The WSJ reports that the Treasury Department is making its biggest offering of inflation linked bonds in five years today:
In a bid to meet the demands of big creditors such as China and Japan and keep its funding costs low, the Treasury will kickstart this year’s offerings of Treasury Inflation-Protected Securities by selling $10 billion in 10-year notes.
With this auction, the total market value of TIPS will top $600 billion for the first time since the government started selling the debt in 1997 …
With the total U.S. government debt held by the public at $7.8 trillion as of last week, $600 billion is still small beans. But if the TIPS share grows, it will get harder and harder for our U.S. government to inflate its way out of its burgeoning debt burden. That is, if all a country debt is in fixed rate bonds (as was the case for the U.S. before 1997), inflation shrinks the size of that debt relative to the overall economy and, more to the point, tax revenue. If all the debt were in inflation-linked bonds, inflation wouldn’t reduce the debt load at all.
So that’s partly bad news—inflation played a big role in the relatively painless whittling away of the U.S. government’s debt load from 108.6% of GDP in 1946 to a low of 23.9% in 1974. But it also imposes a form of discipline on Washington’s taxers and spenders and money creators that will presumably make them less likely to follow policies that could lead to hyperinflation.
It isn’t just TIPs. Before the Great Inflation of the 1970s, inflation provided an easy way of bringing the federal budget into balance (or at least closer to it): the real value of fixed outlays for Social Security and other programs fell as the overall price level rose, while tax revenues rose as inflation kicked people into higher tax brackets. That changed with the introduction of automatic cost-of-living adjustments in the 1970s, and the indexing of tax brackets to inflation in the 1980s. The Alternative Minimum Tax remains as an ever-growing exception to this inflation-indexing, which is why it keeps hitting more people and generating more money. But on the whole, inflation is no longer the budgetary boon in Washington that it once was. Meaning that maybe it’s less of a threat than it once was.
There is one interesting side issue here—that inflation-indexing of government bonds, entitlement payouts and tax brackets makes the measurement of inflation far more politically important than it used to be. As Peter Schiff pointed out to me a couple years ago, undercounting inflation is now very much in the interest of most people in official Washington. That’s not to say we do undercount it. I think the Bureau of Labor Statistics (which calculates the consumer price index) has up to now remained pretty well insulated from political pressure. But not everybody agrees with me on that, and if the government debt keeps growing (the debt held by the public is currently at 55% of GDP), the pressure on the BLS will only grow.