Chronic Deficit Spending: Who Gets Hurt?

DJH: In Part 1 of my series Chronic Deficit Spending: The End of Life as We Know it? I discussed the unprecedented size of the Obama deficit and how it will cost 50 million private sector jobs over the next decade. Today, I want to talk about the inevitable side effect of reckless deficit spending: inflation and more importantly, who gets hurt?

Here on Who Stole My Career?, I try to illustrate the assault on private sector careers in America and in that light, one of the most lopsided threats facing this country is inflation because everyone isn’t hurt equally; in fact some people make out very well and others get financially destroyed!

I suppose it shouldn’t be surprising to see that the people who escape the damage of inflation happen to be “Obama’s people” and the people who get slaughtered are Baby Boomers who work in the private sector; here’s how:

1. As inflation heats up, it shows up first in wholesale and retail costs, which drives the cost of living, which drives “The Cost of Living Adjustment” (COLA),  which is used to drive automatic raises for people who work for the government, unions, or people who have retired with defined benefit pensions (like government and union workers). The whole COLA thing effectively insulates all of Obama’s people from the risk of inflation.
2. People who hold fixed rate loans like home mortgages and car loans do well, because they will be paying them off with inflated dollars. If you believe that Obama’s deficit spending will ultimately lead to high inflation, you should borrow as much money as possible at FIXED RATES and invest it in real property like gold, jewelry, or real estate. Since most of Obama’s people have jobs that do not allow them to move around, chances are they own a home with a fixed mortgage.
3. People who work in private sector don’t do as well under inflation. Their salaries are not tied to the COLA. Although they do get larger raises during inflationary times, the rate of increase is based on salary inflation, not COLA. This means that it’s always going to be about year behind COLA.  Government and union salaries will rise more than private sector workers during inflationary times.
4. Retired people who worked in the private sector and don’t have a defined benefit pension really get slaughtered. Financial planners tell us that once we retire (or as we get near retirement), we need to change the mix in our investment portfolio from stocks to bonds. Bonds get absolutely decimated during inflationary times. Not only to the yields fail to keep up with inflation, but the face value also drops like a rock. For retired private sector workers, this means going from living a middle class life style to a life of poverty.
5. Finally, the other group that get hurts to most are lenders and people who rent or lease property. They are contractually entitled to payments in “old dollars” and cannot raise rates due to inflation.

Is it any wonder that Obama thinks that skyrocketing deficits are the right medicine for the sick economy he’s creating?

Dave

Further Reading: In 1979, Time Magazine published an article called Inflation: Who Is Hurt Worst? that looked back at last great inflation attack that followed the Jimmy Carter regime (click here to read the article).

Coming Next — Chronic Deficit Spending: What is Hyperinflation and Can it Happen Here?