Something in Michael Hudson’s 22 September missive on the financial rescue plan bailout Wall Street welfare scheme suggested to me that maybe what Paulson et al really want is inflation:

… For now the major question is just how the banks, insurance companies and financial conglomerates are to raise the money to pay off this bailout.

The last time the government let banks earn their way out of negative equity was in 1980. Interest rates to bank customers topped 20 percent, driving down prices for real estate, stocks and bonds so low that the leading U.S. banks saw their net worth wiped out. Their debts to depositors and bondholders exceeded the collateral they held in their reserves to back these deposit obligations. But as soon as Ronald Reagan led the Republicans back into office, the Federal Reserve began to flood the economy with free credit, driving down the interest rates that banks had to pay. They were allowed to act as a monopoly and keep credit-card interest rates high, at 20 percent, and above 30 percent with penalties, thanks to the fact that America’s high post-Vietnam interest rates led state after state to repeal anti-usury laws to keep credit flowing.

So the banks did “earn their way out of debt.” But if you were a taxpayer who needed to use a credit card, you paid through the nose. The banks earned their way out of debt at your expense. And by the way, if you really did pay an income tax, you probably did not own commercial real estate or significant financial assets. The Internal Revenue Service made commercial real estate and a large swath of finance (at least for the wealthiest investors) income-tax free by generating tax credits that could be applied against income across the board. The capital-gains tax was lowered to a fraction of the income tax, leading investors to pay out whatever income their investments generated as interest on loans to buy property they expected to sell at a markup. And with Alan Greenspan appointed the head the Federal Reserve Board in 1987, the age of asset-price inflation had arrived.

What’s the best way to “earn your way out of debt?” Inflation. Not cute inflation, of 6% or 8% or even 10% per year, but hyperinflation, which annihilates debt. But it may be why Paulson wants dictatorial power — unaccountable and unreviewable powers, the man holding the economic axe in the fasces — over the economy. It may be that, contra a previous post of mine, that they have considered the inflationary effects of adding a trillion in new debt and currency to the US economy, and that those effects are exactly what they want.

It would be a neat trick, borrowing many hundreds of billions in your own currency to destroy the value of that currency so you don’t have to pay it back, or that it would be much easier to pay it back. I’m not saying that’s what’s happening — I do not know for sure, and the Bush people have never struck me as this smart — but it might be. To work, those doing the borrowing and wrecking need a safe haven, such a gold or other commodities, in order to save their wealth while destroying everyone else’s.

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