MAKING SENSE -- March 13, 2012 at 2:40 PM ET
How Does the U.S. Deficit Affect Me?
Stacks of $100 bills pass through a circulator machine at the Bureau of Engraving and Printing in Washington, D.C. Photo by Andrew Harrer/Bloomberg via Getty Images.
Paul Solman frequently answers questions from the NewsHour audience on business and economic news on his Making Sen$e page. Here is Tuesday's query:
Name: Steve Ehrlich
Question: How does the $15.49 trillion deficit in this country affect individuals? Does it mean that the Treasury is printing money that isn't worth the paper it's printed on?
Paul Solman: Not unless the world price of paper should happen to skyrocket. Most likely, it means the money the Treasury is printing at the moment will be worth less and less over time.
Big surprise. That process has been happening since the advent of federal currency. Since the Federal Reserve was created and got into the act in 1913, the U.S. dollar has lost somewhere between 94 percent and 99.7 percent of its value. (See MeasuringWorth.com for a range of conversion options: constant basket of goods, unskilled wage, etc.) Students of economic history will note that this was the very moment at which America's became the world's dominant global economy. It has remained so for 99 years. In other words, inflating one's currency isn't the end of the world, though it may look like (write it!) disaster.
One consequence of gradual inflation is the erosion of a country's debts, if incurred in its own currency. So much of Greece's problem, for example, is the fact that it borrowed not in drachma, but euro, and must now pay back in a currency it cannot devalue by creating more of it. The U.S. dollar, by contrast, is likely to remain a negotiable currency for quite some time to come. Thus when people confront me with the looming catastrophe of the federal debt, I tend to respond that I'm stirred but not shaken, betting the United States will service it in an orderly fashion, albeit in devalued, i.e, "inflated" dollars.
If the United States were to go the hyperinflation route of a Zimbabwe or Germany, then, of course, look out. Such economies freeze, face increasingly punitive interest rates and eventually require drastic overhauls. Not a zero probability event here in America. But even though my wife and I have invested a little more than half of our retirement funds in Treasury inflation-protected securities to hedge against such a possibility, inflation doesn't threaten to make U.S. currency worthless anytime soon. I'm betting on a gradual version.