Deficits, Debt and Inflation Concern Everyone in the World but the Obama Administration

Posted by PITHOCRATES - March 7th, 2011

Chicago Cuts their Public Sector Budget

Scott Walker in Wisconsin is taking a lot of heat for trying to cut the costs of the public sector.  But he’s not alone.  Even Chicago is trying to cut the cost of its public sector.  By buying bigger, high-tech, trash cans for the central business district (see Chicago trash cans go solar-powered posted 3/7/2011 on UPI).  They’re going to spend $2.5 million for this capital investment to reduce their operating costs (i.e., the cost of people). 

If you use some of the numbers bandied about for public sector pay and benefits in the news today, that $2.5 million could pay for some 25 public sector workers (or more) per year (including health care and pensions).  Now here’s the punch line.  Chicago will uses some federal stimulus funds for this investment.  In other words, money sent to Chicago by Washington to create jobs is being used to cut jobs.  Funny, isn’t it?

This is what you do during bad economic times.  Replace people with technology.  Because people are so expensive.  It’s because of people, after all, that all these states and cities are facing budget crises due to the crushing costs of their public sector health care and pension benefits.  So when times are bad, you make capital investments to increase productivity.  You don’t hire more people.  Even Chicago understands this.

India has a Booming Economy, high Inflation and plans to Increase Social Spending

Once again prosperity leads a nation into dangerous economic waters (see Calling on the gods posted 3/3/2011 on The Economist).

It is tempting to expect the gods to keep smiling. Only China, among big economies, has pipped India’s 8.6% growth in the past year. Mr Mukherjee foresees a rosy period of easing inflation, reviving foreign investment and robust public finances. He may be in for a shock.

Inflation is still a pressing problem. High food prices hurt the urban poor. In December street protests over the price of onions led the government to ban their export. Onion prices have since collapsed, but other causes of inflation remain.

First there’s robust economic growth.  Then inflation.  Then the food riots.  It’s what triggered the French Revolution.  As well as the recent uprisings in the Middle East.  Economic growth is like a drug.  And it’s a good high.  While it lasts.  People are working.  The government is collecting lots of money.  And they can spend it on social programs.  Keeps everyone happy.  And voting for those in power.  Again, for awhile.  It’s when things become rights the trouble starts.  Because people don’t give up their ‘rights’ easily.  Even when the state can’t afford them anymore.  (Incidentally, a true right has no cost.  Freedom of speech is a right.  And no one has to pay for it.  Fat government benefits aren’t rights.  They’re just ways to make people vote for you).

Social spending is set to leap by 17% next year, as the government attempts to encourage “inclusive” growth. Congress’s chief, Sonia Gandhi, next wants a law embodying a universal “right” to food. How this might work (if at all) is unclear. Again, technocrats favour transfers of cash or vouchers over dishing out food through a vast and corrupt state bureaucracy. Either way, the subsidies mean demand for food will soar.

No matter, says Mr Mukherjee breezily. By spending on agriculture, giving farmers credit, easing transport bottlenecks and getting better cold-storage distribution, supply will rise, too. As for other causes of inflation, seven interest-rate rises by the central bank have removed monetary excess, he says. Little can be done about painful world prices for oil and other commodities, but, barring a big shock, Mr Mukherjee guesses annualised inflation will drift down to about 6% in a year’s time, from nearly 10% today.

Chicago as well as other states and cities may be cutting their social spending (i.e., public sector spending), but not India.  Even with 10% inflation.  That’s pretty gutsy.  Or delusional.  And those painful world oil prices?  I think they’re being a little optimistic about peace returning to the Middle East any time soon.  It may very well get worse before it gets better.  However, India has raised interest rates seven times to rein in inflation.  Other than that increase in social spending, India is doing a lot of the right things.  And her economic growth shows it.

China trying to curb Inflation to keep their Economy Booming

Even the IMF think the rise in oil prices is only temporary (see IMF: Signs of overheating in emerging markets by Lesley Wroughton and Chrystia Freeland posted 3/7/2011 on Reuters).

After the global economic slump of 2008 and 2009, the recovery took divergent paths, with emerging markets powering ahead while advanced economies merely trudged along. With growth and interest rates remaining unusually low across the developed world, investors have flocked to emerging markets, bringing much-needed capital but also a risk of inflation.

Rising oil prices have compounded the inflation problem, but Lipsky [the Fund’s first deputy managing director] said the IMF has not cut its growth forecast because it thinks the oil price spike will prove temporary.

