Posted by Tim Stobbs on January 20, 2009
So last week I reviewed the book Crash Proof which I mention had some fairly interesting ideas on inflation and the CPI (Consumer Price Index) in the US. Since some of that material was too much to cover in one post I decided to do a follow up post.
So why would a government actually want inflation, well here are the five reasons from the book:
- It makes government debt more manageable. Basically future dollars are worth less so paying it back debt gets easier.
- In a country full of debt heavy consumers the government will follow the will of the people to help keep polices that are hospitable to debtors.
- Inflation finances social programs that voters demand but avoids raising taxes to pay for them. Basically just print more money or issue more bonds to cover what you need.
- Inflationary spending is confused with economic growth, which makes things look better than they are. Now this I can believe because the CPI in the US is basically garbage for a number.
- Inflation causes the nominal asset prices to rise, which gives the illusion of wealth creation to people who own stocks and real estate. Even when it actually reduces their purchasing power.
Now the other side of the coin is why would a government than proceed to under report inflation via the CIP. Well here’s another five reasons:
- Under reporting inflation keeps interest rates lower, which makes the national debt cheaper.
- Social Security payments and other benefits index to the CPI cost less for the government to pay.
- Income tax brackets and personal exceptions are indexed to the CPI. So the government gets to keep more of your money.
- Lower inflation premiums on inflation adjusted long term debt cost less and keeps interest rates low for the government and for the consumer. This lets the high debt levels for the average person to keep rising.
- In the case of TIPS (Treasury Inflation Protected Securities), less money has to be paid out to people to cover the CPI portion.
Of course anyone with an ounce of sense would realize a program like this would finally result that deck of cards called the US economy falling down and then there could be hell to pay. So that fact most governments are desperately borrowing more money to keep things moving in their economies are ironically setting themselves up for future problems. Of course on the other side letting a recession of this size just take its course naturally could take a very long time to recover without some stimulus package. Basically in a nut shell we are damned no matter what we do. Now don’t you feel better about our governments shoveling out billions of dollars? *grin*