Megan McArdle recently argued that concerns about hyperinflation are overstated, and that we should instead be worried about different economic dangers.
I don’t necessarily agree with her assessment, but I thought I’d point folks towards her post, “Seriously, Stop Worrying About Hyperinflation“.
One point she makes which may have merit is that governments might be able to use hyperinflation to essentially default on already-issued debt, but that doesn’t eliminate the problem of running debt streams (such as Social Security and Medicare), especially when those payments are theoretically indexed to inflation. (McArdle credits GMU economist Tyler Cowen for this argument.)
She also argues that US policy makers are too aware of the problem of hyperinflation, and that they would choose some other “solution” to our fiscal crisis. The alternatives include outright default on the debt (which she also regards as unlikely), or some combination of drastic reduction of entitlement payments and tax hikes (which she argues is the most likely outcome).
I’m not an economist, so I’m not well qualified to assess all her arguments. So here are a few questions that I’d like to throw out to NoodleFood readers:
1) Is it possible that our monetary policies might push us into hyperinflation even if our central bankers don’t want it and are trying to avoid it? For instance, the money supply has shot upwards lately, as noted in this chart:
So is some inflation and/or hyperinflation inevitable regardless of our central bankers’ desires and plans?
2) Will our politicians really decide that they will slash entitlement payments, when too many of them built their entire political careers around promising more goodies for free — and they continue to spend like mad today despite the current crisis?
(I suppose that the government could perform some de facto cuts without calling them such. For instance, they could use artificially low inflation estimates to calculate the cost-of-living increases for Social Security. Over time, this basically allows them to indirectly cut benefits without being too obvious.)
3) Is there some big pot of money out there that the politicians will be tempted to loot in order to buy themselves more time?
For instance, one idea is that the US government might decide to “nationalize” citizens’ private 401(k) retirement funds and instead tell retirees that they would receive public pensions in lieu of payments from those former privately-owned accounts. Of course, the new payouts won’t be as large as the old payouts, thus allowing the government to keep a portion of this formerly-private money.
Or the government might slap a new surtax on 401(k) account balances over $1 million in order to fund the Social Security deficit. After all, that just hurts “millionaires” in order to help those who have the greatest need.
In conclusion, one of the commenters on McArdle’s original post made this good observation:
…She didn’t say that hyperinflation would be impossible, just that it would be really, really crazy and shortsighted. So I’m not comforted.
Given that the current system of deficit spending for unsustainable entitlement programs will eventually collapse, the only real questions are how and when. I don’t think anyone can confidently predict which flavor of bad and/or irrational decisions politicians will make — not when their core economic premises are fundamentally unsound.
I hate to end on such a gloomy note, so if anyone has more optimistic insights to offer, please do so in the comments section!
(McArdle link via Instapundit.)