Wednesday, December 17, 2008

Banks, Bailouts, Economic Stimuli and Inflation.

We all remember the history lessons about the Weimar Republic, and we have all seen the German stamps with new prices reprinted on top of the old ones reaching into the billions of Marks. I have a 5 million pesos bill from Argentina that I use as a bookmarker. The economist Walter Williams in his latest column reminds us of Hungary in 1946, when prices doubled every 16 hours for an annual inflation rate of 1 quadrillion percent and Zimbabwe where prices doubled every 25 hours for an inflation rate of 80 billion percent, making the 30,000% of the Weimar republic seem almost insignificant.

Imagine taking a cab ride in the morning and then the same ride in the evening costing 10% more, and 10% more the next morning and so on again and again. And the same phenomenon occurring with groceries, housing, commodities and the cost of living in general. This is inflation. The most devastating taxation a government can impose while evading the legislative process, all achieved by the uncontrolled printing of money.

The policies that the Bush administration has put into place and which Barack Hussein Obama seems to enthusiastically approve of are preludes to an inflationary period probably unprecedented in the economic annals of the United States. The stimulus and bailout proposed will cost, by conservative estimates, a trillion and a half dollars, and it probably will end up costing twice as much, as all governmental projects always do. For the uninformed, trillion is a 1 followed by 12 zeros. This sum cannot be produced without borrowing and printing. And the result of this is always inflation.

We are not looking into inflationary periods such as the ones described above, but 20% to 40% could have a devastating effect on this country. People on fixed income would find that the purchasing power of their savings and pensions has eroded dramatically. The middle class would face extinction, as their income today becomes the poverty level of tomorrow.

The Federal Reserve lowering of interest rates to 0-0.25% has to be seen as an acknowledgement that they don’t know where to go from here. The last resort thus, becomes the printing press, or as some irresponsible politicians want, higher taxes. Both of these will move us closer and closer to economic disaster.

The government is taking these measures to prevent loses of jobs, but losing a million to two million jobs will look insignificant in comparison to the economic devastation of a period of 30% inflation.

We must insist that the government proceed with the only policy that it is qualified to do, namely, get off our backs and let the collapse of incompetent companies take place. Companies have failed before and will fail in the future. This is how the market disciplines itself. A message that the taxpayers will be here to rescue them sends the wrong signal.

The same is true about the banking industry. Lately I have heard often that banks are different, and must be rescued. Nonsense. Let those banks that were managed correctly take over the ones who were not.

Another fallacy is that banks are not providing credit. More nonsense. Banks are not lending to those who shouldn't be borrowing in the first place. Many of us have opened CD’s in the last few months, and the banks were glad to take our money. How will they pay us the interest owed if they don’t lend it? Lending to the wrong borrowers is what put us in this crisis in the first place.

I am amazed at the arrogance of those politicians who believe that they can control uncontrollable economic forces. Their only experience has been controlling the weather, and producing alternative sources of energy. And we have all seen how successful they have been in these endeavors.

1 comment:

Jeff Parrett said...

Is that an Examgen cartoon?