I wasted away my college and law school years in New England, and so I have a large store of New England jokes. Here’s one:

Tourist from New York: Say, buddy, how do I get to Rutland?

Vermont farmer: Well, now, what you want to do is, you want to head right on up to that stop sign and… No, that ant right. You got to turn yourself around and go on through town and past the creek to the next intersection and… No, that ant right, neither. [Scratches his head and thinks.] Come to think of it, you can’t get there from here!(1)

A few weeks ago I did a series of posts on deflation. That got a lot of comment, but one consistent refrain was, “OK, but you can’t get there from here.”

What they meant was that if we could somehow start the US all over again at square one, it would be a terrific idea to alternate periods of modest inflation and deflation, thus in turn benefitting and curbing risk-takers and risk-avoiders equally. That would allow us to avoid, on the one hand, the enervation that has recently beset Japan and, on the other, the constant risk-fueled crises that have beset the US. Neither unhinged risk-takers nor inert risk-avoiders could get too comfortable in their skins or carry their inclinations too far.

But, unfortunately, we’re not starting from scratch. As I mentioned in the first post, continuous inflation benefits people who build up huge piles of debt and – surprise, surprise – we’ve created an entire society of debt-binging voters. We all want to live in nice homes, but we don’t want to wait to live in them until we’ve saved enough to buy them – we just get a big mortgage. We want to drive nice cars, but we don’t want to wait until we can pay cash – we get a big auto loan. We do the same with college costs (student loans), ordinary living expenses (credit card debt) and so on and so on.

If we decided to generate a period of deflation, huge majorities of folks would be up in arms, because deflation makes debt of all kinds harder to pay back. So we don’t, which encourages people to borrow more and more – because inflation makes debt easier to pay back. It’s truly a vicious cycle and it will treat us to many more Tech Busts, Credit Crises, Global Financial Crises, and so on.

Which brings me to my main point: the main objecting party when we talk about deflation is the US government.(2) One of the congenital defects of modern, consumer-driven democracies is that we all want more government than we’re willing to pay for. In a deflationary world that would be a huge problem. But in an inflationary world it’s no problem at all. Sure, we’re electing governments that are borrowing today so we can live high off the hog and, sure, our kids and grandkids will have to pay all that borrowing off. But inflation will make it much easier to pay off, so what’s the big deal?

If you want to get elected in any modern, consumer-driven democracy, you better be willing to promise more than you can deliver, and then deliver it anyway by borrowing, borrowing, borrowing.(3)

And that’s the real reason we have to have Inflation Forever.


(1) Here’s another version:

Tourist from New York: Say, buddy, how do I get to Rutland?

Vermont farmer: Don’t know.

Tourist: Well, then, how do I get to Montpelier?

Farmer: Don’t know.

Tourist: You don’t know much, do you?

Farmer: Nope. But I ant lost!

(2) And, to a lesser extent, state and city governments. However, many states have constitutional provisions or statutes requiring balanced budgets or limiting borrowing.

(3) To a considerable extent, the difference between Democrats and Republicans is not how much they’re willing to spend (the answer in both cases is “a lot”), but what they’re eager to spend it on. Democrats: food stamps, income redistribution, the environment, health care; Republicans: national defense, law enforcement, prisons, anti-terrorism.

Next up: Our Floundering Elites

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