I was watching Fox's financial news this morning when three stories made me quite irate. First, a general story on the $850 billion bailout boondoggle. Second, a proposal that anyone receiving bailout money must buy American products. Third, a story about states having budget troubles due to swelling unemployment costs. It was Fox, so there were at least a few comments in the right direction, but I can't believe less than a week into the Imperium Obama and I am already this upset.

I have written over and over about the bailout and the futility of it. I wrote it when it was Bush saying it, I am writing it when Obama is proposing an even bigger one, so it is in no way partisan. However, for the benefit of new readers, or for any politicians who may stop by and read this, since politicians seem to have such a hard time understanding this, let me offer a simple explanation.

Inflation creates distortions in the economy. Once they have reached a certain point, the economy becomes unstable and deflation begins. While it may not seem so, much of thew subprime "crisis" is an inflationary crisis. As the loans were effectively credit created without expectation of repayment, backed by incredibly overvalued properties, they represent increases of the money supply. Add to that the explicit inflation which both Clinton and Bush carried out to put off the worst of the collapse that began in the dot-com bust, we have not just an inflationary crisis, but one that has been collapsing since the late 1990's and has only been put off through increasing inflation. In other words, one that has been getting worse and worse.

The solution is not to bailout. Since we are not paying the bailout from savings or money borrowed from real savings, but by "borrowing" which results in monetization of debt, that is MORE INFLATION, we are simply continuing to kick the problem into the future and making it worse all the while. Of course, the bailout may "work", that is it may postpone the worst of the collapse, as Clinton did during the dot-com bust. But even if it works, it just means we will face an EVEN WORSE collapse in 5 or 10 years. Then again, investors and others may not have confidence restored by the bailout. Given the scope of the present collapse, and the size of the bailout, this may not causing an inflationary boom, but rather mark the beginning of a hyperinflationary spiral, similar to the "stagflation" of the seventies, where expectation of additional massive inflation causes a flight into real value, a dearth of investment, but paired with massive price increases due to inflation of the money supply. So it is possible even this bailout may have only harmful effects.

Of course, some will tell me that we "must" bail out businesses, as otherwise people will suffer. My point is people will suffer inevitably, at some point. Better we let the economy correct itself now, when the suffering will be small compared to the suffering if we inflate our way out and cause a bigger crash later on. As I said, it may not even work, and our bailout may just cause even more suffering now. But even if it "works", the suffering will be worse when the next collapse comes. So unless you expect to die in the next few years, and don't care about anyone else, letting the economy recover now is the route of least suffering. And if we absolutely must spend money to assist people, then let us pay for it out of tax revenues, or, at worst, by borrowing on the capital market, not from inflation. Granted, it will slow recovery, as did Reagan's deficit spending in the early 80's recession, but at least he did not resort to inflation and simply kick the problem into the future, and look at the decade and a half of boom times that followed. Do we want that? or do we want to return to the shaky instability, massive price surges followed by deflationary panics, we have had for the past decade? House prices soaring 300% then dropping 40%? Periodic financial panics followed by bankruptcies and government takeovers? Those experiences of the past decade have been the outcome of our reckless financial policy of inflating to keep interest rates artificially low.

In short, we need to change. Unfortunately, we will suffer while the market clears all the inflationary garbage, but that is inevitable, it will have to happen sometime, better now than later. Any "fix" will at best make things worse in the future, and at worst will simply make things worse now. So can we please stop talking about "bailouts"?

Of course, that doesn't even mention all the other absurdities attached to the bailout, the pork, the absurd intrusion into auto industry management, and all the rest. I figure the bailout itself is bad enough that I could just ignore all the graft and inefficiencies, as even a perfectly managed bailout would still be a disaster. However, since one of those idiocies points out one of my pet peeves, let us turn to one of those foolish proposals.

