It appears that the Congress will do little more than “buy time” with some legislation that will extend the debt ceiling (again) and make little reduction in entitlement spending.  The argument is that any reduction in entitlement spending will reduce money in the hands of those on the dole, which will reduce total spending and cause a recession.

There can be no question that reductions in entitlement spending will reduce total spending for a while, but we’re borrowing or printing the money that is spent for these entitlements.  Our country is in a tough spot, with few good alternatives.  However, reductions in entitlement spending by those who receive them is a necessary price we have to pay.  Government is just too big.   We have asked Government to do too much; we have spent to the point of fiscal ruin.

I wish I could predict where this will go from here, but I’m not sure what will happen.  One scenario is that the government will continue to overspend and print money.  This will cause inflation, which is a “tax” on all of us.  All of the “funny money” created by the Fed creates a situation where too much money is chasing too few goods.  The triple digit inflation that results will strip all Americans of their income and wealth.  Inflation will enslave us as just as if the government had doubled or tripled our taxes.

Another scenario is massive deflation, which some economists have predicted.  If you think inflation is bad, you don’t want to look at deflation.  Having prices of real estate and other assets drop to perhaps one-third of their previous values would strip most of us of our wealth.  Virtually everyone would be “underwater” on their mortgages.  I can’t see how deflation could occur unless the Fed would massively reduce the money supply.  I don’t see this happening.

Over the past forty years we have drifted from an economy dominated by private property and self interest to an economy that is largely regulated by the government.  We have traded freedom for equality.  As Milton Friedman once said, “A country that favors freedom over equality will have a great deal of both.  A country that favors equality over freedom will have little of either.”