A New Kind of Depression - 1 of 3 on the new bank bailout

Thursday, March 26, 2009

Obama, Bush, Democrat, and Republican all have sinned in the area of fiscal responsibility. Where a prudent person would save and prepare for tougher times, the Bush administration spent like a lottery winner on steroids. Bringing us to the current administration whose goals cannot be postponed for the sake of economic crisis. Instead of working with the resources available at the time of his inauguration, Obama wines “I inherited this economy” expecting the populous to restrain their cries for immediate relief and persevere in the hopes that spending will one day in the future create new jobs. Meanwhile, they ignore the devastating macroeconomic movements going on in the global economy.

Enough of the candidates and the parties, it’s too late. We may one day start to see a turnaround in the economy, but the damage has been done. The media has glanced over several important events over the last two months that have far reaching implications for lower and middle class Americans. In case you missed it, here is what has been going on.

In February, the Chinese asked Obama and congress to do “the honorable thing” in relation to the country’s spending. Obama immediately held a fiscal responsibility seminar in an attempt to curb the perception that he is only concerned about spending. However, since his fiscal meeting Obama failed to veto the omnibus bill, proposed dramatic increases in spending in his budget and all the while promising to cut some, but not all of the deficit spending in the years to come. Obama may have stemmed some of the criticism at home, but his moves have not bolstered confidence in the world economy. Please pay attention to the next statement. Normally, deficit spending would be backed by the sale of treasuries sold by the Fed. Seeing that no one would finance our debt, for the first time since WWII ended the Fed began printing money. The difficulty in selling our debt has continued with a poor showing at the US Treasury auction yesterday nearly sending the stock markets into a free fall. In the meantime, China and other G20 countries are working hard to establish a form of world currency with the purpose of dumping the dollar.

So what does this mean? It means in certain terms that any recovery in the US will be greeted with Carter style stagflation at best and a new kind of depression at worst. This new US depression will look a lot like the last depression. However, in this depression food for pennies and empty pockets will be replaced with food for hundred dollar bills while everyone has a room of dollar bills that are worth nothing.

How can I be so sure? You may not be aware of this, but the US dollar is the currency of the world. Much of the world holds US dollars in their vaults to bring value to their currency. Our currency only has value so long as people who believe the dollar has value continue to believe in that value. That principle has held water since the Bretton Wood standard was repealed in the seventies. However, once the dollar starts being dumped worldwide, our currency will be rendered useless. We had a small taste of this when China decided to dump some of their dollars in favor of diversifying with the Euro. That action alone has been the main reason for the decrease of the dollar’s value in recent years. In response, we saw more jobs move overseas and gas prices sky rocket. That was only one country dumping some of their dollars.

The threat of dumping dollars was always a constant, but the recent increase in dollar creation only precipitates the problem. Believe it or not, dollars are just like any other commodity. The more dollars there are in the world that people hold but don’t want, the more devalued the dollar gets. It’s just like stocks. If the world is selling dollars, the stock plunges. A new world currency would only solidify the dollar’s devaluation by creating an independent currency that can be recognized outside of the dollar.

Of course there is no sweating at the Fed or the Federal Government. A drastically devalued dollar does not mean that spending must be cut or taxes increase. In fact, the policy of inflating the dollar only makes it easier to pay off debt. The conservative argument that our children will pay higher taxes is ridiculous. Here is why. We owe a certain amount in the future. There is interest involved, but the term of the debt is fixed. Today our money is worth a certain amount and in the future we owe a certain amount of funds. We can simply print money, like counterfeiting, to pay this debt legally and the borrowers must accept the money, but the price is a worthless currency.

This has very serious implications for the middle class, but mostly the poor who have been counting on government transfer payments. They may be struggling now, but the money they do receive does have value. With hyperinflation, it doesn’t matter how much money the government gives them, their money will be worthless. In fact, the more we print dollars and send them to the poor, the more worthless the money will be. Many in the middle class who have saved long will find their savings worthless. I’m talking far beyond the 50% hit they took in the stock market. The best part is, the rich may take a huge hit in their wealth, but ultimately they will remain rich, because they have a lot of the one thing neither the middle nor poor classes have much of; tangible assets.

Let’s put everything on the table. I understand the goals of the American left. Let’s assume that those goals are all things that should be done. Should we not put out the current fire in our economy before advancing the agenda? Should we not get a control over government spending first and then seek the changes that the left feel is needed? Regardless of your anger and regardless of your ethnic or social status, everyone in this country is facing the same fate. Could this be the one issue we could unite and come together on or do you agree with Obama, that the spending can continue unchecked and unbridled? Let's decide not to lose the value we have in our dollar so that we can send banks more money. Let's decide to put the social agenda on hold until spending in Washington is on a tight leash for good.

3 comments

The Law said...

I actually kinda understand all of this!! The economy is quite a beast to understand. And I think you raise really excellent points. To be honest, I have no counter, because I do think your assessment of the crisis is accurate, at least based on my limited understanding of it.

What I will say however, is political capital, even for one with Obama's magnanimity, is very short lived. And the main concern is if we don't get healthcare, energy, and education going with at least a solid foundation soon, I doubt it will happen. And yet another term will go by when these crucial issues go unsolved.

However I predict if Obama got everything he wanted passed, we wouldnt see it all roll into place at once. Whether we agree or disagree with Obama, one thing we should all have faith in is his intellect. He has a core set of values, but if there is a better way to achieve his vision for the country, he'll do it. I have a lot of trouble believing that Obama and his advisors hadn't considered the consequences you raised.

It is a shame you're not an elected official however, because you delivered more substance on your stance on the economy than anyone in the republican party thus far. The lack of debate from the other side leads to one sided decision making which probably isn't the best way to go.

March 28, 2009 at 5:05 AM
This comment has been removed by the author. March 29, 2009 at 3:32 PM

tL,

Thanks for the compliment. I certainly would like to be a politician someday. I think you would also make an excellent elected official. I may not agree with you, but you do keep informed about what's going on. You may not be an economist, but you seem to have a bigger handle on it then most of the people in Washington.

I must agree and disagree, I think the republicans are putting on a pretty sad show right now. However, it is not that there aren't some trying to push the issue, but that their voice is not being relayed by the media. Surprisingly, McCain's been doing an excellent job. The future of the party is not in the current leaderships, but those republicans that will emerge as a result of Obama's presidency. Just as Obama emerged from Bush's.

I'm not a big fan of Ron Paul, but he is voicing some of my concerns. Check out the video I attached to my post.

March 29, 2009 at 3:37 PM

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