Inquiring minds are reading The “Miracle” of Compound Inflation by John Mauldin. Here are a few paragraphs worthy of a closer look.

Albert Einstein is famously quoted as saying, “Compound interest is the eighth wonder of the world.” And compounding is indeed the topic of this week’s shorter than usual letter, but compounding not of interest but of inflation.



First, let’s look at nominal GDP over the last 11 years, from the beginning of 2000. The data only goes through the third quarter of last year, so sometime this year it is quite likely that GDP will top $15 trillion.







Now, to see this in an interesting graph, the Fed has real GDP based on 2005 dollars. You can see that we are about back to where we were in 2008, prior to the crisis, and growing well below trend. But if we adjust for inflation, growth has not been close to what it was in nominal terms.







Now let’s run through a few “what-if” scenarios.



What if the next 11 years look more or less like the last, with 4% nominal GDP growth? That would mean that in 2022 nominal GDP would be 50% larger than now, right at $22.5 trillion. But that is with only 2% inflation.



What if inflation were 4%, with the same growth? Then nominal GDP would be $30 trillion! What a roaring economy, except that gas would $8 a gallon (assuming current levels of supply and demand). In essence, you would need $2 to buy what $1 buys today. Don’t even ask about health-care costs. If your pay/income did not double, you would be in much worse shape in terms of lifestyle. That is the insidious nature of inflation.



But let’s think about that from a federal budget perspective. Let’s assume we get 20% of GDP in federal tax revenues, which is roughly a little higher than the historical average. That means total tax revenues would be in the range of $6 trillion. With 2% inflation, revenues would be just $4.5 trillion. If the federal government froze its spending at current levels for 12 years (no inflation adjustment), we would be running large surpluses under either scenario.



Higher inflation means US debt is easier to pay back, as nominal GDP is what we pay taxes on, not inflation-adjusted. Inflation is a tried and true method of dealing with too much debt. Inflation is also just another word for default, but it sounds so much better to the ear.

Whoa!

What about interest on the national debt?

What if we have inflation without the growth?

What about wage growth and revenue assumptions?

What about health-care costs and other government expenditures?



insidious nature of inflation

"tried and true

Health-Care Costs

Interest on the National Debt

Deficit: Obama vs. Paul Ryan







Paul Ryan made good headway for three years, then fell flat for another 7. This is no way to shrink the national debt or reduce interest on the national debt as we shall see in a moment.



Obama's proposal is abysmal. He made some progress for a few years, then went into reverse.



Interest on the National Debt: Obama vs. Paul Ryan







The above chart shows the effect of cumulative failures to shrink the deficit.



Note that in 2021 president Obama proposes to spend over $900 billion a year on interest on the national debt. This is sickening, not amusing.



Paul Ryan would have us spending $687 billion on interest in 2021. His deficit proposal for 2021 is $731 billion.



CBO Analysis

What the CBO Assumes



The Congressional Budget Office makes projections, based on various Congressional tax bills, as to what future income and expenses might be. But to do that they have to make assumptions about the growth of the economy and inflation.



You can go to their website and see their economic forecasting. The data I will be discussing is on page 7, in http://www.cbo.gov/ftpdocs/120xx/doc12039/EconomicTables%5B1%5D.pdf.



Let’s look at one of the tables.







Note that they have nominal GDP at $24 trillion in ten years (not far from my 2% inflation scenario above), but they assume rather robust economic growth for the next five years (beginning with 2012) of well over 3% and inflation down around 1.5%. Not a bad world if we could get it.

What Happens at "Modest" 4% Inflation?

What About Another Recession?

Locking in Long-Term Rates

in theory

Exit Strategy Will Put Upward Pressure On Yields

Impossible to Inflate Out of This Mess

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Tried and True Illusion

illusion

Addendum - A Long One:

Who Does Inflation Benefit?

Fed's Policy Is Theft



Stephanie, it's a little known fact that inflation benefits those with first access to money, such as the banks, the wealthy (via rising asset prices), and the government (think rising sales taxes and property taxes when prices go up).



Everyone else gets screwed. You are right in the middle of the pack of those most hurt by the serial bubble blowing policies of the Fed.



Viewed this way, Bernanke's policies are nothing but theft, robbing the poor, for the benefit of banks and the wealthy.



This is why I support Congressman Ron Paul's effort to end the Fed.

Systemic Theft

Total Credit Market

Total Consumer Credit

Inflation and Deflation Defined

Hyperinflation Ends The Game

Hyperinflation Theory vs. Practice

In theory there is no difference between theory and practice. In practice, there is.

Does Government Benefit From Inflation?

Summation