Standard & Poor's, the bond rating service, has been widely mocked for its recent prediction that the U.S. government may default on its bonds. It's a highly qualified prediction, sort of a prediction of a prediction of a remote possibility. S&P estimates there's a 1-in-3 chance that it will downgrade its ratings of U.S. bonds. So the chance of a default has increased from unimaginable to almost unimaginable. But, like that kid in math class who bursts into tears when the test comes back graded A-, America would find this traumatizing because it's never happened before.
Some people say, relax and don't worry about it.
They argue first: Standard & Poor's is dealing, in this case, with public information. It knows nothing that you don't know, or could not find out, about United States government bonds. These aren't remarkable investment opportunities involving Nigerian royalty, like the ones offered in my email inbox every day. They are backed by the full faith and credit of the United States.
Besides, the folks at Standard & Poor's are just overcompensating for burying their heads in the sand during the subprime mortgage collapse.
What's more, the United States government will never default on its debts, because (unlike almost every other debtor in the world, including other sovereign nations) the United States can just print more money. "At least one economist" (i.e., one economist) is widely cited in the blogosphere as issuing a "derisive guffaw" at the notion that the United States can ever default on its obligations as long as there's still fuel to run the printing presses.
Well, I don't know. Standard & Poor's may know nothing that I couldn't find out, but it certainly knows more than I've bothered to find out. (And how about you?) And how its experts assess all this publicly available information is surely worth knowing, isn't it?
Second: Yes, the bond rating agencies failed to warn investors about the home mortgage debacle. What are they supposed to do now? Just go out of business?
Third and most important, the blitheness with which intelligent people say "Oh, we can always print more money" is horrifying. For one thing, it's not true. Sure, maybe once. But if we develop a reputation for paying our debts with a printing press, no one will want to hold our debt and no one will buy it.
Ask yourself: If the United States can always cover its debts by just printing money, at no cost, what are we waiting for? Why even bother running up these tiresome debts and paying interest on them? Why shouldn't Uncle Sam just make his shopping list, print out as much cash as he will need and head for Costco?
When I last loosed a jeremiad on the danger of inflation, about a year ago, I was roundly upbraided by people who noted that in fact inflation was at record lows and seemed to be staying there. Inflation is still quite low, but in the past year it has increased by about a third, creeping up to 2.7%. Somewhat more alarming, the price of gold has now broken $1,500 an ounce. Gold is a totally non-productive asset. It just sits there. Its only investment value is as an inflation hedge.
Here's an easy prediction: Soon, many of the people who have been talking about how the return of high inflation is terribly unlikely will start talking instead about how a bit of inflation is harmless or even healthy for the economy. In fact, it's already started. This is from a news article in the New York Times: "[T]he purchases [of debt by the Federal Reserve Board] have improved economic conditions, all but erasing fears of deflation…. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds."
Why are people talking this way? Here's the missing explanation: Inflation reduces the value of debt. If poorer people are on balance borrowers and wealthier people are on balance lenders, inflation can help to reduce one of our most serious economic problems, which is the increase in income and wealth inequality. More important, inflation is the only conceivable easy way we can pay down the national debt to a manageable size, or at least slow its growth.
This is how it works: The debt ceiling we're about to crash through is $14.3 trillion. But even as we borrow more (about $1.6 trillion this year), inflation erodes the value of what we already owe. At an inflation rate of 2.7%, $14.3trillion will be worth about $13.9trillion in today's dollars a year from now. That's nearly $400billion wiped away from the national debt without fuss, without debate and seemingly without cost or pain. A quarter of the deficit. And that's with inflation at record lows. If inflation were 5%, it would wipe out $715 billion; at 10%, nearly the entire projected annual increase in the national debt, even at its current record high of $1.6 trillion.
Of course, it would also wipe out people's savings at the same rapid clip. Anyone who lived through the inflation of 1979-81 knows that there are noxious social effects as well. To say that inflation, at 2.7%, has "climbed closer to healthy levels" is insane.
"At least one economist" (the same one, he of the "derisive guffaw") and I had an exchange of views on the Web awhile back. He is of the view that the debt doesn't matter, that the fuss over it is a right-wing plot to generate unnecessary panic about government spending and use it as an excuse to cut Medicare and Social Security. (Many Republicans think it's a left-wing plot to raise taxes.)
I asked him a version of the question above. If the national debt doesn't matter, why do we have taxes at all? Why not just borrow the entire federal budget? (The same question can be posed to a Republican tax-cutter.)
Derisive Guffaw answered that we need the deficit for Keynesian reasons: so that we can easily raise or lower it to stimulate or sedate the economy, as needed. Of course, in the real world, we don't seem to be able to raise and lower (or at least to lower) the deficit for any reason, good or bad.
The question remains: If the deficit doesn't matter, why have any taxes at all? And if there is some point at which the deficit does start to matter, and become dangerous, when is that point if $1.6 trillion isn't it?
Michael Kinsley, a former editorial page editor of The Times, writes a column for Politico. A version of this column also appears on that website.