The stagflation of the 1970s was chicken feed compared to what Obama has concocted.
For two years now, I have been arguing in this column and elsewhere that President Obama’s economic policies were a throwback to the 1970s, and so were going to produce the same result as the 1970s — the worsening cycles of inflation and recession known as stagflation. With last week’s reports regarding the Producer Price Index and the Consumer Price Index, those results are now here.
But these developments are just several further spins in an accelerating downward spiral for America that leaves our traditional prosperity, high standard of living, and national security extremely vulnerable to three looming disasters, at least two of which are likely to happen within the reasonably near future.
The Inflation Trap
The Producer Price Index rose 1.6% in February, an annual pace of nearly 20%. Over the last 5 months, the index has increased by nearly 5%, an annual pace of over 10%. The index for food increased by nearly 4% in February alone, the largest one month rise since November, 1974. As of February, the Producer Price Index for intermediate goods had increased by 7.8% over the prior 12 months.
This trend is now beginning to show up in the Consumer Price Index as well. The CPI increased by 0.5% in February, an annual pace of over 6% compounded. Over the last 3 months, the CPI has increased by 1.3%, an annual pace of 5.3%. The energy price index rose 3.4% in February alone, and nearly 10% over the last 3 months. The CPI is arguably understating inflation today because 40% of it is now represented by housing, which is still in a recession.
This follows a long-term trend that has been flashing red for inflation for quite some time now. First gold started to rise, eventually to record highs. Then the dollar started to fall, now near record lows. Then commodity prices started to soar, with oil now zooming over $100 a barrel.
Under supply-side economics, the Fed is supposed to tighten monetary policy when these inflation sensitive market prices first start to accelerate. Once the CPI starts spiking at 5-7%, the necessary tightening to stop it will cause sharply rising interest rates, and recession a year or so later. But if the Fed doesn’t reverse course, and continues printing money excessively, inflation will just continue to accelerate. To stop the 1970s double-digit inflation, the Fed finally had to impose double-digit interest rates for over a year, which caused the sharp 1982 recession.
In the past four decades in the U.S., every substantial increase in the real price of oil (meaning in excess of general inflation) has been followed within a couple of years by a sharp rise in unemployment. So with oil now surging past $100 a barrel, what does that suggest about unemployment over the next two years? And what does it say about President Obama’s economic IQ that the goal of his energy policy has been precisely to raise the price of oil, through cap and trade and restrictions on supply? The man can be well-spoken, as President Obama undoubtedly is, and still not have the slightest idea what he is talking about.
America’s accelerating downward spiral advanced on Friday when CBO released a report on President Obama’s exploding deficits and debt. Last month, President Obama’s own budget admitted that he will more than double the national debt in just one term of office, with an admitted budget deficit this year of $1.645 trillion, the highest anywhere in world history by several times over. Friday’s CBO report concluded that federal deficits over the next 10 years under President Obama’s budget would soar by nearly a third more than he estimated, totaling nearly $10 trillion over those 10 years, which would nearly double the national debt again to $21 trillion by 2021.
The Fed’s policy today is known as QE2, meaning the second round of “quantitative easing” (printing money) under the Obama Administration. That basically involves using the printed money to buy 70% of the Federal bonds issued to finance the deficit, a classic prescription for inflation. This Fed policy, continued from QE1, is the only reason that interest rates have remained so low in the face of the unprecedented trillions in federal deficits.
QE2 is scheduled to continue through June, at which time most commentators expect the Fed to end this reckless policy. But if the Fed suddenly stops this “quantitative easing,” who is going to step in to buy the bonds to finance the 70% of the remaining federal deficit of $1.645 trillion for this fiscal year, and the $1.4 trillion deficit the CBO projects for the next fiscal year? Finding real buyers for those bonds is going to require paying soaring interest rates on them, which will only further increase the deficit. And that will cause soaring interest rates across the credit markets as well.
And that will mean another recession about a year later. Which would be in the middle of 2012. Which is why that is not going to happen. Which is why QE2 will be followed by QE3, QE4, and quite possibly QE5, just to make sure no recession or ominous economic clouds darken President Obama’s door during his glorious 2012 re-coronation tour, however much this continuing QE parade may rightfully horrify Larry Kudlow.
But this scenario does not involve President Obama dancing on sunbeams through 2012. For with that extended QE overdosing, how high will inflation be by the summer of 2012? But what is the alternative? Mr. Obama, meet Scylla and Charybdis.
Maybe this is why surveys are indicating collapsing consumer confidence over the past 2 ½ months. Whatever the reason, those surveys don’t portend a rosy scenario for unemployment in the coming months.
The Three Horsemen of the Apocalypse
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
Was the President done in by the economy, or by the politics of the economy?
H/T to National Review Online