Payback is Hell

You a movie fan? I am. I have no taste at all and will watch nearly (well, not Nick Cage) anything. Sometimes the worse, the better. Camp is my thing.

I loved Independence Day. More than anything, I loved Jeff Goldblum, the germaphobe nerd programmer, but there was one character, a minor one, a drunken, ex-fighter jock turned crop-duster in the Central Valley who claimed to have been kidnapped by aliens. His redneck friends at the local diner loved to torment him, asking if “them thar little green men performed experiments (wink, wink) on you.” At the end, dude flies an F-4 up the business end of one of those alien behemoth vehicles laying siege to planet Earth, armed with a nuke. Grinning like a loon, he yells out “Payback is Hell.” Perfect. I still giggle.

Well, this is about payback. No, I’m not gonna even the score with one of my late unlamented colleagues from Euphoric State, or some academic nemesis, or even some more recent colleague. Nop. I’m above that (right). I’m talking about a long unseen economic phenomenon in the United States. Something we didn’t even bother to talk about in macro (hint: it was all we talked about in 1979-80 when I was at Villanova). The dreaded I-word. Gulp. Inflation. It’s baaaaack.

Inflation is defined as a fall in the purchasing power of money. Since money is basically a way of making claims on what is produced, inflation is creating a false claim. Maybe I made “x” and my compensation for that is measured in money (which in our system, the Federal Reserve indirectly creates). Ok. Suppose the government arbitrarily created another claim on the good and gives it you. Logic suggest that both claims are now worth half as much, because there has been nothing real created other than to let you claim what was mine. More or less, that’s what happens. Whether that is actually what is driving prices up in the US right now is an open question: maybe, maybe not. But the media, including the otherwise usually sober FT has sounded the tocsin. Hold on to your savings. The day of reckoning is at hand.

Let’s say, for the same of argument, that inflation is back. Say prices start rising at 5 percent a year. This after years of near zero, and predictions that near zero it would be forever. So this is a surprise. Unexpected inflation. Oh, oh. Aside from the usual political nonsense–Joe Biden and the Democrats cause inflation! (Don’t laugh. Jimmy Carter found out it may be nonsense, but in America, you’ll notice, nonsense sells), you are going to want to ask yourself, what? How does this affect me? Sorry to disappoint you, but you’re going to have to look that up. I have something else in mind.

My revised edition of Allen and Alchian, University Economics (grin, just to piss anthro- and sociology people off, renamed Universal Economics), p. 666 (!), helpfully points out that inflation really messes with the heads of government bondholders. By eroding their wealth. If the bond is paying 3 percent interest, and inflation rises to 5 percent, the “real” return on the bond is minus two (-2) percent. Really? Really. Because you put our money out on the assumption that 3 percent per year would be enough to reward you for not using it. But all of a sudden, the price of everything (the price level) is rising even faster. The interest you get back doesn’t compensate for the erosion of purchasing power by inflation. You are now poorer. You have realized a loss in wealth. Ouch. But your loss is someone else’s gain (funny that). Who gains? Well, the person who borrowed the money is paying you back less in purchasing power than he or she borrowed. Sooooooo, the debtor gains. And the creditor loses.

Now, what in Heaven’s name does this have to do with payback. Heh. Guess? Well, who is the largest holder of US government bonds? More than a trillion dollars worth. Canada? No. England? No. The People’s Republic of China. I’m talking Reds. That’s who. Surprise!!! Boys and girls, did you know the ChiComs were our banker? Keynes once said if you owe your banker a thousand pounds, you have a problem; but if you owe your banker a million pounds, your banker does. Guess who has a problem? Li Keqiang (listen, I lost track back at Deng Xiaoping, so don’t worry…). In any event, since the Western press keeps maundering on about how these guys pose an existential threat to the planet (unlike Joe Manchin or Donald Trump), what with their ambitions in the South China Sea, their nuclear silos, their red investments all over Africa and Latin America, and their cheapo musical instruments (hey, I got a Chinese pocket trumpet), you’d think it was game set and match. Done deal. The East is Red. Maybe it is. But then again, maybe it’s a little more complicated than that. I’ve seen several versions of this movie. Both end badly, true enough, but neither one ends happily for the villain–played sequentially by Japan and Russia. Whether, in the longer scheme of things, anyone is a “victor’ I leave to you.

The point is, we started squeezing the Japanese well before they attacked Pearl Harbor. How was that? In mid 1941, the United States placed an embargo on oil to Japan, which was a very big deal. As you might suppose, the Japanese produced little of their own. If memory serves, they didn’t have a great deal in reserve either. So, guess who came out swinging?The only real surprise was that they hit Pearl Harbor: we had, I fear, figured that the Philippines, Wake or Midway might go, but Pearl, uh, uh. Whoops. You back an adversary into a corner, you don’t assume anything.

Obviously, the idea that an inflation could be any kind of equivalent to the 1941 embargo is pretty far fetched. For one thing, we’re riding in the same car. It’s not too pleasant to think what a bout of sustained price increases could do to working America, which has already been pushed to the brink. Then there are the Golden Agers. For now they may get COLA. You never know, if Uncle Sam lags COLA 2 years or more, you could probably fix our “Social Security Problem,” such as it is. No muss, no fuss. Go read the Trustees’ Reports. They’ve thought of it already. Bet Manchin would get behind it?

Besides, 5 percent is nothing, right?

Weeeellll, if it continues until 2035, it would cut the purchasing power of a dollar in half.

What’s 500 billion dollars between friends, right? We wouldn’t have even made it to the 100th Anniversary of Pearl Harbor, or my 90th birthday. I was so looking forward to both. Hell, the GDP of Taiwan is, as we speak, 689 billion dollars.

Like Jack Nicholsen said in The Departed to the Chinese chip smugglers. Aw, better you watch.