Bailouts, Stimulus and Inflation

Obamania is giving way to bailoutmania. We may not have any good alternatives, but the creation of money, unprecedented in magnitude, is setting us up for the next disaster.

When the current recession ends, as it will at some point, we will be faced with only two options, inflation or another recession, this one resulting from the government ratcheting up interest rates to soak up the excess liquidity. For those of us old enough to remember the early 1980s, those photos of Paul Volker looking over Obama’s shoulder are a clue as to which option might be favored.

I expect to see Obama soon sporting a prince-nez on his nose and his cigarette (yes, he does) in a 3 inch holder tilted up at a jaunty angle from a grinning, confident face. The only problem is that it is well known today that Roosevelt’s New Deal extended and exacerbated the Depression and that it was only WWII that got us out.

The Dems are planning a big, new fiscal stimulus package intended to spur a flurry of consumer spending. One-time fiscal stimuli don’t work. If a starving person is given a carton of food during a famine, he will not host a feast and consume it. He will save it and try to stretch it out as long as possible because he doesn’t know when he will get more. The Bush stimulus in May 2008 did nothing to spur consumer spending.

A better way to stimulate spending is with a permanent tax cut. People will spend more because they know they can count on more after-tax income going forward.

We are also being threatened with New Dealesque jobs program replacing bridges and building and remodeling schools. The problem with these is that after the Congressional wrangling over the pork, architectural/engineering work, contract bidding, etc. it will two years before these projects result in jobs. By that time the economy will have already begun to recover. The net result will be even more inflationary pressure.

Then there is the dangerous phenomenon of all sorts of corporations maneuvering for space at the bailout trough. But that is a subject for another day. Suffice it to say that all this money has to be paid back with interest or by substantially devaluing the currency, in other words, printing money. Both options are grim for US taxpayers and consumers.