Obama's Upcoming Inflation Crunch

t is a truism that government spending cannot create wealth. Yet some economists, following John Maynard Keynes, believe that government spending leads to disproportionately higher private spending--a so-called "multiplier effect" that creates wealth. What's the truth?

If a stockbroker throws piles of money out the window at the crowd below, there can be a small multiplier effect. People buy more, the stores and factories hire more people, who in turn spend more. The multiplier is created not by the money itself, but by the whirlwind of money flying from person to person. But if, instead of throwing money away, that stockbroker went out and grabbed everyone's cash, people would spend less. Factories would close. If the stockbroker did both, there would be no net effect.

Financial institutions produce a much larger multiplier effect. If you deposit money in the bank, the bank can loan that same money to several different borrowers. This increases the amount of money in circulation. The increase is only limited by the reserve requirement, which is 10% for transaction deposits (checking accounts) and 0% for time deposits (CDs or bonds). If the reserve requirement is 10%, the multiplier is 10. Thus, tax reductions and rebates, whether spent or deposited in banks, can have a large affect the money supply.

Enough change for a loaf of bread

What the government is doing now is, in effect, throwing money out the window, with the expectation that they'll go out and grab it back later. But unless government creates something of public value, like the Internet or a new highway system, the multiplier is canceled out by an equal and opposite divisor when the government takes its cut and pays, as it eventually must, for its borrowing--either through taxation or through inflation.

Indeed, when the government is in the red, government spending reduces wealth. Deficit spending leads to higher taxes, which are forever, or to inflation, which is just another form of taxation. In fact, it's the most insidious form of taxation, because it's hidden.

Government often denies that the inflation is its deliberate policy. Officials throw up their hands and lie, saying "We're trying!" in much the same way a corrupt software company might "try" to fight the spread of computer viruses, while raking in millions in antivirus software. But inflation is a deliberate policy, and it's even encouraged by mainstream economists.

When a government burns up a nation's currency through inflation, it's no different than stealing money from its citizens and literally burning it in a wood stove. All deficit spending is ultimately inflationary, because a government that lacks the strength of will to prevent itself from spending money it doesn't have also lacks the will to keep itself from stealing the value of little old ladies' bank accounts by inflating it away. Using inflation to steal money from taxpayers instead of taxing them also relieves government of the obligation to send armed tax collectors out among its impoverished, pitchfork-wielding subjects.

Not all wealth, of course, can be burned up by inflation. Inflation also reduces a consumer's debt burden, allowing consumers to pay off loans with cheaper dollars. For years Americans were chastised for having large debt and not saving enough. But the slobbering American-idol-worshiping masses had shown their wisdom. From their perspective, investing money was almost always a losing proposition. Rates of return on CDs and even securities are half their nominal rate after taxes, even before subtracting the inflation rate and the cost of paying attention to and learning about the markets. For a small investor, this latter cost is not insubstantial. A taxpayer with a full-time job pays it with his or her precious free time. To a worker making $20/hour who gets two days off per week, losing one hour of free time actually costs that worker $70. Brokerage fees are trivial by comparison.

Government is theft

Giving money to people to pick up a shovel and dig holes in the ground is just wasting it. When that money was extracted from taxpayers at gunpoint, it is theft.

In this sense, government is very much like the mafia: both provide protection for a fee, and much of the fee goes toward making the protectors rich. The mafia promise to protect us against themselves, while the government promises to protect us from ourselves and, at least during Republican administrations, from outsiders. Like a mafia protection racket, confiscatory taxation has a secondary dampening effect, because a certain percentage of the revenue pays for their "cut" -- it's used to make government bigger. Whether that cut is 10% or 50%, it is a big chunk of money that is permanently and systemically lost from the economy.

The current economic downturn has an even more sinister flavor: Obama's "stimulus" is not justified by any collapse of demand. It is being promoted by activists who do not trust capitalism and would like to see it replaced with a centralized command economy. In former times, or in Europe (where there can be more than two political parties), these people would have called themselves communists. Of course, they would scream bloody murder if called that today, not because they don't subscribe to the principle of "to each according to their need," but because the word has been so tarnished by history. Massacring a hundred million or so people will do that. People are so sensitive.

