orried about your deposits? Or the bank shares in your portfolio? You should be. Trouble lies ahead.
Just when we arrive at this dire state is not something that this economist can forecast. But the day will come, he says, when investors gag on U.S. Treasury bonds. Unable to finance itself with a rising level of debt to GDP, the government will have to do one of three things: raise taxes, cut entitlements or extract wealth via the inflation tax. Politics makes the first two of these choices all but impossible.
The inflation tax that Calomiris is talking about is now being levied only on currency. At 5%, about where inflation has been over the past year, the $100 you have sitting in your sock drawer becomes worth $5 less every year. The government grabs that $5. Keeping the supply of currency fixed in real terms, it can print $5 of paper money at your expense and use it to pay for Social Security, Medicare and whatever.
Suppose the Fed implements a stiff 40% reserve requirement. Commercial bank deposits now total $17 trillion, so such a policy would boost the reserve base to $6.9 trillion. Add that to the $2.3 trillion of currency in circulation and the government has a potential inflation tax base of $9.2 trillion. People do not, however, sit still while their money is being eaten away by inflation. They hold less cash in their wallets and theyA 40% reserve requirement would be extreme.