Deflation

NYT:

CHICAGO — Even by the standards of this deficit-ridden state, Illinois’s comptroller, Daniel W. Hynes, faces an ugly balance sheet. Precisely how ugly becomes clear when he beckons you into his office to examine his daily briefing memo.

“This is what the state owes right now to schools, rehabilitation centers, child care, the state university — and it’s getting worse every single day,” he says in his downtown office.

Mr. Hynes shakes his head. “This is not some esoteric budget issue; we are not paying bills for absolutely essential services,” he says. “That is obscene.”

For the last few years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession. Now Illinois has shouldered to the fore, as its dysfunctional political class refuses to pay the state’s bills and refuses to take the painful steps — cuts and tax increases — to close a deficit of at least $12 billion, equal to nearly half the state’s budget.

Then there is the spectacularly mismanaged pension system, which is at least 50 percent underfunded and, analysts warn, could push Illinois into insolvency if the economy fails to pick up.

Read the whole thing. I doubt the Feds will be able to bail them out this time.

Due to my interest in tracking the deflationary forces that are building in our economy, some people think that I'm a pessimist. They would be wrong! I'm actually pretty excited to see market forces overwhelm the pinheads' attempts to "manage" the economy. It is exactly these misguided attempts at management, at eliminating the normal business cycle, that allowed these deflationary forces to build to this extreme in the first place. Economic laws are natural laws, and "nature is not governed except by obeying her." The more we resist natural law, the more painful things become.

In short, deflation is nothing more than paying down (or writing off) debt, and that's exactly what our economy needs at this time. Paying our debts is never fun, but its ultimately a good thing.

And, as a side benefit of paying our debts, we will ultimately end up with a smaller, less intrusive federal government. And that's a very good thing.