Money is power, and government benefits give the government intimate control over aspects of behavior that once were thought to be the rights of free people to enjoy. For example, if the government subsidizes hospitals and emergency services, that gives them the right to force people to wear seat belts and carry automobile insurance. If we let them pay for our health care, that will ultimately give them the right to dictate not only what health care we can obtain, but also how often we exercise and how many hamburgers we're allowed to eat--if it's still legal to purchase them. You may scoff, but since the government banned trans-fatty acids, can cholesterol and saturated fat be far behind? A government that wants to put a tax on carbon dioxide might do anything. But as Michelle Malkin said:

The Big Nanny bureaucrats will have to pry the Sonic Bacon Cheeseburger from my cold, dead hands.

Funny. Of course, not even Obama would dare to ban hamburgers straight away. Yet if government decrees that hamburgers must not contain cholesterol, saturated fat, salt, meat, or meat by-products, people will voluntarily stop eating them, because they will taste like crap. Same result, but it doesn't cause a Boston Hamburger Party or a second American revolution.

Possible Outcomes

What are the outcomes of all this?

Up, up and away
Creditors like China and OPEC countries, worried that Obama will burn up their debt, are already pushing to replace the dollar with an international currency. Most likely, this will be a virtual dollar, not a real one, that is created by the IMF or the United Nations. Whichever entity gets to "print" these new dollars will be able to collect taxes on them, either directly from the governments, or indirectly by investments. The dollar will crash.

If you imagine that you'd just refuse to pay any tax to the IMF, as an act of civil disobedience, think again. Your government will pay it for you. You will have no choice.
If Bernanke raises interest rates to prevent the dollar from crashing, the housing market will tank, creating a mortgage crisis even worse than the last one. Within a few years, we'll also see inflation possibly as high as 25-30%. Thanks to Obama and Congress spending like there's no tomorrow, there may not be a tomorrow, economically speaking.
China or other creditors could easily push the USA into default, causing widespread economic collapse. Some economists have pointed out that our debt/GDP ratio is higher than most other countries who have defaulted. Even though China is unlikely to do this, the ability to threaten doing so gives them an incredible amount of power. Power is a zero-sum game because power is relative. As other countries become stronger, the US becomes weaker.

Many suspect that weakening America as a world power is just what the Obama administration and the Democratic Party want to do. If you're skeptical, remember the golden rules of politics:
1. If it quacks like a duck, that makes it a duck. If prices and wages are going up, it's inflation, regardless of what the economists say. But it turns out, we are the ducks. To the government, taxpayers are nothing more than pâté de foie gras, to be periodically fattened up and then eaten (so to speak).
2. There are no accidents. Inflation doesn't happen for no reason: the government has absolute control over the rate of inflation, because it has strong influence over the rate of growth of the money supply and absolute control over the amount of currency in circulation.
3. Governments always lie when it suits their interests. Since the current administration is backed by the news media (to an almost fanatical degree, with one notable exception), there is little pressure for them to tell the truth. So they won't.
  Of course, the media won't tell you the truth either. If the media like whoever's in charge, the economy will magically be "improving." If not, it's a "disaster."
4. Economic disasters always happen at the worst possible time. For proof, just ask John McCain. The mortgage crisis struck just weeks before the 2008 presidential elections. Just a coincidence, right?
5. And since we're getting into conspiracy theories, I should mention that there are some who claim that Obama is following the Cloward/Piven strategy. Cloward and Piven were Columbia University professors who advocated deliberately bankrupting the government in order to force radical change, with the ultimate goal of overthrowing capitalism. This theory only makes sense if you believe those currently in charge are intelligent and not simply hopelessly naïve and incompetent. So in this case, the conspiracy theorists are the optimistic ones.
We'll find out soon enough. The only way to know the intended result is to observe the actual result. If America becomes weaker as a result of the government's policies, that means making us weaker was the goal of those policies.
The government will increasingly be in the business of propping up the value of assets, which will lead to increased unavailability of those assets. This will be most obvious for housing. More people will become renters instead of homeowners. In some areas, annual property taxes already exceed 2% of the property's value and 8% of the owner's income, which means that these citizens, for all practical purposes, are already renters.
A large-scale run on the banking system is more likely than ever now. If banks started failing again, and it became widely believed that the FDIC could no longer protect individual savings, a deep depression would be inevitable.

Our current pork-based economy is more fragile now than before. All that has changed is that Americans have lost more of their economic freedom. While an overprotective government can suppress the natural growth and decline cycles of a capitalist economy, that benefit is counteracted by the enormous tax burden and the thousands of new rules and restrictions which crush the peoples' spirit. History has shown that once a nation is committed to this path, it cannot avoid falling into poverty.