Exactly as I predicted yesterday, the United States is choosing the hyperinflationary route out of its troubles. The first installment (but certainly not the last) of this hyperinflationary approach is the President's emergency bailout plan for the financial markets. The leaders of both houses of Congress have been quoted as saying their chambers plan to act on the proposal by the end of this week. The President essentially wants to create $700 billion (he says) in new money--though Democrats are saying it will actually be well over $1 trillion--to buy all of the endangered assets of the banking, insurance and securities industries. Publicly he says this will take only (!!!) $700 billion, and will initially be limited to high-risk and defaulted mortgages. But the proposal, as submitted to Congress, is open-ended. Officers of the Executive Branch, upon agreeing that there is a need, will be able to expand the bailout to any part of the financial market, buy any kind of distressed assets they believe necessary, and create the money to do it. This is sure to lead to massive inflation, though it will probably not hit until after the election (which is only six weeks away).
Also exactly as I predicted yesterday, the interests of large foreign creditors are being safegurded by the President's plan. To be sure, the legislation the President initially sent to to Congress yesterday morning would have covered only domestic financial institutions. But by yesterday evening, the President had been convinced to modify his plan to bail out foreign banks and foreign financial institutions holding distressed American assets as well. Obviously, the foreign creditors complained, likely reminding the Administration of their power to crush our economy immediately if they are not permitted to assert their full ownership of it more slowly and invisibly.
Finally, I note that the beginning of the fulfillment of my prediction that statutory means would be found to prevent ordinary debtors from deriving any advantage from the hyperinflation. As one article about the President's plan explains, Congress is already considering including in it amendments to federal bankruptcy law that would permit existing mortgages to be modified. This is only the beginning of a massive rewrite of debtor/creditor law that will permit large institutional creditors to unilaterally modify the terms of existing ordinary consumer debts, possibly with the active involvement of an Executive-branch government agency, so as to avoid being damaged at all by inflation--even runaway hyperinflation. My guess is that this is most likely to occur through some sort of automatic indexing of the principal, or by restatement of the principal (at its pre-inflation value) in terms of specie, real property or hours of labor. But however Congress chooses to accomplish it, we can be sure that something will be done to keep ordinary debts from being inflated out of existence, AND IT HAS ALREADY STARTED TO BE CONSIDERED.
Modern inflation is a way for the "big boys" to eliminate their debts to us. It is not a way for us to eliminate our debts to them.