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The US economy's future: crippling taxes and accelerating inflation
Gerard Jackson
Recently a congregation of Hollywood celebrities wildly applauded President Obama when he told them "You ain't seen nothing' yet!", inadvertently revealing that there appears to be little in the way of an intellectual gap between Obama and his Hollywood supporters whose grasp of economics is about on par with his own. But he was speaking the truth. Americans really have seen nothing yet.
Obamatrons have bombarded me with personal abuse, inane talking points, threats and the usual whining one gets from hard core leftists whose tender feelings have been hurt. These cultists' principle complaint is that "Obama did not cause the recession". Of course he didn't. I have never stated otherwise. They then assert that "Bush is the one who made the recession". Bush no more made this recession than he made the one he inherited from Clinton.
Readers will be perfectly aware of the fact that I continually stress that booms and busts are the responsibility of the central banks. Nevertheless, Obama and his little playmates have created the worst anti-business climate since Roosevelt's presidency. And we know how well that worked.
I realise that some people might think I am being too hard on Obama's disciples by calling them cultists. But these are the same poisonous creatures who absurdly argue that Bush's deficit is responsible for Obama's criminally reckless fiscal policy even though his deficit is going to be more than four times bigger than the one Bush left him. It is perfectly clear that there is absolutely no economic justification for Obama's colossal spending programs and deficits — none whatsoever. They are driven by a love of big government and nothing else.
The economic consequences of Obama's economic stupity could be devastating for Americans. How many Americans realise that the projected deficit for the current year is $1.84 trillion and that it might even reach $2 trillion, about 14 per cent of GDP? Give this a moments thought: even the most optimistic estimate means that about every 12 weeks the government needs to borrow the equivalent of Bush's record deficit. This is self-evidently unsustainable. To argue that Obama can slash this monstrosity through a continued increase in GDP is ridiculous. That leaves only taxes and the printing press.
The situation is even worse than this. The bond fund manager Bill Gross estimates that at the current rate of expansion debt could be 100 per cent of GDP within five years. Even Warren Buffett, an Obama supporter, expressed alarm at the trend in debt, warning that it could result in inflation. As Homer would say: "Duh". Once the debt reaches the 100 per cent level governments could find themselves in a "debt trap" where they need to borrow in order to make the interest payments. Regardless of Bernanke's assertion to the contrary this is one economic situation that the government of the day would not be able to exit gracefully and with honour.
(I say governments because those that come after Obama will have to try and clean up this mess. The question right now is whether any future government will be able to take the necessary actions).
The funny money alternative amounts to the Fed monetising the debt. Now Bernanke publically stated that "the Federal Reserve will not monetize the debt." Of course it will. He is already doing it. Where do people think the Fed gets the money to buy securities? When the Fed was authorised to buy Treasury bonds to the tune of $1.75 it was in fact given the green light to print the money. The following chart makes a complete lie out Bernanke's solemn word that he will not monetise the debt.
Austrian money supply definition:
Cash plus demanddeposits with commercial banks and thrift institutions plus government deposits with banks and the central bank plus demand deposit at foreign commercial banks and foreign official institutions plus sweeps.
Bernanke did not engage in this monetary orgy for his personal amusement. He is making it clear that by hook or by crook he will use monetary policy to try and bailout the Obama administration — but within certain limits. He does not want to go down in history as the man who wrecked the US economy by igniting an inflationary conflagration. This is a perilous course of action that appears to have already frayed Bernanke's nerves somewhat. Probably as a result of the rise in long term yields he made a prepared statement in which he said that
even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs.
Now he worries about "fiscal balance". Bernanke is a vulgar Keynesian who can only think in terms of aggregates. This is why he has never really understood what caused and prolonged the Great Depression. Moreover, I get a strong impression that he does not grasp the extent to which Obama's spending, borrowing and tax proposals will damage investment. He does, however, fully understand how inflation acts as a tax that can wipe out debt. And so do other economists
Harvard economist Ken Rogoff, former chief economist of the IMF and a Keynesian, proposes just that. He argues that a 6 per cent inflation rate "for at least a couple of years" would make it easier for debtor to pay their loans. John Taylor argues in a similar vein by making the point that balancing the budget, even in 10 years time, needs a permanent 60 per cent tax increase. Read that again and weep. This would be one of Obama's legacies and a recipe for economic stagnation.
An inflationary solution is a form of bankruptcy. To halve the debt by this means is in effect to pay 50 cents in the dollar to creditors. It is also a form of theft. The fundamental problem with the inflation approach to debt reduction is that it will not only sink the dollar it will lead to an even deeper recession in the future with a greater level of unemployment. But as Keynesians the likes of Rogoff and Taylor cannot see this. In their world inflation has no damaging microeconomic consequences. Its only effect is on the price level.
Americans and the world will pay a heavy price for President Obama's statist illusions.
Gerard Jackson is Brookesnews' economics editor
BrookesNews.Com
Monday 8 June 2009
Monetary base: currency and coins held by individuals, firms, depository institutions and at the central bank.
Sweeps: Demand deposits that have been reclassified as savings deposits.