyed, but that’s not their problem. Furthermore, Washington is sitting on $14 trillion in debt. Some good, hard inflation could knock off six or eight trillion dollars worth of it in real terms. Tempting, eh?

So here’s where we are: We have a political constituency for inflation; we have a debt-addicted government for whom inflation is the only way out; and we have a chief central banker already in the habit of conjuring up trillions of magical dollars out of thin air.

This combination is probably unique in American history — uniquely dangerous, too.

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