DEFLATION CRACKS IN “LOGIC”

On why Schilling sees deflation on the horizon:

“In my new book, I identify seven different types of deflation. Now five of those are already in place — we’re having financial asset deflation, tangible asset deflation, commodities are coming down, wages are coming down. The one that hasn’t kicked in yet is goods and services deflation. The point is that the whole world is really marking down assets. It’s marking down the whole spectrum. I don’t think goods and services are going to hold up in terms of inflation. I think that will move to deflation fairly soon.” Link

Let’s just run with this “deflation” assumption.  Let’s assume <del>Smokey</del> (slip) Schilling is right – for a second.  So we have deflation.  Super.  Prices come down, the dollar strenghtens and that is a good thing.

Right?

Well, not for government revenues.  Our government debt doesn’t deflate.  Professor Kotlikoff pegs our debt at 200 trillion, I’ve said 128 trillion and Bill Gross says 60 trillion off balance sheet and to that we can add another 14.6 for the non-Enron accounted for debt.

Let’s be conservative and go with Gross’s numbers.

We now take in 2 trillion and we piss away 4 trillion.  Or more.  What’ll happen when we take in less than 2 trillion in tax revenues because we have deflating prices?

We could default. That would be massively inflationary as Greece is about to show us.  We import half of our 20 million barrels a day in oil.  Wonder how much gas will cost when our dollar goes from .04 cents in value to .00000000000000000000000000000000000004 cents in value?

We could continue to print the difference.  Zimbabwe here we come.

We could raise rates. Oops, our interest on debt service would kill us and kiss the economy goodbye as commercial credit along with every other type of interest rate would be a firehouse on an already smoldering economy.  And seriously, we’d be at Greek numbers.  Triple digit interest numbers in order to entice enough people to invest in a country that holds more debt than any other country on the globe.

We could cut Grannies Social Security and all her other benefits, cut 46 million people getting food stamps, toss the 99’rs off unemployment.  Oops, we’d have massive social unrest and even less in tax revenues.