There’s a game of chicken going on this summer, and it doesn’t involve cars, train-hopping or holding lit cigarettes between forearms. The federal government may go into default on the national debt as of Aug. 2. Congress is trying to hash out the details of a budget at the same time it decides whether or not to raise the debt ceiling (currently at $14.294 trillion).
Republicans refuse to include raising taxes, which they call a “job killer,” in any solution. Democrats insist that raising some taxes and eliminating tax loopholes and subsidies for corporations and the wealthy are essential to any attempt to reduce the budget deficit, and are loath to sign on to the cuts Republicans propose, which they call “job killers.” Economists on both sides have predicted that allowing the national debt to go into default would be catastrophic.
But what does this mean to you and me? To a small business or a homeowner? To a person who’s unemployed?
Overall, the dollar would be worth less, and interest rates would likely rise. In a nutshell, what you get is inflation. Inflation was branded a dirty word decades ago, and there’s logic there: if your dollar is worth less, it costs you more to buy food, gas, diapers, electricity, anything you need to survive. Historians argue that high inflation aided the rise of Hitler’s Nazi Party, a symbol of strength and expansion in a society desperate for stability and a chance for prosperity. Obviously, no one wants this to happen in America.
But is all inflation bad?
In a recent New York Times column, Nobel Prize-winning economist Paul Krugman argues that a bit of inflation is exactly what the U.S. economy needs to kick it into gear: as its currency becomes slightly devalued, its labor market and manufacturing sector become more competitive. That’s good for employment because it makes American goods and services cheaper. It’s also a covert way to reduce the amount of debt that the nation carries (if I owe you $10 and the dollar becomes devalued by 10 percent, I now effectively only owe you $9). China has been criticized globally for purposefully undervaluing its currency, the yuan, to help make its labor and manufacturing costs the most competitive—a tactic that has kept China’s 5-year average economic growth between 7 and 12 percent (a steroid monster of an economy compared to the States’ anemic -4 to 3 percent).
Krugman explains that despite the apocalyptic talk from people like Treasury Secretary Timothy Geithner, inflation is primarily bad for creditors—big banks and investment firms that are making obscene profits off your debt because the value of your debt (in dollars) is kept artificially high. Think about it: if you have $200,000 in debt on your house, car and credit cards, that debt will be eased by inflation. Only entities that are holding large amounts of dollars (or promissory notes, like those held by your credit card provider) will suffer noticeably from mild inflation.
“More aggressive action by the Fed could help boost us out of this slump,” says Krugman. “In fact, even Republican economists have argued that a bit of inflation might be exactly what the doctor ordered—but deflation, not inflation, serves the interests of creditors. And, of course, there’s fierce opposition to anything smacking of debt relief.”
Though early on, many legislators agreed that some sort of compromise would be reached, it may not be that easy. This may be the point where the Republican Party finds that the populist, anti-debt Tea Party faction that gave it back the majority in the House has so poisoned its own traditionally corporate-friendly core from the inside that it cannot even be saved by the now equally corporate-friendly Democratic Party’s caving on every issue that threatens Wall Street oligarchs.
We are witnessing a slice of government (the Tea Party) trying to reduce debt as the rest continues to represent the interests of big banks and Wall Street, who want nothing more than to keep making money off that debt—while most of us are just hoping the bastards don’t gut and/or privatize our Social Security and Medicare.
Hard as it may be to root for a move that could potentially collapse the world economy, Krugman does a service by reminding us that policies that are good for big banks and pharmaceutical companies are not necessarily good for average Americans, and vice versa. Decades of anti-inflationary policy have apparently done nothing to close the widening income gap, bring back U.S. manufacturing or re-employ the 9.2 percent of unemployed. If raising taxes to help control the deficit is just so politically poisonous that it can’t happen, perhaps it’s time we tried a little homeopathic inflation.
