A Return to Stagflation

We have been told repeatedly that we are in the worst economic crisis since the Great Depression.' We have recently heard that "it is only government that can break this vicious cycle." (President Obama referring to unemployment and consumer skittishness in his news conference Feb. 10th.) Is it however, more appropriate to compare our current situation, to stagflation in the the 1970's or even Japan's lost decade of the 1990's. Right now we don't have inflation, yet. But like in the 70's, we are trying to to address unemployment by government (federal) spending, and as in the the Ford and Carter administration 'Big Government' action will largely have little positive effect (the 'little effect' is from the State Department's own web-site.) We will however, have a another parallel with the Ford/Carter malaise in that we will at some time have spiking interest rates to attempt to combat inflation, which will be difficult to avoid with Obama's "Unprecedented Action" i.e 800 billion dollars. The potential interest rate spike will panic the stock market and we will end up where we started which is climbing unemployment.
What about Japan's lesson to us in history? Google CEO Eric Schmidt was on the Sunday talk show circuit squawking about the need for yet more stimulus saying that the lesson of Japan's lost decade, was that it took too long for the money to be spent. One might ask, however, did borrow, borrow, borrow, really help the Japanese economy? There was plenty of "Unprecedented Action." The equivalent of billions of dollars were spent to 're-stimulate' banking as well as their economy at large, but even after corporate and banking bail-outs banks collasped in spectacular fashion and even to this day many corporate firms are saddled with massive debt. To sweeten the pot a bit more, Japan has only four banks left. Now that Japan is on the verge of another economic crises they are ill-equipped to take more "Unprecedented Action" when after the last series of "bold actions" left them with zero percent interest and money still difficult to borrow. To top off the whole picture as a nation, they are still heavily indebted to foreign banks. One cultural fact that may have kept them from utter economic failure, is that Japanese people have a inherent tendency to save money. We as a nation however, actually have a negative savings trend. We spend both individually and legislatively more money than we have.
The bottom line in the case of Japan, is that in the process of attempting to fix their economic problems after having an economic system based on real-estate and other lending bubbles, they weakened their economy of more lending, by way of federal action.
So, we either keep interest rates low and in-effect weaken our economy, as Japan did; or interest rates rise again and we get stuck in malaise, while attempting to spend our way out of it. We are told that tax-cuts are not the only answer and doing nothing is not an option. We are also told that de-regulation is what caused our current crises. When the answer was the 80's era of fewer regulation and taxes that brought us to nearly twenty years of unprecedented growth (from 1985-2005) in the mean time surviving two recessions and a major domestic terrorist attack. What if during that twenty year period we as a country had saved, or perhaps not jumped from the 'Manufacturing Bubble' to the 'Tech-Bubble' then finally to the 'Construction-and Housing bubble.' What if we had focused on making a product rather than money. What if the Federal Reserve could have kept it's meddling fingers off our economy and allowed certain industries to die a healthy death.

For the first time there is serious discussion that the 'Fed' simply chases the bubbles while creating new ones ,all of which pop. Such radio talk show hosts as Glenn Beck and Michael Medved have had serious discussions on their shows about the steady but gradual dissolution of the 'Fed.' Perhaps, we are to simply look back to the words "government is not the solution, it's the problem," or even more poignantly "government that governs least governs best."

Posted by Rhant at www.realityslate.com