Sunday, January 31, 2010

As “dead” money continues to pile up in the form of unborrowed bank reserves, we’ve grown increasingly skeptical about the possibility of an inflationary spiral. Hyperinflation seems inevitable somewhere down the road, but what about now, as real estate deflation continues to asphyxiate the U.S. economy?  To all who have continued to insist that the Fed would not “allow” a deflation to occur, we say once again: Look around you. Even those two intractable engines of inflation – college tuition and health care – appear, finally, to be slowing down.  Moreover, an even more powerful source of inflation -- government spending – has begun to decelerate with the lethal speed of a crash dummy. Yes, the party may continue for a while in Washington D.C. and its suburbs, since that is the epicenter of an unprecedented fiscal blowout. But the ripples from fiscal stimulus cannot reach New Jersey and New York, even, let alone California.  These states and quite a few others face grim budget realities that will continue to deaden whatever short-lived stimulus the federal government can create. And let’s not lose sight of the fact that stimulus itself implies borrowing down the road from a dwindling number of taxpayers who, miraculously, have money left after paying for life’s necessities. We told the inflationists to wake us when tract homes were selling for a quadrillion dollars, since that would imply deflation had been reversed by true helicopter money.  That would be terrific news for the perhaps 50 million homeowners who currently are underwater on their mortgages, since it implies that the main source of household debt had effectively been liquidated.  But before you get your hopes up, consider who would lose if mortgage debtors were allowed to skip out on trillions of  dollars worth of obligations.  Lenders and savers would