Thursday, August 20, 2009

Will we Face the Threat of Inflation?

The most discouraging aspect of the irrationality in evidence at the town hall meetings about health care is the further irrationality they portend for the discussions that will be coming in regard to the need to balance the federal budget and reduce our national debt.

Warren Buffet describes the challenge our nation faces as the economy improves and the printing presses churning out greenbacks are turned off:

Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

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