…Michael Kinsley’s warning that inflation remains a clear (if not present) danger? Kinsley’s point is pretty straightforward. For good Keynesian reasons, Washington is currently running humungous budget deficits. But once the recession is over, there will be no political will to contain federal spending (especially on Medicare and Medicaid) or to raise taxes sufficiently to narrow the gap. Kinsley worries that the government will follow the path of least resistance, inflating our way out of one sort of economic mess into another.
Maybe. But the path from here to there is less than straightforward. If financial markets (not to mention the Bank of China and other major creditors) believe that Congress will fiddle while Washington burns, it will only become possible to refinance maturing portions of the federal debt by making a deal with the IMF, demanding that the Federal Reserve buy the paper (i.e., print money), or allowing interest rates to go through the roof. Len Burman has a nice piece projecting this endgame in the next issue of The Milken Institute Review. Suffice it to say, though, that inflation may no longer look like the path of least resistance once the dollar collapses and interest rates hit double-digits.