It’s been said that when countries become too indebted, they either default or inflate their way out of the problem.
This is a real issue. The Federal Government ran a deficit equal to 10% of GDP last year. That’s the largest budget gap in the developed world. Only two years ago it was about 2% of the economy. For the past 40 years, the fiscal deficit has averaged about 2 ½ percent. And lest one is tempted to be partisan about this, let it be noted that Nixon, Ford, and Clinton all saw surpluses.
But now that we’ve borrowed the money, what can we do? Default just isn’t an option in a fiat currency. But inflation? This ignores history. Double-digit inflation wasn’t brought on by deficits: the ‘70s deficits were moderate. And when you can buy TIPs, inflation isn’t a risk at all.
One option rarely mentioned is just growing up. The debt incurred in the ‘80s became less and less important in the ’90s and the ‘00s as the economy grew. That wasn’t inflation, it was just solid economic growth. 200 billion dollar deficits, an item of panic under Reagan, now seem quaint.
Parents often hope their kids will grow out of bad behavior. Hopefully the same thing will apply to our economy.
Douglas R. Tengdin, CFA
Chief Investment Officer
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