Ideas Have Consequences—Even Stupid Ones

When Barack Obama became president in January 2009, he began a campaign to weaken America. I’m not talking about military cuts; I’m speaking of America’s stature.  Barack Obama famously refused to acknowledge American Exceptionalism in 2009. He bowed to kings and princes, then denied doing so, then bowed again and again. His White House has driven down the dollar. Timothy Geithner, Obama’s Secretary of the Treasury, warns that the world economy must “rebalance” with less reliance on America.

Barack Obama is short-selling America.

The results of a US President talking down his own country are stark.  America is losing prestige, and the office of our president loses prestige right along with the rest of us. 

Asian Embarrassment

In the last week, Barack Obama got a taste of the new, devalued USA.  In South Korea and Japan, Obama was no longer treated as first among equals, but us the kid at the far end of the table.  Having trashed America’s swagger and replaced it with a lilting prance, Obama learned that it’s not so fun to be a relatively young leader of relatively young nation whose prestige has taken a major blow.

From a Wall Street Journal editorial, we see just how far the USA has fallen under Obama’s presidency:

Has there ever been a major economic summit where a U.S. President and his Treasury Secretary were as thoroughly rebuffed as they were at this week's G-20 meeting in Seoul? We can't think of one. President Obama failed to achieve any of his main goals while getting pounded by other world leaders for failing U.S. policies and lagging growth.

For Obama, now, there is nowhere to turn.  American voters have rejected his domestic policy. His base has turned against his handling of Afghanistan. The world leaders, seeing him as weak, are planning world economic policy more or less over Obama’s head.

Stagflation

But there’s more. Obama’s economic policies promise to do two things: 1) perpetuate high unemployment and 2) increase inflation.  In fact, the Fed’s stated policy, which Obama defended twice in Asia last week, is to use Demand-Pull inflation to grow the US economy. 

We’ve seen this before.  In 1978 to 1982, America suffered a malaise brought about by bone-headed economic policies from a president who believed America had gotten too big for its breeches.  Jimmy Carter’s policies produced high unemployment, flat growth, and runaway inflation.  The term for this economic condition is “stagflation.”

True, Bernanke is a Bush appointee and the Fed is independent from the White House.  But Treasury Secretary Geithner and President Obama are full participants in an economic policy that threatens to revisit the disastrous years of 1978 through 1982.  Being unemployed, underemployed, or underpaid is bad enough. When the cost of necessary goods and services rise quickly, things get worse fast for the economically challenged.  And signs of stagflation are everywhere.

Alan Reynolds of the Cato Institute wrote in a WSJ op-ed that several inflationary signals surfaced in October:

Producer prices rose at an annual rate of 5.5% in September and 4.8% in August. The broad price index for GDP rose at an annual rate of 2.3% in the third quarter, up from 1.9% in the second quarter and 1% in the first.

For ordinary folks trying to make ends meet, the prospect of inflation is frightening.  Already the weak dollar has driven up the price of gasoline and food—the two things we all need to survive.  The two things the government omits from its consumer price index.  In the past week, gasoline prices in the St. Louis area jumped $0.25 overnight. 

The Next Congress

There is little the 112th Congress can do to repair the economic damage, but it can lay the foundation for the next president and the 113th Congress. I encourage all members of the next Congress to follow Arthur Laffer’s prescription of extending the Bush tax cuts, repealing Obamacare, eliminating incentives for idleness, and push free trade. 

5 Horrors of Inflation *Update*

**Scroll for Updates**

Ronald Reagan and Jack Kemp wanted to index everything, especially Treasury notes and taxes.  By "indexing," we mean tying rates (interest and tax) to the inflation rate.  Calls for indexing subsided after Reagan and Volcker did what Ford and Carter could not:  whip inflation now.

