Would the increase in the US federal deficit cause higher inflation?

[Huntsman2012]

In other words, wouldn't the $700 billion dollar bailout cause higher inflation or am I a moron?

[Fozz]

Yes, absolutely, and no you are not a moron. America is in over $10,000,000,000,000.00 of debt. Our government is broke. The only thing saving us from catastrophe is China and other countries who lend huge amounts of money, which America will not pay back. Our current possibilities of deflation are short term; it will not last. Remember that the real definition of inflation is not the increase of prices, but printing money, which leads to the increase in prices. So the solution is not to set price controls, which distort the market, but rather to stop printing so much money

But instead of the government being responsible, its spends more and more and more!!!! Its bailouts reward greedy, corrupt, and highly irresponsible companies and punish the more humble and responsible US citizens.

But the spending is still far too much. How will we get more money? We can only get so much from higher taxes? Whats the alternative?
Print more money!!!!! Its easier, more convenient, and a more subtle way of taking our money away. Its value goes down.

Welcome to inflation. No, I'm not talking 2-3%. I'm talking about inflation at the rate of college tuition, and gas prices (before the crisis) extending to everything else, and getting much worse. This foolish spending and printing of money may lead to hyperinflation, and the US$ will be worth less than toilet paper. The Fed will start printing more and more $100 bills, introduce $500, $1000, and keep adding more and more 0s. Impoverished millionaires will be rampant. This corrupt and fraudulent institution is responsible for much of our problems.

People, even those who are disciplined and personally responsible, will be punished into poverty unless there is a way for them to be self sufficient with their needs of life. Such as growing food, maintaining a proper shelter, and hunting. Or unless they invest in real assets like gold, which will never lose its value to US$ inflation.

Both Obama and McCain have supported this foolish decision, and this could lead to disaster. The media wants you to think that these bailouts are necessary to solve this crisis. This is designed to loosen credit and "get the economy going". But that is exactly what created this crisis. Phony economic growth created by artificially low interest rates and an inflated money supply will surely make the rich men at the Federal Reserve, the bankers, the politicians, and the people on Wall Street richer. That is why they don't like deflation. But normal people suffer from higher prices and a lowered standard of living. To think that it will make our country richer is a lie.

The media will tell you that even a little deflation is disastrous and they will immediately bring up the Great Depression as the reason (as if all deflation is Great Depression deflation). But deflation rewards people who save and prevents people from getting into debt. They say people won't spend money, but the recent problem has been people spending so much money that they don't have. Deflation of 1% will not kill our economy.

The right solution would be to drastically reduce the size of the government and stop policing the world and intervening in countries. Gradually end Medicare and Social Security. People should learn to save for retirement and pay their doctors when they are sick. We lost a valuable chance by ignoring Ron Paul and now we are stuck with the usual spendthrift politicians. Whatever solutions they have are not. They will only delay the catastrophe, not prevent it.

If China finds a way to be independent of American commerce, and if more countries reject the dollar, then it is over. If you take debt into account in measuring rich/poor, then America is one of the poorest countries in the world. That fact is well hidden, but when the superficial foundation fails, then it will show.

[TK]

With all the write downs and losses being taken by US businesses and the consequent cutbacks in capital investment, with the significant erosion in home prices nationwide, with stagnant wages and rising unemployment, in what scenario do you foresee an increase in aggregate consumer demand that would lead to higher inflation and what would your time frame be?

P.S. In my haste to return to watching football, I failed to give the situation I outlined its proper due. It's a lose-lose-potential win situation, where the potential winners are the couple who buy the home with 10% to 20% down and a 80% to 90% mortgage loan.

I say potential because no one knows if real estate prices will continue to slide, a similar 20% loss in value over two years will make this a less attractive real estate investment for the young couple, and no one knows what will happen to unemployment rates nationally. If either or both of the buyers loses his or her income for a protracted period of time, then they stand to lose their home through foreclosure if they can't sell it in a short sale.

I heard that by through the end of October equities had lost $18 trillion in value on the various international stock exchanges, and that roughly half was lost in the US alone. I have heard that approximately $6 trillion has been lost in US real estate values with the potential of another $4 trillion in losses over the next few years. I have no idea how much value has been lost in the corporate debt market, but I would imagine that it has been some trillions as well.

Not to belabor the point, but don't you think that inflation is the least of our concerns at this moment? How could $700 billion even if it had a multiplier effect equal to ten times that spending, i.e., a $7 trillion stimulus, get us into inflationary hot water, and, if it did, how much better or worse would that be than inadequate spending that failed to abate the multi-trillion asset deflationary spiral? Wouldn't you prefer to have the inflation dilemma?

I just realized that I inserted this post script into the body of my original comment. I don't know how to fix that. Sorry!

One of my clients is representing a woman who is selling her house for $248,000. She bought it a little less than two years ago for $300,000 and she has about $315,000 in mortgage debt. She is losing on this short sale and so are her lenders. In addition, she's lost her job, so even if a bankruptcy court judge had authority to modify her mortgage debt she doesn't have any income to finance a personal reorganization plan. This is a lose-lose situation from which there will be no threat to the rate of inflation in 2008.

Unfortunately, there are many more Americans like her which means that the real risk is severe asset deflation in America during a period of time when unemployment is rising substantially, and not just among blue collar workers. Wall Street has been decimated, and those are some of the best paying jobs in America.

I wouldn't call you a moron, but I would suggest that your fears about higher inflation are unfounded at this moment. Asset deflation and unemployment are the much bigger concerns that have to be addressed and arrested as soon as possible.