Inflation may appear contained these days, but the future is always unclear.
As we discussed in our previous post, there’s a persuasive new report making the rounds that extends further support for the notion that human beings are in control of their own monetary fate. That, at least, is true in a world where fiat currencies prevail and the gold standard is considered the financial equivalent of the horse and buggy.
If central bankers can excel (as they have in recent years) at their appointed task of controlling inflation through enlightened monetary policy, they can also stumble (as the decade through the early 1980s reminds). Perhaps success will continue into perpetuity for the grand task facing the Fed and its counterparts around the world. Alas, we’re unsure of the outcome one way or the other in the long run. So it goes in matters where human beings are in charge.

Consider a few numbers from the Congressional Budget Office. Last year, the combined spending for Medicare and Medicaid (M&M) was $555 billion, or about 21% of the federal government’s total outlays for the year. The CBO projects M&M spending will jump to $756 billion by 2010, representing nearly 25% of outlays. By 2017, M&M spending will hit $1.26 trillion and consume 31% of outlays. In short, rising absolute and relative M&M spending looks likely.
The impact on future inflation may be more than trivial. Indeed, M&M is a big chunk of the budget, but it’s hardly the only source of rising spending liabilities. But we digress. Returning to M&M, consider that for the seven years through last month, the broad consumer price index rose by 19.8% on a cumulative, not seasonally adjusted basis, according to the Bureau of Labor Statistics. The sub-category of medical care advanced nearly twice as much, by 34.8% over that span.
The growing pressure on the government to spend more will be most pronounced in medicine. As new technologies offer advances in health care, the political pressure will likely increase on new spending initiatives as well. Add in the other liability pieces and the picture becomes frightening.
A new study published in the March/April 2007 issue of Financial Analysts Journal offers some sobering perspective. “If the U.S. federal government properly accounted for its explicit and promised liabilities,” the paper advises, “it would record a national debt of $64 trillion and a national deficit of $2.4 trillion in 2006.” One example: “The recent
retiree prescription drug law… added more than $15 trillion to the federal government’s
shortfall….” Overall, the study warns that “the U.S. federal government has promised much more than it can deliver with its existing tax base.”
Yes, that may be shocking news for some, but let’s compose ourselves and put on our risk-manager hat for a moment and consider what might trip up the business of central banking. A story this morning inspired such ghoulish thinking on our part and it relates to spending on health care in general and testing for breast cancer in particular.
A study published yesterday by the New England Journal of Medicine recommends broader and more frequent use of MRI scans for breast cancer in women who already have the disease or who are considered high-risk candidates for such. As a health issue, it all seems perfectly logical, at least from our layman’s perspective on medical matters. If there’s a superior approach for detecting, treating and perhaps preventing the worst-case scenarios for cancer, it’s a classic no-brainer situation. In short, just do it.
But when we consider the macro financial implications, our anxiety level goes up a notch. According to a New York Times story today on the new advice, breast MRIs are ten times more expensive than mammography, the current standard for screening. In addition, MRI imaging is far more sensitive than mammography, and so additional scans are more common with MRIs to distinguish between false alarms and actual threats. Beyond that, MRI scans “require special equipment, software and trained radiologists to read the results.” The Times story also reported that the new advice on MRI scans “could add a million or more women a year to those who need breast magnetic resonance imaging — a demand that radiologists are not yet equipped to meet, researchers say.”
The larger point is that the federal government faces enormous spending pressures in the years ahead as the demand for medical services grows. The MRI issue is just one small example of what’s coming, namely, much higher health care spending by the government in absolute and relative terms.
Perhaps even more worrisome is that the financial markets have barely noticed, the paper observes. The additional liabilities assumed by the government in the prescription drug program “had no appreciable effect on long-term interest rates.”
The question is whether all the debt will have an impact on such things as inflation and the price of money. We have some very definite, albeit speculative ideas on the issue for the long run. And we’re preparing accordingly. Yes, we may be in the minority in that regard, but we’re used to it.