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No Hope for This Change
You can hardly pick up a paper or listen to a newscast without hearing how inflationary Uncle Sam’s bailout efforts are. “Money out of thin air” is a phrase never so popular as it is these days. And, indeed, every bit of the money going to bail out the administration’s political cronies on Wall Street and fatten Obama's constituency everywhere else is being created out of thin air.
The Federal Reserve recently proposed what may be the most inflationary policy in it’s history, directly buying government securities to the tune of a trillion or so. Thin air again is the well from which all the Fed’s funds are dredged up.
One might logically ask, with all this inflationary action by the Fed and Obama, why are the prices of so many things, notably housing and gas, coming down like the Hindenburg? The answer is complex, but never so complicated that O’Boyle can’t oversimplify it with a few wisecracks.
Economically, change is the last thing the administration and the banks want. The only welcome change in the money game is an increase in the supply of it. Our leaders underestimate their enemy, however.
They imagine that they are fighting merely a “lack of confidence” on the part of borrowers and lenders. What they are really fighting are the enormous natural forces for the other 'flation: DEflation. These forces gathered impressive power since Uncle cut away the dollar’s anchor to gold in 1971. In the last few years they’ve become what Elliot Wave theorist Robert Prechter has called a cresting tidal wave. It is a capitalist wave breaking onto the shore of manipulated markets and dishonest political money. It is breaking onshore now, sweeping away the illusions created by paper money.
Politicians have convinced people that capitalism that has failed. But capitalism is not a system, it’s a law of nature. It neither succeeds nor fails, it simply rewards good decisions and punishes bad. To the extent that political systems allow the capitalist laws of nature to operate freely, those systems prosper.
It is not a co-incidence that as communists have become more capitalist they have increased their prosperity and freedom. Nor is it a co-incidence that as capitalist countries have moved toward planned economies they have become poorer and less free. Obama is making all the right moves to achieve levels of prosperity in the U.S. that are more common in North Korea, Cuba, and China.
What we are witnessing today are the natural forces of capitalism attempting to correct the vast misallocation of resources that the abuse of political money has caused. The bankers and politicians can no more stop the correction than they can relieve us from the force of gravity. To be sure, they can bail out a few leaky boats and keep them floating as the wave passes, but only by filling a whole lot of smaller boats to the gunnels and dooming them to certain destruction. Most of us are in the fleet of smaller boats.
Deflation is the natural finale for inflation. Money is borrowed into existence these days, not printed. All the money that was borrowed to inflate the prices of stock, housing, sushi, and granite countertops is now vanishing as waves of default sweep over the markets. Inflation is the increase in the money supply. Deflation is the inevitable destruction of all that imaginary wealth.
Ironically, after such a long and constantly accelerating increase in the supply of dollars, it doesn’t require an actual contraction in the money supply to cause deflation. Simply reducing the rate of increase is sufficient to cause prices of all manner of assets to crash. The rate of increase in the money supply has plummeted in the last few months and will probably continue to do so for a while. Political efforts to try to create money faster than it disappears will merely punish the prudent to reward the reckless. Deflation follows inflation as night follows day.
It is impossible to borrow ourselves rich or spend our way to prosperity. Obama is doomed to take the rap for the depression no matter what he does. If he changed his mind and did nothing the worst would be over before he left office. At least he would have done no harm.
But I fear that is one change that simply has no hope.