Higher Taxes or Hyperinflation?

In the Weekly Standard, Economist Irwin M. Stelzer ponders on the two options to pay off the massive debt that will be left in the wake of the Obama presidency.

Excerpts:

We are (also) certain to see the portion of our pay that we actually get to take home decline significantly. The debt that Obama is running up will have to be repaid. Already, there are grumblings in the market about the future of the dollar, with the Chinese not the only one of our creditors worrying that we will inflate our way out of our obligations. Run the presses, make dollars cheaper, and use the debased currency to repay debts. Former Comptroller General David Walker believes that we are in danger of losing our triple-A bond rating:

How can one justify bestowing a triple A rating on an entity with an accumulated negative net worth of more than $11,000bn [$11 trillion] and additional off-balance sheet obligations of $45,000bn? An entity that is set to run a $1,800bn-plus deficit for the current year and trillion dollar-plus deficits for years to come?

But inflation is not the only possibility. Instead, politicians, remembering the fate of Jimmy Carter when he allowed inflation to climb towards 20 percent, will try to restore fiscal sanity by raising taxes. Harvard economist Martin Feldstein, who supported the president's stimulus package, puts the needed tax increase at $1.1 trillion over the next decade; the International Monetary Fund puts the figure at $1.9 trillion, a sum the magnitude of which is better understood when written as $1,900,000,000,000.

After all, Congress won't be able to cut spending. Obama's drive towards a trillion dollar health-care tax-funded system seems to be irresistible. Drug companies will go along so they will be relieved of the cost of subsidizing lower-income folks' prescription drug needs. Insurers will go along because the law will require everyone to take some sort of coverage. Employers will go along so they can shift the cost of employee-benefit plans to taxpayers.

Posted by Nick Stone on 1:20 AM. Filed under obama, obamanomics, one term . You can follow any responses to this entry through the RSS 2.0