Back to the 70s: The Threat of Inflation is Real Again

"The best way to destroy the capitalist system is to debauch the currency," said Lord Keynes. Ben Bernanke disagrees…Bernanke is printing money to buy U.S. bonds…This new gusher from the Fed, after the $700 billion TARP bailout, comes on top of a Congressional Budget Office estimate that this year's deficit will be $1.85 trillion, 13.1 percent of gross domestic product, more than twice the share of the U.S. economy of the largest previous postwar deficit…Concluding the dollar is being abandoned…markets reacted instantly. The dollar plunge was the steepest since the Plaza Agreement of 1985…The Weimar Solution, Townhall.com, Patrick Buchanan, 3/24/2009

In Weimar, in the 1920s, when the deutschmark was devalued, it got so bad that a shopping basket full of money wouldn’t buy one egg. It got so bad that when a thief attacked someone carrying all those billions of deutschmarks, the robber would let the money fly into the wind because the basket was worth more money. That’s what inflation does.

In the 1970s, beginning when Buchanan was one of Richard Nixon’s aides in the White House, and continuing for years afterwards under Carter, prices were rising at more than ten percent a year. This was partly because of Nixon's action to take the dollar off its indexing to a fixed gold price of $35 an ounce, but more because a mountain of debt from the deficit-financed Vietnam War and Great Society was monetized, i.e., bought with printed money. Both policies and three administrations effectively devalued the dollar by more than sixty percent over the decade. A $50,000 salary in 1970 was worth less than $20,000 in 1979 and taxed at the same rate. A three-year battle led by Paul Volcker and the Reagan Administration stopped inflation cold in 1983, but it took 20% prime rates and sharp restrictions on the money supply to do it. A lot of people lost their jobs. We recovered. It’s a funny thing about sane fiscal policies in response to a crisis. When the country’s government began to act as though it ought to manage the household budget, the country began to find it had room to grow.

However, from the 1973-74 bear market to 1983, inflation sapped much of the creativity and life out of the U.S. economy. Someone in their early twenties in 1973 didn’t see much promise in the future for nearly a decade. The writer speaks from personal experience. The remarkable hope and expansion of the next thirty years was not a paradigm for life anyone in America recognized in the 1970s. Typical cultural responses were movies like The Godfather Network, and Serpico, deeply cynical and dark, however brilliant, or, for that matter, Star Wars, a fantasy about a world that had never been and would likely never be.

In New York, the confidence gamers played for rent-controlled, or rent-stabilized, apartments. It wasn’t just the scam that it is now, but a matter of survival. In a desperate effort to index city worker incomes to inflation, Mayor Lindsay, in a series of very foolish agreements, bankrupted the city, whose citizens effectively lost control of their own government as makeshift bureaucracies stepped in for both the Mayor and the City Council. In a cynical and desperate strategy to get some kind of income from properties bound by rent price controls on one side and skyrocketing prices on the other, landlords set tens of thousands of apartment houses on fire for insurance money. The scam became the only game in town. A master of the universe in the 1970s put his or her income in a Cayman Islands tax shelter, dodged for a rent-controlled apartment, claimed twice as many dependents as he or she had, and, in many neighborhoods, preyed on the old, the infirm, and the unwary to make a living, in short acted like a Soviet citizen trying to make it in Moscow in 1935. Every system the city depended upon, from subways to water mains, began to break down. In the blackout of 1977, the cameraderie of the blackout of the 60s was replaced by citywide looting and riots. It was an urban miniature of Atlas Shrugged. This is what inflation does.

That is also what happens when you spend far beyond your means. And, by comparison, what the Congress and White House are trying to do now dwarfs what happened in the 1970s. They are risking Weimar by flooding the market with phony money. And what followed Weimar was not a rational reconstruction of Germany but Adolf Hitler. This is a lesson they're about to learn in Britain all over again. And it's coming here fast.

Buchanan puts it best:

Inflation is theft. It make liars and cheats of governments. By eroding the value of a currency, inflation punishes savers and creditors and rewards debtors. And what nation is the biggest debtor of them all? The United States of America. Insidiously, inflation consumes the value of cash, savings, municipal bonds, corporate bonds, Treasury bonds and T-bills. Friends who lent America money, who bought our debt in good faith, are robbed…(The Weimar Solution, Buchanan…cont’d)

Luther

Obama Spending Spree and the Imperial Dream

For decades, the United States has relied on a tortuous financial arrangement that knits together its economy with those of China and Japan. This informal system has allowed Asian countries to run huge export surpluses with the United States, while allowing the United States to run huge budget deficits without having to raise interest rates or taxes, and to run huge trade deficits without abruptly depreciating its currency…an obsession of bankers, international economists, and high officials like Fed Chairman Ben Bernanke…” Debt Man Walking, John B. Judis, the New Republic, 12/3/08

Did you think it was going to last forever? Nothing is free. An individual life comes and goes, a candle in the wind. The triumph in the Cold War in 1989 led to a two-decades party in which the celebrants, dancing naked past the cemetery of a dozen old empires, neglected to notice the blank marble tombstone and the open grave. If they had, would they have known it was for them?

