PrintNovember 16, 2010
Obama's Nixon Gambit Will Fail
Barack Obama will soon discover that printing money to stimulate the economy won't work for him as well it did for Richard Nixon, with disastrous results for America and his reelection chances.
There are two reasons for the Federal Reserve's decisions to print lots of money. The good reason is that the real estate crash still hasn't cleared. That is, too many mortgaged homeowners are still underwater, and the real estate estate market is all locked up with a huge overhang of foreclosures. When too many debtors are under water and can't make their payments, the economy is going to stagnate.
People like to make this complicated, but it isn't. Capitalism works on credit. Credit means faith -- faith that the other guy can meet his obligations in the market. When you are afraid that the other guy is going to stiff you, then you stop trading in the market.
The bad reason for the Fed's QE2 policy is that President Obama needs a good economy when he goes to the voters in 2012. When bad politicians need to goose the economy in time for the next election, they traditionally opt for the quick fix of easy money.
We've seen all this before, of course. President Nixon successfully used easy money to goose the economy prior to the 1972 election. In 1971, the president was concerned that the economy was not coming out of the 1969-70 recession fast enough. So he closed the gold window, imposed wage and price controls, and gunned the money supply. Here is what happened.
As you can see, President Nixon's policy got the economy through the election with gangbusters growth of over five percent real GDP in 1971 and 1972, but inflation soared once the president started to relax the wage and price controls, and by 1974 the U.S. was back in recession again. Then we had another inflationary boom in the Carter years and another big recession in 1980-82. It took a Federal Reserve Board chairman with cojones and an amiable dunce of a B-movie actor in the White House to stop the rot.
The problem for President Obama is that the economy will probably not react to economic abuse as meekly as in 1971-72. The reason is that back then, the U.S. government had numerous instruments of financial repression that are not available today. Americans couldn't own gold back then. They couldn't easily switch out of dollars. There were Depression-era financial regulations still in place that made it easy for the government and hard on the consumer and the investor. Plus, of course, back in 1971, the U.S. dollar was the unquestioned global reserve currency.
Today, the average investor can own gold, can own foreign currency and equities, and can switch in and out of them at the drop of a hat. That just means that when the end comes for Obamanomics, it will come quickly. The trouble for Obama and the Democrats is that the end might come before the election.
When the end comes, Democrats are going to find out that it is Democrats who are going to have to pay the price for the follies of big government. It's about time. Big government is bad for the economy and bad for the welfare of individual Americans. But up to now, Democrats have avoided paying for the messes of big government, because whenever the economy has turned sour, they have demanded "equal sacrifice." Equal sacrifice is a weasel phrase; it means that the guys who caused the problem should not have to pay for it.
One of the reasons that "equal sacrifice" won't work this time is that Republicans all of a sudden have their own Saul Alinsky. When Gov. Chris Christie (R-NJ) publicizes school superintendent Lee Seitz by name for trying to re-up his contract before New Jersey's superintendent pay cap takes effect, you realize that he is following in the steps of the master. Remember?
"RULE 12: Pick the target, freeze it, personalize it, and polarize it." Cut off the support network and isolate the target from sympathy. Go after people and not institutions; people hurt faster than institutions.
Greedy bankers, please give a hand to your new partners-in-crime: greedy educrats.
Looking forward to 2013, we will either see a new president cutting spending after two years of stagflation or we will see President Obama facing a nasty recession and a committee of wise men telling him that the only way out is to cut spending.
So the only question for 2013 will be how much we are going to cut public-sector pensions, how long we are going to freeze public-sector wages, and how deep we are going to cut the vast universe of wasteful government programs. You can go to usgovernmentspending.com to check on all that. The big programs are pensions, health care, and education. Each of them amounts to about $1 trillion a year. That's where the money goes. Everything else is chump change -- including interest payments, at least for now.
The real biggie, down the road, is cuts to Medicare. What will grandma say when they come to cut her Medicare?
Christopher Chantrill is a frequent contributor to American Thinker. See his usgovernmentspending.com and also usgovernmentdebt.us. At americanmanifesto.org he is blogging and writing An American Manifesto: Life After Liberalism.
