By Alan Parks.
Business World writer Holman Jenkins, Jr. lays out the case very well in a Wall Street Journal article on April 6, 2011 that the United States is almost certainly going to deal with its massive deficits and unfunded entitlement liabilities by printing fiat money—which could lead to significant, painful inflation. Even the so called Inflation Protected Securities (TIPS) issued by the government will not be safe from the ravages of the looming inflation. The government will likely either underestimate the inflation rate, start taxing TIPS, or otherwise reconfigure the formula to make even savers of TIPS losers when the government overspends. If owners of TIPS get the short end of the stick, then one can only imagine what kind of a raw deal the owners of traditional treasury bonds and notes will get. The soon-to-debut inflation will ravage all savers in general. Plan on watching 401K plans, IRAs, and SEPs all get devastated. Real wages will plummet. As happened in the late 1970s and early 1980s, the stock market will plummet as the price/earnings ratio must drop to levels to reflect the real return in a setting of double digit inflation. There is no reason that we can’t expect the inflation toward which we are now headed to be milder than the inflation we had in the late 1970s.
This hyperinflation which Mr. Jenkins and most other thoughtful economists are predicting will be due to our country’s flooding the market with newly printed money since it will have no other way to pay all of its entitlement obligations. The ultimate blame lies with the American voter who keeps electing and then re-electing leaders who promise government hand-outs without regard to a realistic match with revenue raised. Our citizens almost always elect whoever promises the most. The politicians generally pay lip service to the debt problem and come up with painless solutions that don’t pan out in the real world such as “taxing millionaires” to pay for entitlements, or “converting to electronic medical records” to dramatically lower the costs of medical care. These solutions sound good enough in campaign speeches to get the politician elected but they are totally unrealistic when it comes to actually solving the problem.
The off-quoted line attributed to A. Tytler summarizes the root of the problem: “Democracies never last. The people eventually figure out they can vote themselves money out of the treasury. The country then collapses due to loose fiscal policy.” This is the self-destructive flaw in democracies being demonstrated all over the world.
There is a solution. While it is true that the majority of Americans will not elect leaders who will do the right thing when it comes to fiscal policy, multiple surveys indicate our citizens do favor a balanced budget amendment by a substantial majority. This amendment actually came within one vote in the Senate of becoming a reality in 1997. Since our financial situation is much more dire than it was in 1997, support for this amendment should be much greater. A well-written balanced budget amendment—one that eliminates all loop-holes, including the war loop-hole–and requires a super-majority roll-call vote each and every year that deficit spending is allowed for war, national security threats, or other national emergencies will prevent our descent into a hyper-inflation morass or worse.
In short, there is an antidote to this destructive flaw in our representative democracy.
Alan Parks, MD
Americans for a Balanced Budget Amendment