Moving at the Speed of Creativity by Wesley Fryer

Is the Obama Administration Dooming Us to HyperInflation?

According to today’s English WikiPedia entry, “hyperinflation” in economics is:

…inflation that is very high or “out of control”, a condition in which prices increase rapidly as a currency loses its value. Definitions used by the media vary from a cumulative inflation rate over three years approaching 100% to “inflation exceeding 50% a month.” In informal usage the term is often applied to much lower rates. As a rule of thumb, normal inflation is reported per year, but hyperinflation is often reported for much shorter intervals, often per month.
The definition used by most economists is “an inflationary cycle without any tendency toward equilibrium.” A vicious circle is created in which more and more inflation is created with each iteration of the cycle. Although there is a great deal of debate about the root causes of hyperinflation, it becomes visible when there is an unchecked increase in the money supply (or drastic debasement of coinage) usually accompanied by a widespread unwillingness to hold the money for more than the time needed to trade it for something tangible to avoid further loss. Hyperinflation is often associated with wars (or their aftermath), economic depressions, and political or social upheavals.

I voted for President Obama and do not regret that decision. The Bush administration not only provided poor leadership for our nation in foreign policy and military affairs, but also advanced a destructive agenda of high stakes accountability for our schools which I staunchly oppose. I defy stereotypical categorization as an extreme conservative or a bleeding heart liberal, because on different issues I don’t fit clearly into either box. I was very dissatisfied and upset with the leadership of the Bush team on both domestic and international issues, but I am ALSO unhappy with the economic approach we see the Obama team taking toward our present recession. Are we speeding headlong into an era of hyperinflation due to government spending and unbounded borrowing? I hope not, but I fear that may be the case.

As a student of history, I’ve read scholars who contend the only thing which truly brought the U.S. economy out of the great depression was World War II. The administration of Franklin D. Roosevelt worked to spend the United States out of the depression, but I’m persuaded to think the unemployment rates of the 1930s were only remedied by the industrial full-court-press of the United States in supporting the war effort.

This historical issue is relevant to our current economic and political landscape today, since the Obama Administration seems bent on trying to SPEND our nation out of our financial slump. I don’t think that is the right course forward, or a course which can be effective in the long term. Conservatives have long-criticized Democrats as being “tax and spend” politicians. Where is all the money coming from for our current economic stimulus package spending spree? President Obama is mortgaging the future economic spending potential of MY CHILDREN and yours, borrowing YET MORE against the good name of the United States in the fervent hope that these injections of borrowed capital can jumpstart a sluggish economy. This is a bad plan, and I think as voters we should be speaking out loudly against it.

Our national as well as global economy is very complex, and I am not going to attempt to over-simplify it. A few things seem clear, however, which are NOT going to be effectively addressed by the American Recovery and Reinvestment Act. These include:

  1. Americans need to save more money and spend less. Our savings rate is much less compared to many nations (like those of east Asia) and we need a higher savings rate to be economically healthy.
  2. Too much debt is bad, for individuals as well as nations. We see evidence of this all around us. From individuals going bankrupt as well as corporations, to nations which are ostensibly drowning in their debt obligations to the International Monetary Fund, examples of excessive debt hazards abound.
  3. Printing money is not a viable solution to get out of a recession or depression. Is it true the United States government was the primary buyer of the last two months of treasury bill / bond auctions? How would that be possible? There is a limit to “the good name” of any individual, organization or nation, and the Obama Administration seems to be acting like the United States has an unlimited national debt ceiling. We don’t, and it is foolish to act like we do.

lots of money

As a nation, WE SHOULD DEMAND that our nation STOP spending more money than we are taking in. WE SHOULD DEMAND that we start paying off our debts NOW, and stop mortgaging the futures of our children. Yes, our former national leaders have declared a never-ending “war on terror” analogous in many ways to the ill-informed announcements of prior chief executives of a never-ending “war on drugs.” The “weed the garden” metaphor from the Nixon administration for drug control is also applicable to crime and terrorism. We’re never going to completely eliminate crime worldwide, or terrorism in all its forms. It’s stupid to “declare a war” on something that is never resolvable entirely by military means. We are NOT fighting Hitler in Europe and Japan in the Pacific today, facing a global war which can have a definable endgame. THIS MEANS WE SHOULD NOT BE SELLING GOVERNMENT BONDS TO FUND OUR CURRENT SPENDING SPREE. This economic strategy is rash, hard or impossible to defend, and will lead our nation (in all liklihood) down a dark path of hyperinflation and even worse economic suffering.

I will readily admit that some of my thinking about these issues today was colored by a conversation with a friend who is an big fan of Rush Limbaugh. I’m not a big fan of Rush, but I am a big fan of anyone who has good ideas and gets me thinking. It doesn’t take a rocket scientist to figure out that individuals, businesses, and governments need to carry LESS rather than MORE debt today. The U.S. National Debt Clock should not just get our attention, it should GALVANIZE us as voters to take action.

