Inflation Worse Than Financial Crisis

On my latest post ‘Obama’s Car Business’ Paschen commented:
“A lot of money that has been burnt for nothing, and still no reforms in sight. Tax payer will have to pay for all this for decades and maybe generations and still lose their jobs and still have the Big 3 as well as the Banks go bankrupt wile having collected great bonuses prior to that and made sure those would not be taxable either.
It is a joke, only no one is Laughing any longer.”

Paschen is right, this crisis is going to end in a tremendous inflation never witnessed before just to compensate for the money that is burnt off on behalf of leaders from nations who didn't care and had no wisdom thus being incompetent for their jobs.

In my posting ‘Simple Bookkeeping’ Stanford professor John Taylor was cited as:
"I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis.”

Credit expanded for half a century. The Bubble Era at its end caused trillions of dollars worth of errors. Many of those errors have already been corrected. But the bubbles that were built remained unresolved. The same is the case in mismanaged companies like GM, the same for mismanaged regulators as proven with Madoff’s Ponzi scheme, the same for mismanaged banks, of which are too many to mention by name. Exporting nations had gotten into the habit of earning net sales from the U.S.A. and the EU of $3 billion per day. Those earnings provided much of the speculative capital that created the Bubble Era prices, with money that was kept too cheap for too long by the Feds and other central banks. Meanwhile this money has disappeared in thin air. There's not much chance that this money will return anytime soon either.

Instead of a healthy new boom, the world is enjoying a sick echo of the previous economic era. Governments, led by the U.S.A., attempt to re-inflate the bubble with guarantees and giveaways equal to an entire year's annual output of the world's largest economy. Since every dollar of this money is borrowed, it makes the implication that every dollar has to be withdrawn from the world economy at some point.

In fact, economists are already looking ahead to the moment when deflation fears give way to severe inflation fears.

"Inflation Nation," is the title of an editorial in the International Herald Tribune a couple of weeks ago. In it, Alan Meltzer, University Professor of Political Economy argues, "If President Obama and the Fed continue down their current path, we could see a repeat of those dreadful inflation years [the 1970s]."

Professor Meltzer reminds us that cutting off the inflation of the '70s weren’t easy. The feds turned the screws...and let the prime rate go above 21%. Of course, today's Fed has this information. And Paul Volcker, who was Fed chairman during that period, is now an economic advisor to Barack Obama. Still, "I do not worry about their knowledge or technical expertise," continues Mr. Meltzer, "What I doubt is the commitment of the administration and the autonomy of the Federal Reserve ... Under Bernanke, the Fed has sacrificed its independence and become the monetary arm of the Treasury..."

"The Fed's job is to take the punch bowl away," said an Eisenhower era leader. But we have come a long way since the Ike and Dick Nixon years. This time, the inflationary party is likely to get out of control; happy days will be here for a while during deflation = stuff getting cheaper, and then very sad days are likely to come with inflation = everything by the day becoming more expensive.

When the I.O.U.S.A. team interviewed Paul Volcker in December of 2007, he said, "...when I look back on my lifetime, it is obvious that letting inflation get a little bit out of control and not dealing with economic problems effectively in the'70s led to a very uncomfortable crisis. We don't want to have to go through big recessions again to teach people fiscal responsibility. Instead, we should anticipate what needs to be done while maintaining the growth of the economy. And the threat will always be an unstable economy and an unstable currency. And that's not just destructive to economic life, but it can be destructive to America's position in the world, which to me is the greatest concern."

Finally the critical Question: Why is not another of Paul Volcker’s calibre in charge to lead the economy out of these doldrums?