The writer, scorned by family and friends for his opinions, has been noticing this for a very long time. Hubris, that ancient Greek word, has been raising its skeletal fingers in warning for years. Historical parallels, even within our own time, are laughed at, or simply unknown. Think, for instance, of the transition between the Kennedy-Johnson era and that of Richard Nixon. For eight short, intense years, the United States acted as if, in the old communist locution, anything was possible. We had conducted an enormous war without considering taxes to pay for it. We had launched a series of missions to send human beings to the moon. We threw off our clothes. We plunged into drugs. We drove cars so fast that the officers and EMS medics at accident sites suffered post-traumatic stress from the ghastly scenes of blood and gore. We spat on history, tradition, family, economic sense, and imagined a timeless space of endless triumph. We believed it possible to liberate human beings from work, duty, and mortality. We lost everything and hated Richard Nixon for six years for his struggle to right a shattered republic, finally chasing him out of Washington as if he were a cancerous lesion.

Americans don’t like to admit the failure of dreams. Even in telling the truth about the way our material desires have been paid for, Judis can only go so far as to recommend the same sort of programs that contributed so much to the federal and private debts financed by the Japanese, the Saudis, and the Chinese over the past twenty years. And the previous and new Administrations? They’ve proceeded as if the world were made of cotton candy, all of it destined to be eaten by their constituents.

I ask you now to turn away from the bogus bonus smokescreen over…compensation for AIG employees. It is a pittance compared to the gargantuan spending spree happening right under our noses. The AIG bonus price tag amounts to one-tenth of one percent of the total AIG giveway ($85 billion in September, $37.8 billion in October; $40 billion in November; $30 billion in early March, which took place with the assent of a Republican administration, a Democrat administration, and the congressional leadership of both parties…they moved Thursday to dump another $5 billion into the failing auto industry…on top of the Thursday announcement by the Federal Reserve to print up $1 trillion to buy up Treasury bonds and mortgage securities sold by the government…that no one else wants to buyLook Beyond the Bogus Bonus Smokescreen, Michelle Malkin, 3/20/2009 (syndicated column)

What is the effect of such a grandiose expansion of public debt?
A)Those expected to buy it, such as the Chinese, who talk and write every day about their plan to extinguish American hegemony within the next decade, will, if they choose to pay for a very low grade investment vehicle, have enormous influence over every area of American government policy, foreign and domestic. If they choose not to buy, as looks to be increasingly likely, they will force us to devalue our currency by printing money to buy T-bills (already happening). The loss of wealth and spending power has been estimated to start at fifty percent or more for every American.
B)It shows an American leadership utterly out of touch not only with a vast proportion of Americans, but with reality itself. Like an Argentine Colonel in the 1980s, the current President apparently believes that all he has to do to revolutionize America, is print the money, go on the Leno show, and promise health care for all, clean air for the entire world, and green jobs for everyone. The man is a fabulist. His policies will, as a group of Argentine Colonels in the 1980s, destroy America as a world center for development.
C)The fantastic increase in government debt will crowd out American entrepreneurs from investment capital for a decade or more. There are suggestions that this will create a mess like the depression of 1873, which lasted for twenty-three years. For a generation in their twenties, vanished expectations will mark the bulk of their most creative and productive years.

This writer would go further and describe this as a massive crime wave originating in Washington, DC. Rather than buck up, cut spending, open our energy resources to domestic development, restrain consumption with a flat tax and value added tax, steps absolutely required in most opinion on the subject, from The Wall Street Journal to Investors Business Daily, for the American economy to recover the robustness lost in the housing crash, the gang from Chicago has decided to loot the entire society, spread some of the booty to their favored special interest groups, and put us at risk of losing control of our sovereignty to a hostile government. This is a long way from “preserve, protect and defend.” Why would they take such steps?

Like it or not, they’re defending not the Constitution, but the mob’s fantasy of the good life. Everyone’s entitled. Everyone gets their choice of everything that’s out there. Nobody has to worry about not having enough money or spending too much. This is the mob, with their imperial dream, that the gang from Chicago is serving. They are not serving you.

Luther

The Democrats' Economic Stimulus Plan: How It Will Work

Over on the Knox News blog, the commentator denounces several Republicans, including Tennessee's own Senator Lamar Alexander, for refusing to follow John McCain's amendment and voting for the Democrats' pork barrel spending plans.

One commentator takes the cake for his keen insight, proving that the rubes are actually hip to DC flimflam. Let's turn it over to him:

How the New Stimulus Plan Will Work

Three contractors are bidding to fix a broken fence at the White House. One is from Chicago , another is from Tennessee, and the third is from Minnesota.

All three go with a White House official to examine the fence. The Minnesota contractor takes out a tape measure and does some measuring, then works some figures with a pencil. "Well," he says, "I figure the job will run about $900: $400 for materials, $400 for my crew and $100 profit for me."

The Tennessee contractor also does some measuring and figuring, then says, "I can do this job for $700: $300 for materials, $300 for my crew and $100 profit for me."

The Chicago contractor doesn't measure or figure, but leans over to the White House official and whispers, "$2,700."

The official, incredulous, says, "You didn't even measure like the other guys! How did you come up with such a high figure?"

The Chicago contractor whispers back, "$1000 for me, $1000 for you, and we hire the guy from Tennessee to fix the fence."

"Done!" replies the government official.

And that, my friends, is how the new stimulus plan will work.