“[T]he Treasury has a good deal. The Fed pumps money into the economy by buying Treasurys with checks written on thin air. The Treasury quickly spends those dollars on the huge ongoing expenses of a government running a trillion-dollar deficit. Recipients of its spending put the money into bank accounts and, presto, the money comes right back to the Treasury to finance yet more government spending… The government is thus the main beneficiary of the phenomenal rise in the monetary base.”—George Melloan, “We’re All Keynesians Again,” January 13th, 2009.
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The coming inflation storm is inevitable. The only remaining question is the degree to which the next asset bubble will inflate. But rest assured—in case anyone still harbors any doubts—the sky’s the limit.
As Zimbabwe has discovered, once the inflation mill kicks in, hyperinflation is only a few ink jets away. Just this week, that once-solvent nation proudly unveiled its first-ever $50 billion note in the midst of 231 million percent annual inflation. Actual vendors in that country are not even accepting the Monopoly money anymore. The economy is now utilizing barter or accepting foreign currencies for goods and services. Foreign creditors will not lend to the government anymore.
For those who believe it cannot happen here, they have either not paid attention to the asset bubbles that have in recent history wrecked the economy: the tech bubble of the 1990’s, the housing bubble of the late 1990’s and 2000’s, the oil and commodities bubble of 2008. Or they are deliberately ignoring them in hopes of “talking up” the economy.
And they are also not paying attention to—or are ignoring—the current actions being taken by government that can only be inflationary by definition. Either way, the signs are unmistakable, and unless government completely reverses course, it will only get worse, and the American taxpayer will be left with the bill at the end of the day.
It is important to remember that it was, in fact, as ALG News have previously reported, the loose monetary and easy credit policies of the Federal Reserve and Congress that created, in particular, the recent housing bubble. Through keeping interest rates too low for too long, and encouraging banks to lend heavily to stoke the embers of the housing market, government forced home prices through the ceiling. Mortgages were rolled into securities, and were insured on a massive scale. And investment firms—like Bear Sterns and AIG—became contaminated by these so-called “toxic” assets and overleveraged by as much as 30-to-1.
It is important to remember because easy money is how we got to where we are today. And now, proclaim the insidious salons, it is more easy money that will avert the crisis and return the nation to prosperity. Were it only so.
The fact is: the U.S. central bank has doubled the monetary base since September. It has expanded its financial obligations abroad by raising the debt ceiling, first to $10.6 trillion in July, and then to over $11 trillion in September.
The government has committed over $8 trillion in bailouts last year taken together. As Americans for Limited Government Chairman Howie Rich recently tabulated in his column, “$2 trillion in FDIC assurances, $1.75 trillion in Federal Reserve commercial paper purchases, $900 billion in term auction facility lending, $600 billion to insure money market funds, $600 billion to cover Fannie and Freddie’s worthless mortgage-backed securities, $550 billion for discount Federal Reserve loans, $500 billion to insure FDIC deposits, $300 billion for FHA mortgage relief, $250 billion for Citigroup debt, $225 billion for securities loan facility lending, $200 billion for Fannie and Freddie’s debt, $112 billion for A.I.G., and on down the line.”
And then on top of that, factor in the proposed $775 billion economic “stimulus” package being proposed by the incoming Obama administration (which should really be called the debt stimulus package since it’s just another gargantuan I.O.U.), and the $1 trillion that the states are asking for to balance their budgets. That brings the bailout figure close to $10 trillion in less than a year, almost 70 percent of the Gross Domestic Product.
The Congressional Budget Office has projected the 2009 budget deficit will be $1.2 trillion, and as Bloomberg’s Kevin Hassett reports, that’s just a lowball estimate. The actual deficit will be closer to $2 trillion if President-elect Obama gets the full $775 billion of his debt stimulus plan.
This is simply astronomical. There is no way the American taxpayer will ever be able to pay it back. Nor will their children, or their children’s children, for generations to come. And those still arguing that this will not be inflationary are either duplicitous, disingenuous, or both. The U.S. is going bankrupt. And these policies can only create another asset bubble by design.
And nothing and none of America’s vaunted wealth will remain if this outbreak is not fought like the economic plague that it is.
Actually, it’s all very obvious. The laws of supply and demand apply to dollars just as any other good, service, or commodity. Put simply, the more there is of something, the less it is worth in value. Taken together—the monetary base expansion, the national debt expansion, the bailout mania, the deficit-spending—and that is a whole lot more money than there was previously in circulation.
One does not need to be a financial maven like Anna Schwartz to figure this out. In October, she told the Wall Street Journal, “If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset… The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it’s so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object.”
The only question is that of degree. How bad will the coming inflation storm be? Well, it depends on several factors.
For starters, the economy is still recovering from the most recent oil bubble that popped in late July, as well as the housing bubble that popped in August 2007. The salons proclaim this to be “deflation” when in reality the prices for these assets are simply returning to market norms. Deflation would be if prices were to fall below those norms. And we’re simply not at that stage.
Secondly, there are several questions that will be answered over the next few months and years by both the market and by government, which will affect the degree of the inevitable inflation.
Will demand for credit increase substantially in the next two years? Will there, through normal market forces, be something of a recovery in the next two years? Will the government double, triple, or quadruple down on its historic bailout gamble? Will the government enact costly cap-and-trade-style legislation intent on transforming America into a “green economy”? Will the government enact socialized medicine? Will yet more favored industries be nationalized on top of the mortgage, insurance, banking, and now auto manufacturing industries? Will Congress once again restrict oil exploration (as Harry Reid now proposes), thus driving up gas pump prices?
These are important questions because the prediction is not for instant inflation, but that once market-based thawing does apparently begin to ensue, and all the excessive liquidity finds its way into the marketplace, demand will spike in one area or another and thus so will prices. There will be another asset bubble. And then the politicians will dutifully declare that the “recovery” has ensued. And they will proclaim the Obama plan a success.
From the incoming Obama administration’s perspective, they can only hope this will be in time for the 2012 election cycle. They have to know that it will not be long-term, sustainable growth. But of course they will say it is such. They have to know that it will only be another asset bubble. But they’ll never let that secret out—because they are, after all, politicians.
In the meantime, they will—for no other reason than the political rationale of securing a second term—desperately try to create that next bubble. Or as many bubbles as possible. As it stands, the Democratic Party is intent on increasing dramatically public spending for health care, for education, and for “green” energies like solar, wind, and tidal. That may be enough.
Through a combination of yet more easy money and Congressional deficit-spending appropriated to favored industries, and the convergence of economic circumstances including increased demand for credit and economic growth beginning again, it may be the perfect storm for inflation to take hold.
That inflation may not be as bad as Zimbabwe. Or even the Weimar Republic. That will only happen if the nation’s foreign creditors decide to stop servicing our national debt in response to, or on top of, our own malfeasance. And then the sky really will be the limit.
Robert Romano is the Editor of ALG News Bureau.
