Train Wreck

by Peter Saint-Andre

2009-06-04

Thanks to Greg Feirman, I had a look at a fascinating article about the impending choice between hyperinflation and deflation that's facing economic policy-makers in the District of Columbia (fascinating in the way that, say, a train wreck is):

1. They can gut the savings of those who have been economically productive and fiscally prudent over the years (a.k.a. the "haves") through hyperinflation, i.e., a policy of devaluing the dollar and essentially nationalizing entities that would otherwise lose a lot of money (e.g., banks, insurance companies, unionized auto makers, and probably whole states like California).
2. They can make life even tougher for those who have been economically unproductive and fiscally imprudent over the years (a.k.a. the "have nots") through deflation, i.e., a policy of defending the value of the dollar and letting irresponsible corporations, banks, governments, and individuals experience serious asset deflation or even default on their debts.

It seems to me that the political class and those who keep the political class in power would prefer option #1. For the banks and unions and certain large corporations, it means their economic salvation through government largesse. For the huge swathes of the electorate who provide a veneer of democratic legitimacy for the political class at the ballot box, it provides a continued handout. For the political class itself, "doing something" will make them feel important and, not coincidently, will put them in control over ever larger stretches of the economy. Sure, this sticks it to responsible individuals, productive companies, and low-debt / low-tax states like Wyoming and New Hampshire, but who cares about them?

By contrast, option #2 sticks it to the kind of irresponsible individuals who vote but essentially don't pay any taxes or at least who receive more from government than they put in (can you say "representation without taxation"?), the unions (which these days really means government employees of one stripe or another), politically-connected corporations in industries like finance and real-estate development, and high-debt / high-tax (and voter-rich) states like California, Michigan, and New York -- the core constituencies for the political class.

Is there a "third way", a path between the Scylla of hyperinflation and the Charybdis of deflation? If there is one, it will probably consist of stagflation and many grey years of slowly working off the excesses of the last few decades. And yes that is the best we can hope for.

I simply don't see a good end to this impending collision of interests...

Peter Saint-Andre > Journal