Inflation and Deficit Hawks Set to Derail Economic Recovery
Posted by Michael A. Kamperman on November 3, 2009
The economic recovery is totally dependent upon massive Washington stimulus, both fiscal and monetary. The Federal Reserve is meeting today and needs to expand its quantitative easing program, not end it. Similarly, the Congress needs to come forward with another massive stimulus bill focused on job creation. Credit remains very tight for both consumers and small businesses. For example, recent quarterly data shows credit card solicitation mailers fell from 2 billion a couple of years ago to 350 million. Both small businesses and consumers rely heavily on credit cards to maintain current spending levels. The mildly positive third quarter reading for the economy was the result of zero interest rates, cash for clunkers, the first time home buyers tax credit, and the stimulus bill. Without these measures from Washington the economy would have been decidedly negative. Yet the twin hawks, inflation and deficit, will worsen the depression if their point of view wins out. The inflation hawks are clamoring loudly for the Federal Reserve to detail an exit strategy from its current accommodative policy. The Fed will probably cave and throw these hawks a bone. Well I’m clamoring as loudly as I can for them to print more money and buy more U.S. Treasuries. They should keep on printing until the unemployment rate goes back under 8%.
The Congress should also keep coming forward with massive job bills until the unemployment rate falls below 8%. But neither the President nor the Congress have the political will to do something significant. The reason is the liberals are too defensive about their own policies and want to defend the failed stimulus plan as adequate. You can count President Obama amongst them. The conservatives are too distrustful of government and too anxious to see President Obama fail. That leaves the moderates, most of whom are deficit hawks. In fact Senator Bayh wants to establish a bipartisan commission to balance the budget. This commission made up of republicans and democrats would annually recommend both tax increases and federal spending cuts to tame the deficit. I cannot think of any economic policy scarier than raising taxes and cutting federal spending in the middle of a depression. Yet amazingly that is the glide path Washington is on at the moment.
The inflation hawks and the deficit hawks both have their world view shaped by an antiquated concept of money based on the worship of gold. In the ancient world gold was the best form of bartering for goods and services. Yet its supply was limited. In the modern world paper and paperless money (fiat) backed by the full faith and credit of strong governments is the best form of bartering. Yet unlike gold, printed money is not limited by physical supply. It is flexible and can be expanded or contracted by the government that issues it. In times of an over-heated inflationary economy the government needs to contract the money supply. The inflation hawks agree with this. Yet in times of a debt-induced deflationary depression the government needs to expand the money supply. The inflation hawks fear this because of a misunderstanding of the events surrounding the hyper-inflation experienced by Weimar Germany. The deficit hawks likewise see paper money and government debt as fixed, just like gold. They can’t seem to grasp that the federal government is not bound by the same rules as everyone else because they have the power to print more money. Why is it that the deficit hawks are obsessed with debt that we can print and pay-off at anytime? This depression could end in an instant and your loved ones could have jobs if the federal government would simply start printing money and spending money until the unemployment rate fell below 8% and the private sector economy could then take over. Instead you’re stuck with your jobless college grad kids’ moving back in so they can be protected from the mythical ravishes of future inflation and future federal debt. C’est la vie.
