Posted by
Andrews on Tuesday, January 27, 2009 6:21:19 PM
I was watching the news tonight when I heard truly chilling words. "Both parties agree the economy needs a jolt." Not a single dissenting voice was raised arguing that too many jolts over the past sixteen years is precisely what got us into this situation, and adding another massive inflationary "jolt" will do nothing but send us into even worse problems.
Ideally, I would hope someone would suggest a few simple steps to stop any additional harm and give the economy time to recover. First, as I doubt anyone will even dare to propose returning to a commodity currency, I would at the least like to see the Fed not only stop trying to keep interest rates artificially low, but also stop inflating the money supply for a while, say a six month moratorium on open market operations. Second, I would like to see the feds scale back the budget. As an end of open market operations would require the deficit be funded by private sector borrowing, it only makes sense to try to run as small a deficit as possible, to leave the maximum currency available for economic expansion. Third, I want to see the government stop any plans for bailouts, investment or any other means of "injecting money into the private sector".
Of course, someone will point out this will cause some companies to fail and some people to suffer. My response is that there is no way to avoid that. All the bailouts in the world, all the added inflation will do nothing but postpone the suffering, and make it worse. If you want to minimize suffering, then we need to suffer through it now. Putting it off does not prevent the collapse, just delay it and amplify it.
In some ways, the attitude of the feds reminds me of a theory I developed in my twenties. I discovered the way to drink as much as I wanted without ever having a hangover. You never stop drinking. Similarly, the feds think they can avoid being called to account for deficit spending and monetary inflation by simply "bailing us out" with more deficit spending and monetary inflation. And as the outcome of my theory is eventually alcohol poisoning or cirrhosis, likewise the eventual outcome of the government's plan is either a total deflationary collapse into a massive depression or, more likely, a Weimar-like hyperinflation with prices rising hundreds of times faster than the government prints money.
The truth is, you cannot put off paying forever for past errors. I know promising the impossible is a politician's stock in trade, but still, at some point they need to face reality. We can suffer slightly now, or we can suffer much worse in the near future to buy ourselves a few months, maybe a few years of reprieve. Of course for a politicians, putting off disaster until after the next election always sounds good, but I do wish one would show a little back bone and state the truth, that every day we buy we buy at the expense of worse down the road.
Then again, much as I wish one would, I know it is a pipe dream, just as it is unlikely the government will sit back and allow the market to correct itself. The best I can hope is that the bailout doesn't start a hyperinflation, and in four years we get a new president who shows a Reagan-like willingness to bite the bullet, stop inflating, and suffer the high interest rates and slowed economic growth until the economy adjusts.
POSTSCRIPT
Even the Reagan era handling of the post-Carter inflation was not ideal. Reagan had to rebuild the military, while congress could not scale back their spending, resulting in massive deficits. As a result, Reagan had to choose between inflating and borrowing on the market. He wisely avoided inflation and adding to the ills that had come during the Carter years, but the borrowing did act as a drag on the economy and slowed the recovery more than necessary. Had congress and the president been able to spend less, the recovery would have been much faster and less painful.