By Craig Smith
It was debt that caused the 2008 crisis. Today we have even more debt than we did in 2008.
There are many ways to deal with excessive, unmanageable debt.
1: You can pay it back the honest way; by growing the economy, boosting output and outrunning the debt. In other words, you work and create wealth that then can be used to pay back the debt.
2: You default on it the honest way; by telling your creditors you can't pay and come up with some sort of other arrangement. In 2008, many people did just that. They lost their jobs - and therefore their income to pay their debt - and handed the keys to the bank.
3: You chose to default the dishonest way - by breaking your commitment and not repaying at all - by simply telling your creditor that while you can pay, you are not going to pay. In 2008, those people lived in their houses without payment until evicted and were off the hook, thus adding fuel to a deflating housing market hurting the entire economy and those who kept their commitment.
4: You repay it the dishonest way - which provides the same outcome as defaulting on on it the dishonest way. You pay off the debt by inflating it away. But people are still hurt in loss of buying power.
If President ElectTrump gets just half of the infrastructure spending he is proposing - along with tax cuts - we will see a run up of another $5-6 trillion in debt. This will cause huge inflation as more money is in peoples' pocket from the tax cuts and the jobs created start to fill the economy. Of course none of this is applicable until after Jan 21, 2017 and even then it may take a year or more.
I am of the belief the next crisis - unlike the 2008 crisis - will be very inflationary. That inflation will allow debt to be paid off with inflated dollars at a discount. Inflation affects people in a way that, "not one in a million can diagnose until its too late". It will look like the honest way but will take from people who have left their money in currencies that lose value ie: the dollar.
Leaders like Mr. Trump, who don't believe in paper but in things like real estate, gold, etc., are comfortable with the tool of inflation because they understand it. Frankly, America needs a healthy dose of inflation...IF you have your money in things, not paper.
Equally important, we will have a leader who understands inflation is part of our money system and will use it to the country's benefit to relieve the serious debt crisis that can't simply be written down. Mr. Trump is wise and strong enough to lead the people through a period of pain - much like Ronald Reagan did in 1980 – that will start the process of repairing the progressive mess created by our current president. Obama grew debt by $9 trillion and has nothing to show for it.
For a simple explanation of how our system is designed I offer the following: Say we start a money system with $1,000 and we lend that money into the system at 5%. We are now creditors for the $1,000 plus $50 of interest. So the debtor must pay back $1050. If we never create more money how can the debtor pay us back? We must create more money, get it into the system so that the debtor can earn it and pay us back.
Our system is designed to always inflate. The challenge for the Fed has always been to keep the pace moderate as not to cause hyper-inflation like Germany in 1923 or Venezuela in 2016. Mr. Trump is brilliant in his ability to use debt (paper) and turn it into an asset (real estate). He understands the system.That is why we need a leader like Mr. Trump for a world steeped in debt.
So get ready for a serious dose of what I see as very intentional and needed inflation. Inflation is far more welcome in a Democracy than deflation. People would rather pay $5 for a loaf of bread that's on the shelves than to have bread priced at .50 cents but not have any available.