U.S. National Debt Clock

President Obama and members of the U.S. Congress, please hear my plea. (Yes, I’m sending this to them by email as well as writing this blog post.) STOP BORROWING MORE MONEY TO PAY FOR GOVERNMENT PROGRAMS. No one asked my children if they wanted to take on all this new future debt, and as their father I’m speaking for them today: THEY DON’T WANT TO. Please encourage fiscal responsibility for individuals, businesses, as well as our nation, by modeling DEBT PAYOFF instead of DEBT BUILDING. No one wants hyperinflation. How can we avoid hyperinflation, however, if YOU (and by “you” I do NOT just mean President Obama, I also mean all members of Congress who have the power of the purse per the U.S. Constitution) keep on spending money WE DON’T HAVE AS A NATION?

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5 responses to “Is the Obama Administration Dooming Us to HyperInflation?”

  1. Stephen Downes Avatar

    > I’ve read scholars who contend the only thing which truly brought the U.S. economy out of the great depression was World War II. The administration of Franklin D. Roosevelt worked to spend the United States out of the depression, but I’m persuaded to think the unemployment rates of the 1930s were only remedied by the industrial full-court-press of the United States in supporting the war effort.

    This is probably true. But if true, then it should cause you to rethink your position.

    The “full-court-press” of the United States was essentially the U.S. government spending every dime it had, and borrowing a lot of money (remember “buy war bonds?”), in order to produce stuff (like tanks and bombers) that had no economic value. In other words, the U.S. got out of the depression by throwing money away.

    We are in a similar situation today. Any sort of “do-nothing” approach is going to result in millions of people unemployed. I’m not sure you can imagine that. Can you picture our modern society with thirty percent unemployment? The consequence of doing nothing is roughly that, because that’s how much of the economy is directly at risk.

    Indeed, while we’re at it, I would think that the current recession should put to the test the idea of *saving* to protect one’s wealth and provide for a retirement. You can’t isolate yourself from the economy as a whole. You can’t put the amount of money needed to support an entire generation into savings without tipping a balance. The economic collapse reflects the fact that the idea of ‘saving’ for retirement or ‘investing’ in the stock market is a giant ponzi scheme. Unless the next generation invests as well, there is no growth – but there is no money left for the next generation (it has all been sucked up into corporations, the value of which represents the savings of the previous generation) and they cannot invest. And the bottom falls out of the investments and the economy collapses.

    Do nothing, and what happens? The younger generation still has no money. So they stay in debt. The savings of the older generations collapse, and those that can return to the workforce. But now nobody has any money to buy products, so the companies that would employ them also collapse. More people unemployed. Then comes the collapse of the dollar, and retail collapses as well. Most storefronts are shuttered, most plants are shut down. People are out of work and there’s no welfare, no health care, no hope.

    So if you’re Obama, what do you do?

    Well, the previous government has already committed you to a massive bailout. Yes, you could stop it, but that would drop the stock market to unbelievable lows. So you continue with the bailout, but you ensure (unlike Bush) that you establish an ownership position in the companies you’re helping. You need to do this because otherwise the companies will simply take your money and funnel it to shareholders without building any value (that’s how the war-time economy worked).

    But you also know you have a deep structural flaw in the economy. Basically, the American people have been lied to for the last two decades or so. They have created this consumer society supported by housing equity and increased value of production, something which, when it faltered (as it did from time to time) could be rescued with a war. But (a) there’s nothing left to consume – the resources have run out; (b) the younger generation is, as I mentioned above, incapable of consuming more; and (c) the U.S. won’t win its next war, and everybody knows it.

    So, the bailouts are a necessary short-term measure. You hope to capture as much value as you can, because otherwise you’re just throwing money away. This means taking a major ownership stake in major elements of U.S. productive capacity, its banking and insurance system, and (probably, to come) its retail sector. Once you are in this position of owning much of the economy, you can retool it.

    So, you launch what amounts to a war footing. This will be Obama’s campaign for his second term. The United States, he will say, can do nothing less than to reinvent itself. It must provide for everyone – this means housing, education, health care, etc. An effective transformation from (the fallacy of) the ‘ownership society’ to an inclusive society. Because if people are sheltered from the impact of the recession, the recession hurts a lot less, and can be withstood (by contrast, compare that to the depression, where you had armies of unemployed migrating and rioting in city after city – can you imagine the same today? It would be brutal).

    The second part of the campaign is to rebuild the economy on sustainable principles. This means green energy, green transportation, green housing, the rest. The United States will have to throw everything it has into this initiative, because failure means relegation to permanent third world status. The military will be recruited into this, and will find itself involved in the massive reconstruction effort. The U.S. is a country with few remaining natural resources, and few financial resources. If its major corporations leave (and what would stop them?) it will be in desperate straits.

    If you have a better plan, I’d love to hear it. Remember, doing nothing is not an option – that leads to full scale economic collapse in a matter of months. You have to rescue the situation, because the previous government has left the U.S. well and truly up a creek.

