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The Coming Inflation

December 8th, 2008 by Myrhaf · 5 Comments · Politics

Speaking from the non-existent Office of the President-Elect (complete with a prop desk at which no work is done), Barack Obama announced plans for the biggest public works program since FDR’s New Deal.

President-elect Barack Obama added sweep and meat to his economic agenda on Saturday, pledging the largest new investment in roads and bridges since President Dwight D. Eisenhower built the Interstate system in the late 1950s, and tying his key initiatives – education, energy, health care –back to jobs in a package that has the makings of a smaller and modern version of FDR’s New Deal marriage of job creation with infrastructure upgrades.

The president-elect also said for the first time that he will “launch the most sweeping effort to modernize and upgrade school buildings that this country has ever seen.”

“We will repair broken schools, make them energy-efficient, and put new computers in our classrooms,” he said in the address.

The president-elect is bringing new elements of his domestic agenda into his economic recovery plan, committing to a path toward giving every American access to an electronic medical record as part of an “economic recovery plan … that won’t just save jobs, it will save lives.”

Joe Conason says that’s not enough.

His first priority should be immediate, substantial financial aid to the states and cities that are now laying off thousands of public employees and preparing to fire thousands more. Rapid, generous assistance to localities would not only keep hundreds of thousands of workers employed, but would simultaneously advance national priorities in health, education, infrastructure, and energy efficiency.

Where will the state get the money to pay for all this and the rest of our escalating federal budget? It looks like we’re in for a vast increase in deficit spending.

In the old days before Reagan the Democrats were the party of deficit spending and the Republicans were the green eyeshade party that clucked about balancing the budget. Then the Republicans discovered the Laffer Curve, which holds that a tax cut allows the economy to be more productive, which ends up bringing in more tax revenue that the higher tax rate would have. As tax cuts cause deficits, the Democrats became the anti-deficit party in order to protest Republican tax cuts.

Now that both parties seem to have decided it’s time for a spending binge, nobody cares about the deficit anymore. Perhaps the Republicans will make an issue of the deficit if they ever figure out what they stand for now.

Why is deficit spending bad? Is Wikipedia puts it,

…deficit spending may create inflation — or encourage existing inflation to persist. (In the United States, this is seen most clearly when Vietnam-war era deficits encouraged inflation.)

I don’t see how the government can avoid inflation. Even if they passed a tax increase, I doubt it would be big enough to cover the huge increase in spending coming our way.

Galileo Blogs might be right that we’re probably about to see a replay of the 1970’s. Are we ready for high inflation rates and high interest rates?

Inflation is the politicians’ favorite tax increase because people don’t understand that it comes from the government printing more dollars and thus devaluing the dollar. People see greedy corporations raise prices for their products and blame them for inflation. Politicians then exploit the anger of the populace against capitalists. Men like Henry Waxman will hector corporations for daring to raise prices when America’s workers face tough times.

I’m no economist, but I’ll give you my guess as to what is coming. I think we’re in for inflation far greater than the 1970’s. What we are about to see will be unprecedented in American history, although it has been seen in other countries such the Weimar Republic.

As someone (I forget who) recently quipped, invest in wheelbarrows.

UPDATE: Victor Davis Hanson writes,

I don’t think we are near a Great Depression by any metric—GDP performance, unemployment, or bank collapses. But at some time in the near future, the enormous bailouts, reprieves on debt, spiraling federal debt and borrowing from overseas, expansion of the money supply, envisioned near zero-interest loans, and trillion-dollar plus savings in gas and energy prices will, in the manner of a perfect storm, begin to create a great inflation. When capital invested in stock, cash, bonds, or real estate brings no interest or profit, then indebtedness has less of a down side, and inflation starts to roar.

5 Comments so far ↓

  • Las propuestas económicas de Obama « Sarah Palin en Español

    […] Myrhaf en New Clarion apuesta porque viene una época de alta inflación. Tiene sentido su razonamiento, no económico, sino político: la inflación es el incremento de impuestos favorito de los gobiernos. Al bajar el valor del dinero, los precios suben, y los consumidores no culpan al gobierno, sino a los egoístas y avariciosos empresarios. […]

  • Bill Brown

    The other great thing about inflation—from the politician’s perspective—is that they get to decide who gets the new money before the economy even realizes that there is new money. That’s a very lucrative handout because the purchasing power of that initial money is greater than it is for those who subsequently receive it because prices will rise to reflect the inflated supply.

  • Jim May

    The more I think about it, the more I’m inclined to agree with Harry Binswanger: the reason why the media and many pundits are focussing on the Great Depression and its deflationary aspects, is because the Left succeeded in rewriting history so that people see it as a mess made by capitalism and cleaned up by government — as opposed to the 1970’s, which is seen as a government mess cleaned up by getting it out of the way.blame capitalism for it.

    Thusly, the Duranty media pushes the Depression meme, because it allows them to push Obama as FDR — instead of the 1970’s meme, which would paint Obama as Jimmy “Welcome Back” Carter, and remind people of what ended *that* — the “Deregulator”, Ronald Reagan.

    They are wrong, however, because of the single but gigantic fact I noted at the Crucible and Column some time ago: now, as in the 1970’s, we have a fully fiat currency — whereas in the Depression we were still on a gold standard, even after the confiscation and single devaluation of the dollar.

    That is another reason why the specter of the Depression is being raised; mainstream economics considers one of its key hallmarks to be deflation, which is made out to be worse than inflation. The current emphasis on deflation (not to mention the degraded mainstream definitions of the terms) provides cover and justification, under the rubric of conventional economics, to inflate the money supply.

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  • Hal

    I don’t know how we can avoid massive inflation either what with the way money is being printed and thrown into the hands of people who failed big time. Did you see the AP report that banks have refused to say how they’ve used the bailout money? Mind numbing to me.

    I’m thinking that gold and silver is probably a good bet as investing a percentage of my money. I’ve been watching both with the free real time tracker, ExactPrice, and I continue to be surprised that the COMEX price remains subdued in the face of high demand. If you check out how much gold is going for on eBay compared to the Comex price it’s amazing.

    Whatever happens, the coming 3 to 5 years are going to be dizzying.