patrick.net

Okay, I always thought about various problems with current and rising government deficits, entitlement programs, current economic conditions, etc. and have always felt very strongly that inflation was a solution to most of the these structural problems. Given this background, I knew government will always choose low interest rates, stimulus bill, and bond buyback over inflation risk as I felt that government would be estatic about inflation, notwithstanding what the fed say about monitoring inflation risk. This is especially apparent as government's structural financial problems are harder and harder to overcome.

While I am in the camp that modesty high inflation is good for the government, it is hard to articulate. Here is an article that articulates my thoughts perfectly and I think is a good read.

http://articles.moneycentral.msn.com/Investing/MutualFunds/why-inflation-would-be-good-for-us.aspx

Select bullet points from the article:

- The idea is that a quick bout of higher-than-normal inflation would lower the nation's debt in real dollars, bailing the government out of the debt threat. That means we could avoid Draconian tax increases or big spending cuts, both of which would be politically unpopular and could scuttle the economic recovery.

- who would see the value of their homes and retirement accounts increase. U.S. exports would become more competitive as the dollar weakened. The unemployment rate would fall, partly because real wages would decline, a less pleasant result.

- the faster real wages fall, the faster the unemployment rate falls, Higher employment would fuel increased economic growth and bolster the government's tax revenue. The trade-off would be a decline in real wages, but inflation would mask those declines

-Inflation would also act as a stealthy fiscal reform. Though tax revenues are affected only slightly by inflation, two-thirds of government expenditures are affected more. That's why the real cost of government spending would wilt away in a high-inflation environment

- In fact, it may already be at work; if it isn't, don't expect an announcement if it begins. That's because politically and economically, everyone with a hand in its implementation must deny it. In theory, in order for inflation to work this magic, it must be unanticipated.

I think the real point here is clearly I think federal policy will bias toward inflation and we should be aware of what that means to us financially. I know everytime inflation comes up, Japan will come in mind.

#environment