    (p.s. I also think that it might not be possible for the U.S. to get through this without some sort of economic or political union with Canada, because Canada has resources the U.S. badly needs and will not be able to afford to buy. But the price for union with Canada? Public healthcare and a sane policy on militarism and guns. It will be a bitter pill for the U.S. right to swallow, but that’s the price for being the worst government of a major power ever – I’ll probably have more to say alone these lines in the future).

  2. Bret Willhoit Avatar
    Bret Willhoit

    It is interesting timing that you bring up inflation right now as Paul Krugman just wrote about it in the NY Times here:

    I believe that Paul Krugman and his Nobel prize for economics/professor at Yale have more authority on the subject than Rush Limbaugh.

    With all of this government spending, inflation is a concern, not hyperinflation. That is just Rush’s way of trying to scare everyone, unfortunately which he is good at. There have been documented cases throughout history of hyperinflation and sadly, right now Zimbabwe is a textbook example with 11,000% inflation. But according to the most recent data, we aren’t even experiencing inflation right now, let alone hyperinflation.

    To your point about the national debt, my macroeconomics professor said it best when he said that the most important focus of economists is to balance the national economy, not the national budget. Just after WWII, there was a law passed that stated the three main goals of the government in relation to the economy:
    to achieve full employment, price stability, and economic growth. There are still plenty of buyers of our debt, and will be for quite some time. That is why the national debt, for as big and scary as it sounds, isn’t that important to all of the government economists.

  3. Mike H Avatar

    I won’t argue inflation/hyperinflation here . . . but an interesting note that I heard recently was that what really solved the Great Depression was the cut in spending done by the government AFTER the war. Bush and members of Congress were irresponsible to have the debts they incurred, and I believe that Obama and members of Congress today are 3 times more irresponsible. I won’t say McCain wouldn’t have done the same thing, it’s possible. Point is, I think you’re right. The spending is too much, and will only gain a very short term positive and a long term negative.

  4. Daniel Avatar

    In response to Bret’s comment about economists, I’d like to point out the obvious: everyone is fallible. Economists can get a very good education and be very good at what they do, but personally I would prefer an economy balanced not by academically-oriented economists, but by everyone living in that economy via the principles of free trade.

    Secondly, I’d just like to fact-check something you said. A law was passed about the government’s economic goals? Is it actually on the books as a law? I haven’t heard of it (my education in modern history is sorely lacking), but how can you state a goal as a law?

    I’d be interested to see what you all thought about Obama’s declaration that the stimulus spending has created 150,000 jobs already while we’re on the topic of inflation. Newsy just ran a video comparing responses to his policies, but I didn’t see that they really covered (a) the long term effects of that kind of spending or (b) if you can even measure the impact of a single act like that.

  5. Wesley Fryer Avatar

    Daniel: I’d like to see the “proof” that the stimulus program has “created 150,000 new jobs.” The fact is, we don’t need new jobs that are merely created by more deficit spending by the government. We need to be investing in education and infrastructure, not throwing dollars at “shovel ready” proposals. It is really weird to be living in the midst of these times, writing grants to help schools capitalize/take advantage of the unprecedented stimulus dollars which have been and are being released for educational technology, while simultaneously thinking that this entire effort to deficit spend ourselves out of recession is misguided.

    Stephen: You may be right that the Obama administration didn’t have a choice but to continue the bailouts, but I think the lack of scrutiny and oversight to which his proposals have been subjected is not right. I’ve heard these thousand page bills were delivered to Congressmen the day before the vote, so no one had time to read what was in the bills. That is not the way our representative democracy is supposed to work. It sounds as if Obama has been operating on a mandate which does not include accountability, and I am personally not in favor of this type of unscrutinized, “let’s vote blind” form of governance.

    Hopefully the decisions he and others in his cabinet are making are well-informed and will bear good fruit. I still have my doubts, however, about the overall prospect of this strategy to work to bring our economy back in balance.

    It seems to me the rampant deregulation which we saw in the banking industry and other sectors has led to a lot of the problems. My dad heard a speaker at Rotary the other day who gave a history lesson on banking that sounded instructive in this regard. Traditional commercial banks were NOT the ones who got our nation into this subprime lending crisis. The corporations like AIG and Citi have had their hands in lots of pies, and probably should NOT have been permitted to play with banking like they played with other financial gambits.

    I hope Obama is listening to American bankers and not just financial corporation gurus who are desperate to preserve their own financial stakes.

    I think our government is WAY too involved in bailing out corporations for misdeeds and missteps which should have natural consequences in the marketplace. We should have CEOs and corporations going bankrupt because of the poor financial decisions which were made in the past. Fannie Mae and Freddie Mac insured people who should not have been buying homes. The government shouldn’t bail that out and continue that gambit. There are reasons banks don’t take those kinds of financial risks on their own, and we should pay attention to their wisdom, rather than letting the good name of the US government underwrite the expansion of the US housing market at the expense of our future.