All right, let’s say that peace does indeed break out throughout the Middle East.  Will that keep oil prices down?  Well, it didn’t during the last years of the Bush presidency.  The only reason why they fell was due to the worst recession since the Great Depression.  China and India are building cars.  Cars that run on gasoline.  This is what pushed up gas prices before.  And it will push them up again.  Because more and more people are driving cars in those countries.  Even when there was peace in the Middle East.  And when gas goes up everything goes up.  Even food.  Because food has to be transported.

China has made curbing inflation its top policy priority this year. Its finance minister said earlier on Monday China will ensure that spending on social priorities does not fan inflationary fires.

Separately, Zhu Min, special adviser to the IMF’s managing director, said China’s loan growth was too strong and addressing that was key to safely slowing down the economy…

Brazil and some other emerging markets have increased taxes on foreign investors or raised banks’ reserve requirements to try to slow inflows of investment money and ward off inflationary pressures.

China is worried about inflation.  So is Brazil.  And other emerging markets.  Because there is such a thing as too much of a good thing.  If their economies overheat they will create bubbles.  And when bubbles pop they become recessions.  So they’re concerned.  Besides, they have enough on their minds to worry about.  One of their biggest export markets, the United States, is having their own financial problems.  And if they lose their biggest customer, that bubble will come sooner rather than later.

The United States has no Booming Economy but Spends like it Does

So what’s the problem in America?  Well, right now, it’s social spending.  It is out of control.  And there appears little incentive to do anything about it because, unlike Chicago or the other states and cities with financial crises, the federal government can print money.  But when they do they inflate the money supply.  We call this inflation.  And they’re inflating the hell out of the money supply these days.  To pay for record deficits.

So how bad is it?  Pretty bad.  We’ve set a new record.  The largest monthly deficit in history.  A staggering figure of $223 billion (see U.S. sets $223B deficit record by Stephen Dinan posted 3/7/2011 on The Washington Times).  That’s in one month.   That’s about how much the annual deficits were under Ronald Reagan.  And the Democrats pilloried Reagan for his ‘irresponsible’ deficits.  But now?  $223 billion a month ain’t so bad.  Go figure.

Unlike India and China, America has high unemployment.  But like India and China, America has some inflation concerns.  Well, those outside the current administration do.  The Obama administration and the Federal Reserve aren’t all that worried about inflation.  Because they’re Keynesians.  Rational people, though, are very concerned.  And for good reason.  Because when you add unemployment and inflation together do you know what you get?  Stagflation.  And stagflation sucks.  People have less money and everything costs more.  Stagflation made Jimmy Carter a one-term president.  Yeah, it’s that bad.  So knowing our history we must be doing everything within our power to avoid a repeat of the malaise of the Jimmy Carter years, right?  Well, not exactly.

Have Printing Press will Ease

The Fed is planning to print more money (see Oil Shock=More Fed Shock by Douglas French posted 3/7/2011 on Ludwig von Mises Institute).

Atlanta Fed President Dennis Lockhart told a group at that National Association of Business Economics in Arlington, Va. that if the price of oil keeps climbing, the Fed will need to purchase more assets, or QE3.

Of course the men at the Fed don’t believe all of this new liquidity they are creating has anything to do with the prices of oil or food. Oil over a $100 a barrel is an external shock you see. A bolt of lightening out of nowhere. Those crazy kids in Cairo twittering and whatnot.

Ben Bernanke testified last week that inflation will remain tame. And when pressed about oil and food prices, he said “My sense is that the increases we’ve seen so far — while tough for many people — do not yet pose a significant risk to the overall recovery.”

Quantitative Easing 3.  As if QE 1 and 2 wasn’t bad enough.  Neither has helped.  And the inflation lurks out there.  Building.  Just waiting to explode oil and food prices.

The problem with Bernanke is he studied the Great Depression.  But the only thing he apparently learned from it is how the Fed caused the bank runs by tightening the money supply when they should have been helping the banks to stay solvent.  He does not grasp this fundamental: businesses don’t need to borrow money today.  They’re sitting on piles of it.  Why?  Because no one is buying anything.  So they’re not going to hire people and add capacity.  Even if they can borrow money at 0%.

Jimmy Carter’s Second Term

If you weren’t around for the Jimmy Carter years here’s your chance to live history.  While Chicago, India, China and other emerging markets are being responsible, the Obama administration is finally answering that age-old question.  What would a second term of Jimmy Carter have been like?  The answer?  As bad as the first.  Perhaps even worse.  Because we should know better now.  It’s no secret what happened during his presidency.  So there’s no excuse for repeating his mistakes.  And yet we seem to be hell-bent to do exactly that.  Amazing.

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