It has been suggested that those receiving bailout money should be forced, wherever possible, to buy American products rather than imports. The "logic" of this is that it would keep the money in the US, and, thanks to the Keynesian absurdity of the "multiplier" would cause each dollar to "stimulate" more. I have written before about Keynes and his errors, and Hazlitt completely demolished the absurdity of the multiplier, so I won't get into that. Instead I will simply point out the most obvious logical problems here.

Our current problem is a lack of liquidity (among other things), meaning companies wanting to make capital investment, to expand or start up a new enterprise, are having trouble finding enough money to borrow. Now, the reason people buy imports rather than domestic goods is because imports are, in that specific case, either cheaper or of better quality, otherwise why not buy domestic goods and avoid the costs to import. So, domestic goods cost more per unit of value than foreign goods. If companies already have trouble finding funds, why would we want to increase their costs? Even if they get bailout money, they still will have a shortage of money, and thus increasing their costs seems a bad idea. Not to mention that any increased costs will not be borne wholly by the company, but will also be passed along to the consumers. That means either consumers will see prices rise, or they will choose to buy from companies with cheaper goods, making those who received bailout money fail due to lack of sales.

Of course, since protectionism is enjoying popularity at the moment, with both liberals and nominal conservatives decrying "outsourcing" and NAFTA, I suppose it is politically expedient to propose such measures as a substitute for real patriotism. On the other hand, I don't see how forcing those taking bailout money to price themselves out of the market will make the economy improve. Once they fail due to higher costs, the sale of US goods will be no higher and their whole "multiplier" will break down, if it ever existed in the first place. The whole theory is just nonsense.

And the mention of nonsense brings me to my third topic, the woes of states which can't meet unemployment payment while maintaining their current level of spending.

Now, I am no fan of unemployment "insurance", as it is not truly insurance. Any plan which includes everyone without any risk polling or adjustment of premiums to risks is not "insurance". For the same reasons Social Security is not insurance, unemployment is not insurance. It is simply a welfare plan which is subsidized by a means adjusted payment and with payout based upon amount paid in. That does not make it insurance, simply a different approach to welfare.

In any case, if these states have trouble meeting their unemployment payments, I have a thought. Why not cut other things? I know states love to have tourism bureaus and fund "the arts" and pay for ten assistants for each law maker, but in rough economic times, it may be a good idea to cut back slightly. Of course, that is the problem, the government's spending policies.

The government spends the way gold fish eat. As long as there is food available, goldfish will eat, even when it makes them ill. The government, likewise, will spend all the money they have available. A sound policy would be to save any surplus in good times again the bad times, so that they average out to zero and the government can maintain a constant level of spending. however, that is not how things work. Instead, when things are good, the government increases program until every last dime is spent. Then, when times turn bad, they first seek federal money to make up the difference, then, if they can't find that, raise taxes. And then, when times turn good, rather than restore the lower level of taxes, they just spend up the new surplus, setting up yet another shortfall when times get bad again.

Worst of all, once a policy has been established, once spending has started, it becomes "essential". No matter how absurd, the government will claim it cannot be cut. They will argue "during hard economic times, we cannot afford to cut spending on the Avocado Commission, as the loss of avocado revenues would just make us even worse off." And so any program, once started, ends up becoming sacrosanct and essential, no matter how absolutely absurd such claims are.

My only question is, does not one realize that the only possible outcome of this pattern is a state government which eventually takes every last dime leaving nothing for the tax payers?

Well, I have griped enough. It was just a few minutes of financial news, and it seems absurd to waste so many words on them. But even on a channel which is relatively moderate, such as Fox, it seems the financial news is just chock full of absurdities which manage to work me up far too much. Probably why I watch so little news any more.

POSTSCRIPT

To repeat my postscript from an earlier article: For a full discussion of the crisis and the bailout, examine the list of posts found in the postscript to "History Repeating Itself". And, as always, I recommend my two posts "Monetary Issues Made Simple Part I" and "Monetary Issues Made Simple Part II" as they offer better explanations than I can give here of why I oppose the Keynesian consumerist fallacies as well as any theory which extols the virtues of inflation or deficit spending.