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Two Cheers for the Coming Collapse of the U.S. Economy!
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"At some point, holders of Treasury securities are going to recognize that these unfunded liabilities are going to affect the fiscal capabilities of the government and then you're going to have the same situation that happened in Greece happening in the U.S.," says Jeffrey Rogers Hummel, who is a professor of economics at San Jose State University and the author of a recent paper on the consequences of a U.S. government default. "In the short run it's going to be painful, but in the long run it'll be a good thing."
I have two problems with Hummel's comments.
First, I always thought that the whole point of the Austrian economic theory was that specific predictive claims by economists are false because we can not know the future "mind" of the market, thus I wonder what Austrian business cycle models? Economics can only make broadly general predictive claims, such as this: the more fiat money units one creates the less the value of the existing stock.
Second, I believe he is totally wrong when he claims we libertarians are like generals fighting the last war and the central banks by competing have solved the problem of inflation. That is complete lunacy. They compete to inflate more to achieve the short term gain of lowering the value of exports versus imports. The whole thrust of the New Deal financial reforms, and all the subsequent tweeking by quasi-Keynsean Monetarists is to postpone the liquidation of debt by preventing a deflationary collapse of the inflationary fiat money, central banking system. When the US Treasury Bond crisis finally arrives in the form of the market forcing up interest rates as a reaction to price inflation (a different issure from monetary inflation because prices go up in the long run due to increased money supply, but prices may rise and fall in the short run do to central bank policy generated credit cycles) the Fed will be forced by political policy to create more fiat money at an ever increasing rate.
That is the finality of all inflationary cycles throughout the history of fiat money and no tweeking of interest rates by central planners can change that. All they can hope to do is postpone the inevitable. The assumption that the Congress and Executive branch will suddenly come to their collective senses and correct the run away inflation when it becomes too evident for them to continue to deny, like Volker and Greenspan did 40 years ago, is absurd. That is a case of fighting the last war if there ever was one. That is because the debt has grown at an ever increasing rate while the population ages and becomes less productive. The same level of taxing and regulation has an even greater impact on a dwindling private sector, but the regulations and taxes are growing at an increasing rate at every level of society, (while Hummel only sees the Federal level) as the proportion of the population who are net tax receivers grows. The only possible reaction of the central planers will be two choices, either to permit a deflationary collapse (the very thing that all central policy is intended to prevent) or create more fiat money to make up an ever increasing deficit. As interest rates go up the deficit will increase at a geometric rate, the result, hyper-inflation.
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