Saturday, January 10, 2009

Bad Economics Obama

The problem with President-elect Barack Obama's plans for the economy begins at the very core of his economic beliefs. In his speech yesterday, he said:

If nothing is done, economists from across the spectrum tell us that this recession could linger for years and the unemployment rate could reach double digits -- and they warn that our nation could lose the competitive edge that has served as a foundation for our strength and standing in the world.
This is simply not true. Many economists do believe in Obama's plan, but they are all Keyenesians of one stripe or another. They are not all economists "across the spectrum". Economists from the Austrian School, for example, believe that the plan Obama is about to initiate will be a disaster that may likely doom his presidency.

Here is the problem.

The current downturn in the economy is a result of decades of Federal Reserve money printing that has distorted the economy in favor of those who received the money printing first. The Summer of '08 saw the near halt in this money printing.The slowdown in this money printing resulted in the economy beginning to readjust to a non-Federal Reserve distorted structure. Such a readjustment means unemployment and a drop in prices especially capital goods prices. As this readjustment set in, the Federal Reserve reversed engines and began prnting money again at record double-digit money growth rates.

These Federal Reserve actions are the key to the business cycle and the problems that are ahead. Without Federal Reserve intervention, the economy would have readjusted on its own with smooth sailing within six to twelve months. The Federal Reserve activities, however, will result in a halt to the readjustment process. It will result in supporting the previous distorted structure and the economc numbers will show a much stronger economy than most expect, unemployment will decline and GDP will be positive. But because it is a distorted recovery fueled by money printing, the money printing will ultimately result in an inflation of dramatic proportions.

The dollar will crash on international markets and inflation will be at double digit levels. Obama's plan is really nothing more than a sideshow when viewed from the true problems in the economy.

There is nothing wrong with his tax reductions (limited though they may be). However, they should be accompanied by spending cuts. His further increase in government spending will do nothing but take the money out of productive hands via the borrowing that will be required. This borrowing will either be purchased by the Federal Reserve which will create even more inflation, or the borrowing will crowd out private sector borrowing. In short, Obama's plan does not deal with the real problem, Federal Reserve money printing, and his solution through additional government spending will result in only negatives. But, hey, unemployment and GDP are going to look much better.

It's just that when you go to the grocery store and see soaring prices that you will know something is very, very wrong.

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