Continued massive deficit spending by the government is merely encouraging U.S. households to respond in kind — they will spend far beyond their means rather than save for the future, according to investment manager and economist Jason Hsu.

The ultimate result, sooner or later, is bound to be inflation provoked by irresponsible Federal Reserve policy, said Hsu, chief investment officer at Research Affiliates and an adjunct finance professor at University of California, Los Angeles.

“[A]s the government expands and spends more, so too will the number of public sector employees and beneficiaries expand; and so too will their expenditures increase,” Hsu wrote in a note to clients.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

“At the same time, the private sector will produce less — this is before we even attempt to adjust for the additional decline in labor productivity due to the aging U.S. demographics.”

Hsu’s prognosis is that Americans, with their consumer culture, are going to imitate their counterparts in southern Europe (read: spendthrift Greece or Spain), rather than the Japanese, where household savings is high.

“Moreover, to exacerbate the danger, in response to the massive deficit spending — which is dominated by welfare transfers from future taxpayers to the current generation — U.S. households are more likely to consume with abandon (and entitlement) instead of investing for the future,” Hsu wrote.

When governments can issue substantial debt at zero interest — which is what the Fed’s policy of quantitative easing permits — they inevitably spend more freely than if they had to roll over the debt at higher interest rates, Hsu said. Ultimately, inflation arises from too much of such nominal, government-generated wealth chasing too few goods, he noted.

The United States will not be able to rely on trade with China to offset our spendthrift behavior, Hsu predicted, because “with the rapid rise in their household income and consumption, the Chinese won’t always sell their labor and resources cheap to Americans.”

In a recent article, the Federal Reserve Bank of St. Louis traced the origins of household spending problems in the United States.

“Beginning in the 1980s, several developments combined to stop millions of Americans from saving altogether. Deregulation permitted the financial industry to offer massive amounts of credit on strikingly favorable terms — even to very poor households and students. The new instruments included credit cards, home equity loans and subprime mortgages.”

Now to restore American’ household balance sheets, the St. Louis Fed called for curbs on predatory lending while improving Americans’ access to savings institutions.

Currently, banks discourage young and lower-income people from saving by charging excessive fees and requiring high minimum balances, the Fed said.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.