With a $2 trillion deficit this year and multi-trillion deficits projected as far as the eye can see, inflation will return to ravage the American consumer.  To make a former Economics professor happy, inflation deteriorates the purchasing power of a dollar.  (Happy, Bruce?)  But it does more than that.  Here are 5 horrors of inflation that will come to pass thanks to your U. S. Government:

Tax Bracket Creep:  When your household income exceeds $110,000 (married filing jointly) a year, you lose a lot of deductions.  For instance, the child tax credit.  As wages inflate to keep up with costs, millions of tax payers will cross this threshold and lose deductions.  In fact, it's common for a family's take home pay to fall as a result of pay increase.  You take home $60,000 a year after taxes and deductions, you get a $10,000 raise, and you're now taking home $53,000.  Fun, isn't it?

Interest Rates:  Interest rates represent the price of cash and are most sensitive to inflation.  If I lend you $1,000 for 10 years, the interest I charge must, at least, cover inflation.  If inflation is 2 percent over the period, then I would charge 2 percent interest and you would pay me $1,218.99 in year 10.  I break even.  If inflation is 18 percent (and that's not unlikely), to break even I charge 18 percent interest and in 10 years you pay me $5,233.84.  Big difference, huh? That's compounded annually.  Compounded monthly, far more common, and you have to pay me over $5,900.

Investments Lose Value:  Having seen the effect of 18 percent inflation on a $1000, 10-year loan compounded annually, you can see how careful you'll be before investing.  Would you buy a 10-year T-bill at Friday's closing rate of 3.84 percent if you knew inflation over the next 10 years would be 10 percent?  Of course you wouldn't! You'd lose money.  (To perform an easy future value calculation in Excel, type =fv([rate],[# periods],0,[present value]), for example:  =fv(.0384,10,0,1000).  A more accurate method for solving bond pricing with Excel is explained here.)

Quality Plummets:  If you were born before about 1968, you probably remember that the 1970s saw lots of really crappy, low quality junk on store shelves everywhere.  It wasn't just a change in tase, it was a response to inflation.  When prices of goods and services rise faster than consumers' incomes, manufacturers and retailers must find cheaper goods and services to fill a given need.  Jack-in-the-Box was caught mixing oatmeal in its hamburgers.  Plastic furniture replaced wood, steel, and leather.  Polyester replaced wool and cotton.  Men let their hair grow hideously long to save money at the barber.  While you can argue all you want that buying low quality costs more in the long run, if you need toilet paper today, Charmin's higher quality at $5.00 a roll does you no good if have $3.00 to spend.

Savings Dwindle:  If you know the dollar in your pocket today will be worth $0.65 tomorrow, you'll spend it today.  During periods of high inflation, the marginal propensity to consume skyrockets.  True, it skyrocketed during the relatively low inflation periods of the 1990s and 2000s, but just wait to see what happens when generations of spenders meet years of high inflation.  And every new round of fast spending drives prices higher, as more money chases after fewer, crappier goods and services.  Why not buy that $5.00 hamburger today since it will cost $5.50 tomorrow and $7.00 next week?

These are just 5 horrors of inflation.  Please use the comments section to provide your inflation horror stories.  If you have any tips to help people prepare for and deal with high inflation, please add those, too.

Why would the government touch off inflation?  Perhaps because, in the short term, inflation tends to help the poorest quintile, according to Heinz Herrmann.  While the inflation devastates the poor in the long run, a period of very high inflation over the next 2 years will allow the party in power to say, "Look, your wages have increased 10 percent since we took office."  Of course, their taxes will have gone up 12 percent, prices 15 percent, and their standard of living will have fallen.  But who wants to wallow in those sordid details?  This administration is all about hype.

MORE:  Gateway Pundit reports that Obama is killing jobs faster than any U. S. President in history.

*UPDATE*  Fed is shocked--Shocked!--that multi-trillion dollar deficits are driving up interest rates instead of stimulating home buying.  I suppose they don't teach Finance 501 in Harvard's MBA program.  With interest rates rising, home buying will slacken, economy will sink.  Hello, Jimmy Carter.  Drude reports that NYT will carry Monday morning story of tension gripping Obama's economic team.  About friggin' time.

While we're at it, one of the best -- if not THE best -- article on what's wrong with the Obama economic plan is on NY Times today.  Read it.  It's very long, but you must read it.  Cohen and Lewis skewer the White House like no one I've read to date.  Intelligent, informative, penetrating, and convincing.  This is the op-ed that could topple Obama's house of cards.