Is Inflation the Answer?!?
In the March 30, 2009 issue of the Wall Street Journal, an article entitled, "Inflation Is Tempting for Indebted Nations", discusses the implication that inflation can have on a country which is heavily indebted. The United States is considering using inflation to reduce the value of the U.S. dollar, which would significantly reduce the burden of money owed to other countries. Economists are saying that it would be "epic, a terrible thing to do" but it would be better than outright default. The United States is planning to increase the money supply by more than $1 trillion with the hope of causing some inflation to weaken the value of the dollar and reduce the current federal deficit. Some are concerned with the idea and speculate that this will cause hyperinflation, comparing the current situation to that of the 1920s Germany and the 2000s Zimbabwe in which the local currency was debased and hyperinflation followed. Most economists are saying that this "doomsday" is possible but extremely unlikely. Policy makers will be trying to stimulate some inflation but will be closely monitoring it to prevent it from getting out of hand. While I agree that hyperinflation is not a likely possibility, I am concerned about investing and the stock market. As the dollar weakens, the amount of consumer confidence could fall, causing the stock market to continue to plummet. On the other hand, the burden of debt, which in the U.S. rests heavily on the taxpayers, would be lightened and nominal wages, house prices and tax revenues would increase while mortgage and bond debt would remain constant.