President Obama met with British PM Cameron and the news media has been comparing the Brits approach to the economic downturn with the US approach. They have chosen austerity and spending cuts and we have chosen stimulus spending and no cuts. So far our economy is growing faster so the experts conclude that we have the best plan. This is typical short term thinking and assuming that you can change one part of the economy without effect the other parts.
We will pull out ahead over the next couple of years but in about five years when we pay for our spending with inflation things will change. Most of the debt the US has incurred is short term meaning a few years as opposed to long term, things like the 30 year bond. We have to refinance out debt every couple of years because we have mostly short term bonds. As inflation rises so does interest rates and we have gotten off cheap these past three years because of low interest rates. The average interest rate these past three years has been about 2.5% and the interest payment last year was 250 billion. If interest rates would increase to 7.5% the interest payments would exceed social security payments. Recall that just a few years ago at the end of the Carter administration the prime rate was 13%. If that happens we will be like Greece.
Everyone understands that printing money is followed by inflation. What we don’t know is how much and when.
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