If history is any guide, we may already know the answer. Politicians will take the easy way out.
Given the increasing deficits, the outlook for growth is problematic. It would appear there are three available options. Which one do you think the politicians will choose?
(1) Reduce the level of debt, i.e., reduce spending; or
(2) A combination of higher taxes and reduced spending; or
(3) inflation.
Since politicians can’t seem to get agreement on either of the first two, don’t be surprised if inflation will be the “solution” – the one that will bear no one’s finger prints and allow everyone to blame the other in their next re-election campaign… it’s always good to have another issue in your back pocket, you know.
Inflation is a common solution. One study has found that in the past 400 years, inflation has been the most common way that governments have dealt with excessively high levels of debt.[1] The reasons stated above help explain why. Those of you who’ve been following my pontifications over recent years may remember my going on about this issue before. The short version: Look for the U.S. to simply print money and inflate the currency to repay the debt – and taxpayers will be left paying for their spending to buy re-election. While the Main Stage debate will be over tax brackets and deductions, who pays, etc., the real action will be off to the side out of sight: Hidden taxes through higher prices, taxes buried inside the higher prices, fees we don’t know we’re being charged.
