The US Government’s balance sheet is looking a bit unsound lately – $12.4 trillion in public debt. Correcting for the Enron-like accounting that hides the Government’s Social Security and Medicare liabilities, the figure is estimated at $59 trillion. While “can’t” is not in the traditional American vernacular, repaying $59 trillion in debt, or even servicing it, is nearly impossible. How will the Government get out of this mess?

One way would be for the Government to mend its wasteful ways. Congress could eliminate pork, stop creating new programs, cut wasteful programs that are not essential or do not work, and focus on cutting the Federal Budget as a percent of GDP. As long as Congress runs a surplus, the economy would slowly grow out of its debt problems. Of course that would take decades of prudent fiscal management and is therefore unlikely. Few have ever realized such a monumental goal as responsible governance.

Another way would be for the Government to liberalize economic policies. If the cost of manufacturing in the US were allowed to reflect the true market, the US would again become the world’s manufacturing powerhouse. US labor is the most productive in the world, and the US’s system of property rights and its superior infrastructure are unmatched. Of course hindrances such as militant unions, abusive trial lawyers, excessive regulation, and anti-immigrant isolationism are so entrenched in US Politics that reigniting US industry is a long shot.

Should Congress fail to restrain its spending or liberalize its regulatory stranglehold on industry, what then? Governments have faced this dilemma since the early Roman Empire, and the answer has always been the same: inflation. Time and again, failed governments have used surprise inflation to melt away obligations they cannot pay. Also called ‘printing money,’ inflation reduces the real value of the principal on any debt.

Perhaps the most egregious example of surprise inflation was the Gold Confiscation Order of 1933. Pres. Roosevelt, in what seems outlandishly un-American today, outlawed the ownership of most gold. FDR forced gold savers (whom he called hoarders) to cash in their gold for paper certificates. Almost immediately thereafter, FDR declared the value of gold had risen from the confiscation rate of $20.67 per ounce to $35 per ounce. The value of every cash savings declined by a third overnight, and the US Treasury essentially stole it from those foolish enough to save.

Now, without a gold standard to manipulate, the Fed inflates currency by buying government bonds in the open market. During the recent recession, the Fed inflated the money supply by buying back bonds with new dollars. While this tactic is generally accepted as appropriate to combat a deflationary spiral, it is also the cause of runaway inflation. If the US cannot find lenders for its excessive deficit spending, it will be forced to issue worthless dollars in exchange for its obligations.

For inflation to work, governments must surprise or deceive their creditors. If a creditor expects inflation, as in the case of Zimbabwe, he will either not lend at all or structure payment in the form of harder currencies like the Dollar or the Euro. Paper money is a matter of trust alone, and to inflate one’s way out of debt requires violating that trust.

Inflation also harms those who save. Most assets do not go up in value as fast as inflation, so savings are reduced or wiped out by inflation. Inflation does benefit those who borrow, because the real value of their obligations is reduced. In effect, when a government inflates its way out of debt, it steals real wealth from those who save and gives it to those who borrow.

Unless the US changes its unsustainable ways very soon, the second half of this century will be grim indeed. The many benefits of the Dollar’s world dominance will evaporate. A generation’s savings will be wiped out by runaway inflation. International investment in the US’s economy will greatly slow. Foreign trade will be cramped by an unreliable Dollar. In short, the US may become a shadow of its former greatness when the Government is forced to inflate away its debts. That is something to think about the next time a politician wants to spend a few billion more dollars on some superfluous new program.