[quote=Bob]I know this might sound shocking to some of the readers, but at this point, I’m almost hoping for a massive increase in interest rates, and perhaps even hyper-inflation. Unfortunately, that might be the only way to stop the jokers in Washington from continuing their spending spree. And it also might cause voters to boot the socialists out of congress in 2010. Short term pain might result in long term gain.[/quote]
How would high inflation punish the most irresponsible or contain govt spending? High inflation is the primary financial goal of govt now, and is favored by maybe half the business community, and probably 2/3 or more of all voters. Why? Because a lot of them borrowed and spent like drunken sailors, and high inflation lets a lot of them off the hook for the debt repayment (in real terms).
If you wanted to teach the lesson that overspending is bad, you’d deflate. The pain of debt repayment is proportionate to (Interest rate – inflation rate). So increase interest rates and/or deflate, not inflate.
All theoretical, of course. We will inflate and hold interest rates relatively low, so the real interest rate will be forced to be low, probably quite negative. That will tank the dollar. And that’s the end game:
1. Inflation
2. Negative real interest rates
3. Lower dollar value
By the way, you can get negative real rates without ever showing Treasury rates less than CPI inflation rates. How? A lot of debt (like mortgages) is at fixed rates of interest, so just arrange for massive amounts of financing of debts at low fixed rates,and then inflate. Treasury rates rise some, even with the Fed pushing down, but there’s a huge windfall for all the people who borrowed at the earlier fixed rates. So effective real rates become negative for large chunks of the economy, without ever showing up in the stats as negative real rates.
