Potential Inflation

Mathematical economics mimics physics. As such, it “assumes away” what it means to be human and inserts beings that are malleable so as to fit the assumptions necessary to support the mathematical model at hand. At times, in order to allow a mathematical model to work, a mathematical economist will assume that economic actors are omniscient. Of course, this has nothing to do with reality, but that is beside the point. As long as the math scribbled on the chalkboard is rigorous and pure, it must be right. Human nature be damned. This is the sad state of affairs in economics today (with the exception of the Austrians).

Now to commit a little of my own heresy. In physics there is a term known as “potential energy." For example, if a gun safe is hanging from a rope ten stories high, we know that it has potential to do great damage. The higher something is, the more potential energy it has, because the greater might be the consequences should it fall.

To use this analogy with respect to the United States’ national debt, the higher the national debt goes, the higher the potential for hyperinflation. Today, the national debt exceeds $7 trillion. The following table shows how rapidly this debt load is growing:

Current Amount 01/23/04 $7,011,706,193,371.95 Current Month 01/20/2004 $7,006,834,072,435.49 01/16/2004 $7,002,877,924,418.81 01/15/2004 $7,001,852,607,623.35 01/14/2004 $6,988,602,001,011.26 01/13/2004 $6,991,843,338,608.59 01/12/2004 $6,988,570,014,716.87 01/09/2004 $6,987,116,908,679.61 01/08/2004 $6,985,436,709,829.38 01/07/2004 $6,990,408,199,507.34 01/06/2004 $6,991,488,657,454.93 01/05/2004 $6,989,184,944,125.77 01/02/2004 $6,981,477,122,871.86 Prior Months 12/31/2003 $7,001,312,247,818.28 11/28/2003 $6,925,065,499,881.34 10/31/2003 $6,872,675,839,106.67 Prior Fiscal Years 09/30/2003 $6,783,231,062,743.62 09/30/2002 $6,228,235,965,597.16 09/28/2001 $5,807,463,412,200.06 09/29/2000 $5,674,178,209,886.86 09/30/1999 $5,656,270,901,615.43 09/30/1998 $5,526,193,008,897.62 09/30/1997 $5,413,146,011,397.34 09/30/1996 $5,224,810,939,135.73 09/29/1995 $4,973,982,900,709.39 09/30/1994 $4,692,749,910,013.32 09/30/1993 $4,411,488,883,139.38 09/30/1992 $4,064,620,655,521.66 09/30/1991 $3,665,303,351,697.03 09/28/1990 $3,233,313,451,777.25 09/29/1989 $2,857,430,960,187.32 09/30/1988 $2,602,337,712,041.16 09/30/1987 $2,350,276,890,953.00


As this mountain of debt grows, it becomes less likely that it will be repaid in “today’s” dollars. As has happened with all previous fiat currency experiments, government debt is repaid by simply printing the money to pay back the government’s debt obligations (i.e., bonds). Of course, as more money is printed, its value falls just like the gun safe plunging from ten stories above the ground. The more rapidly the value of money falls, the higher the level of inflation. So beware, as the U.S. national debt increases, the greater potential there is for a massive fall in the value of the dollar. Potential inflation indeed.

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