Cliff jumping

Only a few days from the fiscal cliff, it's my turn to weigh in on what this all means. Of course no one knows. The experts don't. Our political representatives don't. So there's no harm in my throwing in an opinion.

First in my mind is that the national debt ($16.3 trillion) will never be paid; it will only be serviced (there were a few years under Clinton and Bush when the dot-com bubble created surpluses and debt was paid down, but that was the exception.)

If this is true, then the debt should be viewed as the required payment as a percent of the annual budget. Right now it is $360 billion per year from a $2,600 billion per year budget. That's 14%.

But this payment is variable. It is determined by the interest rate on Treasury bonds, and those are bought and sold on the open market. The free market determines the rate. Greece learned that this year. Right now our interest rate is around 2 or 3 percentage points. Greece's rate in 2012 fluctuated between 18 and 30. So, when private investors determine that the risk on US debt is too great, our rates will go up in the same way.

When this happens, the Fed will try to hold the rate down by purchasing bonds on the open market. It does this with new money, created out of thin air. Of course, they've already been doing that for the last couple years, in small amounts, with little observable effect. But these small moves are setting policy for the big dance.

What will a substantial and sustained influx of new money mean to the little guy? Inflation. It is the inevitable result of deficit spending. It's the hidden tax that sneaks up and takes money from your back pocket. The rich mitigate it by purchasing real assets that rise with inflation. The poor don't know what just hit them.

Do you remember Ross Perot's dire warnings about the national debt? I still remember the little guy and his alarming charts. Our annual deficit in 1992 was around $290 billion and our national debt was around $3.6 trillion. Those numbers aren't alarming now, courtesy of inflation. And that was modest inflation.

This is why I'm not overly concerned about the fiscal cliff. It was a compromise between conservatives and liberals, signed into law by President Obama, which actually cuts spending. Yes, it raises taxes too, but this is the nature of a compromise. It was supposed to be a poison-pill compromise, one that would be avoided by both sides. But, amazingly, what it actually does is reduce the deficit. Maybe there is no way for either side to actually cut the deficit and take credit for it. Instead, we have to cut by blaming the other side. Is this so bad?

So I think we should let things take their course. Over the cliff. There will be short-term pain. The media will show the poor on the street, then cut over to House Republicans making speeches. It won't be pretty. It won't be fair. But what is a greater long-term help to the poor: more social programs or less inflation? Republicans should refute the charge that they are dismantling the social safety net or weakening national defense. A safety net based on deficit spending is not safe. An army funded by deficit spending is self-defeating.