Friday, December 19, 2008


From today's Political Diary from the Wall Street journal comes the exact thing I've been complaining about for weeks: the fact that out of control government spending will cause huge inflation:

Mr. Obama sees that the Fed is out of (interest rate cuts) and has seized upon this as an opening for his $1 trillion spending plan. "It is critical that the other branches of government step up," he said at his Chicago press conference, reiterating his support for new roads, green energy projects, school construction, bike paths, museums and bridges to nowhere.

What Mr. Obama and Fed Chief Ben Bernanke seem to have in mind is a replay not so much of the 1930s New Deal as the policy configuration of the 1970s: lax monetary policy, weak dollar, high tax rates and explosive spending. The Fed repeatedly cut interest rates in the 1970s to jump start an economy hampered by over-regulation and 70% marginal tax rates. Each Fed move inched the inflation rate from 7% in 1978 to 11% in 1979 to 14% in 1980. One of Jimmy Carter's chief economic advisors, Lawrence Klein, reflected the wrong-headed economic thinking of that lost decade when he said: "We need faster monetary growth," even as inflation hit double digits.

As for fiscal policy, federal spending almost tripled in the 1970s, from $195 billion to $590 billion, but the unemployment rate steadily climbed.

We don't have inflation now to be sure, but a 40% increase in the money supply in the last six months in combination with zero interest rates almost guarantees that any incipient recovery will be accompanied by a surge in inflation. Economist Arthur Laffer predicts that "inflation will come when the economy picks up." Mr. Obama's policy prescriptions are likened to FDR's New Deal, but the more apt comparison may be Jimmy Carter's malaise.

As was commented on Ace of Spades' website the other day (I paraphrase): "if all you needed to do to create wealth was to print money, why isn't Zimbabwe the richest country in the world?"

That's the point exactly-you can have the treasury print off all the money you want, but all you do is devalue the currency. And a weak dollar is part (a smaller part but a part nonetheless) of what got us into this mess.

If you're broke and out of a job, do you go out and spend all the money you have left? No, and neither should the government.

PS sorry I'm not positive yet-Neil has not yet occurred.


Kristen said...

We'll keep our fingers crossed for tonight :)

Kirk said...

I don't mind your's all true..if you were just making up stuff to complain about, that would be different. I have been talking about the hyper inflation staged to riech havoc on our nation. People seem to have a hard time remembering when banks didn't buy their capital from the fed and instead paid consumers 20% on a CD. This was only about 30 years ago but most people, at least younger ones, have a hard time even believing that could happen. We'll see what they say when their home loan rate to refi their 1 yar ARM is 18% even if they have stellar credit.

Christian said...

If you can even get an ARM after all this. Since ARM adjustments were a huge part of the problem (although at this rate IRs would likey go down unless your credit sucked), it might just that you'd get slapped with an ungoshly fixed rate with DSI or something horrid. The benefit of an ARM (to the lender) is that you shift the risk from the lender to the borrower and blame it all on the LIBOR instead. But politically a lot of places just won't touch them anymore. Too much uncertainty I think.