We have lots of debt, last I checked, it was approaching 13 Trillion, which is usually more than I can find in my couch cushions. The national debt is approaching 70% of GDP. That is essentially saying if your family brings in $100,000 a year, that you have $70,000 in debt. Not an enviable place to be in. This represents all time high in percentages as well; we have not seen levels like this since we were crushing the Nazi’s and the Japanese in 1945.
Usually in the past we pay off our debt by simply printing extra money and just use to pay the debt down. I assume that is exactly what whoever is in Washington over the next 10 years will try to do (Democrats and Republicans have both proved unable to fix this problem). Except that this time I am not sure that it will work. Those fine folks in Washington I recently mentioned also promised extensive benefits to many, many, MANY of the people who vote for them. They don’t just promise them an amount; they promise them an amount that is indexed to inflation.
What that means if Joe Retiree got $100 a month in social security in 1980, he would get $100 * (1 + inflation) today. This is not good; this ensures that no matter what inflation does Joe Retiree will still get his share. The head of the Federal Reserve Mr. Bernanke recently stated this fact publicly, monetizing the debt will do nothing to reduce it and just destroy the savings of the middle class.
“Given the structure of our debt, [inflation] wouldn’t even help reduce the debt … given that so many of our obligations are indexed.”
-B. Bernanke
So what’s next, Taxes? Reduced benefits? Cut back on social security and Medicare? Oh the horror? AARP would (slowly) march on Washington! I think that these situations are about as likely to happen as me winning the lottery without buying a ticket.
Moral of the story: be prepared for inflation with assets such as precious metals, real estate, or other hard assets.
Tea (party) anyone?