Do Deficits Matter? Does Inflation Matter?

Yes. Deficits cause inflation.

National debt is one of the most important factors that determines the value of the US dollar and international confidence in American investments. With extensive history and other nations as examples, we clearly see that as the debt gets bigger, we will risk higher inflation, not be able to buy as many foreign goods, and see less international interest in our stock markets.

This fiscal year’s $477 billion deficit (Oct 1, 2003 – Oct 1, 2004) is the largest in US history.

Federal Budget Surplus or Deficit

Although the level of deficit is the largest in history, it is not the largest when measured as a percentage of GDP. The current deficit is about 4.3% of GDP. This is high by historic standards, but has been exceeded in 6 of the fiscal years since 1962.

Data source:

If you are wealthy

We all like tax cuts that put money into our pockets today, but these tax cuts impact income, not wealth. Inflation, on the other hand, is a tax on wealth. If you are wealthy, then inflation will cost you a great deal in terms of spending power. You will be pushed into equity investments because fixed income and cash are hurt by inflation and rising interest rates. If you would be hurt by inflation, then deficits are your enemy.

If you are in debt

Inflation decreases the value of wealth and debt. Those who have money can buy less with it, and those who are in debt find it easier to pay off. This discounting of old wealth makes the “real” distribution of wealth less concentrated. It brings us all closer to each other by bringing us all closer to zero. If you are in debt, then inflation will reduce the burden, making it easier to pay off. If you are in debt, then inflation and deficits are your friend.

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