Anyone except for perhaps the nation’s highest paid Wall Street Economists should be able to understand our nation’s present predicament. We are in a situation very similar to 1930. Our nation is carrying a historically high total debt to GDP ratio, our investment markets are jittery and we are looking to the government to somehow fix the problem.
During the Great Depression the major economic threat that most people feared was inflation. So the government used politics instead of common sense to solve the problem. Since people feared inflation then it was deemed that the government should abstain from "substantially" increasing the money supply.
Thanks to our unwarranted fear of inflation and with help from the Federal Reserve our economy was locked into 10 years of grinding deflation.
Today our nation has an abject fear of deflation because of the memory of the Great Depression. No matter what the alternative we will go to any length to avoid the dreaded “D” word.
It was this ridiculous deflation fear that caused then Fed Chairman Alan Greenspan to flood the economy with money in 2003. The Greenspan faux pas added to the supply side largess from the Bush Tax cuts to create the biggest real estate bubble in the history of our nation.
Even after the incredible debt, waste and excess of the housing bubble our nation still lives in abject fear of deflation. We are demanding another bubble from the government.
Of course they are happy to oblige.
Chairman Bernanke has removed the bolts from the base of the money fire hydrant and liquidity is shooting high in the sky. I have no idea how he is going to reattach it in the future. Money is gushing into the government and the financial sector faster than the oil spew coming from the Gulf of Mexico.
The high end real estate markets and our commodities markets are still in a bubble. And our long term bond market is in a super bubble. The unrestrained spending of the government and financial sector make Imelda Marcos’ shoe purchases seem frugal.
Although we are in a situation similar to 1930, bad government policy has created the antithesis of the Great Depression. Instead of runaway deflation and economic starvation we are incurring massive bubbles, horrendous waste and historic misallocation of resources.
Speculators are bailed out 100 cents on the dollar paid for by our savers. The highest paid government employees retire as kings at 50 while teachers and police are laid off. The financial sector is receiving record pay raises and bonuses for destroying our economy. Education and health care expenses are on a space shuttle trajectory to the moon. If the public sector was an economy unto itself, it would be in Zimbabwe style hyperinflation.
The private sector is affixed in a position antipodean in relation to the public sector. The private sector must hire illegal aliens and ship jobs to foreign countries to pay higher and higher taxes. Private sector jobs are extinguished with the massive subsidies required by this bloated non productive bubble creating bureaucratic behemoth.
But amazingly, the taxpayer is not upset at this monumental misallocation of resources as long as they are protected from the monster of deflation.
So our fear of the deflation of the Great Depression is driving policy in the opposite direction. Our government will fight tooth and claw against deflation even if it means living from bubble to bubble, creating massive borrowing and waste with the day of debt reckoning being pushed onto our children’s scrawny overtaxed shoulders.
Our highly paid Wall Street economists are telling us that we are on the verge of another Great Depression and that we must use extreme measures to avoid deflation at all costs.
My only advice is to be careful what you wish for.
Stagflation here we come.