Future Inflation Worries

Thursday, October 8, 2009

I've wanted to bring up a few things about inflation for awhile. Maybe you've been thinking about it and maybe you haven't. After all, we've yet to see rampant inflation hit us yet. I for one think it's coming.

I'm going to approach inflation starting with a story from when I was a bit younger. I remember when I was an early teenager my father would always be yelling at the news. I didn't care as much then but I sure understand the frustration now that I'm probably following it even more than he ever did.

Not understanding much about inflation or economics at the time I innocently asked my father, who has a master's degree in accounting, why can't we just print money if we need it? After all to me at the time a dollar was a dollar. Why wouldn't a candy bar be .50 cents anymore just because of some more money circulating out there?

The answer I got was simple and made perfect sense to me. "If we just print more dollars then the dollar becomes worth less because there's more of it." It's a pretty simplified answer to inflation but one that explains it perfectly.

What makes a rare baseball card or stamp worth so much?...The fact that it's rare. The more dollars we print then the less rare a dollar is. Therefore, the less rare a dollar is the less it's worth. We haven't increased our supply of anything, (like gold), that can back our dollar up. We just keep increasing our supply of dollars.

Now, we do have to print money at a certain controlled pace because of a growing population and a growing cost of living. We can't have more and more people chasing the same few dollars. However our monetary policy has to be sound and carefully controlled. At the moment our monetary policy is nothing short of insane and never mind controlled, the government for the most part doesn't even know where a lot of the money is going.

"We know from centuries of evidence in countless economies, from ancient Rome to today's Zimbabwe, that running the printing press to pay off today's bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid."


Notice that this is from June of last year. It's the Democrat controlled congress and former president Bush.

Ok, so that's a story worried about inflation and here's one from Paul Krugman that isn't, gotta love the NY Times.

And the United States itself emerged from World War II with debt exceeding 120 percent of G.D.P. In none of these cases did governments resort to inflation to resolve their problems.

Mr. Krugman forgets some major factors that make the difference between FDR's New Deal America and today's Obama New Deal 2 America. For one thing during WW2 the dollar began to stand out as the top world currency. Other countries involved in the war invested in the dollar which made the dollar strong despite heavy deficits.

We took gold etc. and they took dollars. We have the opposite happening now. Instead of the world turning to the dollar and thus helping to stabilize our money, many like BRIC, (Brazil, Russia, India, and China), are thinking about what to do about the decline of the dollar.

The only thing helping to stop rampant inflation of the dollar is the fact that so many other countries like BRIC are so heavily invested in the dollar, especially China. They are currently trying to think of a way out of it.

"The Chinese see that America’s economic policy could drastically reduce the value of their holdings in dollars. China cannot completely abandon the U.S. dollar without severely damaging the value of U.S. dollar assets that it already holds.

But now that America is creating trillions of dollars of more debt, China’s U.S. investments are going to get damaged anyway. With that realization, China is thinking about spending its money elsewhere."

China stops buying U.S. debt.

Some of Obama's economic advisers, who convince me more and more each day that they got degrees in economics out of cereal boxes or Cracker Jacks, helped cause this mess even though they take no credit for it now.

"As treasury secretary in 2000, Mr. Summers championed the law that deregulated derivatives, the financial instruments — a k a toxic assets — that have spread the financial losses from reckless lending around the globe. He refused to heed the critics who warned of dangers to come."

"Mr. Geithner, currently the president of the Federal Reserve Bank in New York, also has helped shape the Bush administration’s erratic and often inscrutable responses to the current financial meltdown, up to and including this past weekend’s multi billion-dollar bailout of Citigroup."

Full article.

Does any of that give you confidence in President Obama's economic advisory team?

The problem is that so many believe in the myth of FDR. Many think that FDR's New Deal helped end the great depression. Even Newt Gingrich, who I'm a big fan of, has stuck up for FDR. The problem most seem to ignore is that as a wartime president FDR fought to win and he was obviously a good wartime president. After all he fought to win, unlike Obama plans too.

Before WW2 though FDR was a catastrophe. His economic policies failed miserably and unemployment skyrocketed to 25% with the New Deal in effect. Obama seems to embrace all of the economic failures of FDR but none of his wartime will to win.

Here's a great book about the New Deal. As I read it I was amazed how much compares to President Obama's current policies. If President Obama's New Deal 2 yields the same kinds of results as the previous one we may be in more trouble than anyone realizes.

Many Americans today have never lived under a true depression, myself included. If our dollar collapses then this current recession will seem like the tip of the iceberg. I for one would rather not be on that ship.

World War 2 truly ended the great depression. I hope for all of our sakes that World War 3 isn't necessary to end this one. Sorry to end on such a grim note, but like all of you I fear for the future we may be handing to our children.


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