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
But the problem is much bigger than the 1970s style
inflation trap that President Obama and his supporting cast of
left-wing flower children have worked us into. For America is
financially much weaker today, with government spending, deficits
and debt dwarfing anything America suffered in the 1970s. And the
world is far less stable than then, financially, economically and
politically. Moreover, America suffers far more virulent enemies
today, at home and abroad, far more focused and determined to bring
America down. As a result, America is extremely vulnerable today to
three looming disaster scenarios.
First, our soaring national debt is not free. We have to
pay interest on all those trillions in debt, every year. The Fed’s
extremely loose, bordello-style monetary policy has kept interest
rates at record low levels throughout the Obama Administration,
with short-term rates near zero.
But that can’t and won’t continue. Accelerating inflation
will itself push up interest rates, as investors demand a market
real return in excess of inflation. When the Fed finally moves to
counter inflation with a tight monetary policy, that will further
sharply increase interest rates. The pressure of trillions in
federal borrowing further contributes to rising rates, as does
continuing economic recovery at home and abroad, though that may be
less of a factor in America going forward.
With America’s national debt already over $10 trillion
this year, and projected by CBO to grow to over $20 trillion by
2021, America is extremely vulnerable to soaring interest rates on
that debt, which will produce soaring federal spending for debt
interest, resulting in further soaring deficits and debt. Already,
assuming only a modest rise in rates over the next 10 years, CBO
projects that annual net federal interest spending on the national
debt will soar from $214 billion this year to nearly a trillion by
2021. More rapidly rising rates could quite possibly result in
federal spending, deficits and debt exploding out of control,
beyond our capability to finance. The resulting financial chaos
would further cripple our economy, making all the numbers much
worse, indeed, completely intractable.
Secondly, with our deficit already at an all time world
record by far of $1.645 trillion, what happens if we fall into
another recession? How high will the deficit go then? Well over $2
trillion for sure. Will America even be able to borrow that much to
keep the federal government functioning? That will be all the more
dubious if the Fed has to stop printing money to buy so much of
that debt. But if the Fed does not stop, how high will inflation
go?
With soaring oil prices, regenerating inflation
threatening to force the Fed into tight monetary policies, and all
the Obama tax rate increases now scheduled for 2013, due to the
expiration of the Bush tax cuts and Obamacare, another recession is
frankly already on the horizon. That would likely leave America
bankrupt just like Greece. The EU provided a trillion dollar
bailout to back up Greece. But who would bailout America? Who even
could?
Finally, these financial vulnerabilities leave America
militarily vulnerable as well. America defeated Nazi Germany and
Imperial Japan in World War II by running up the national debt to
109% of GDP. But CBO projects that on our current course the
national debt will already be soaring close to 90% of GDP by 2021,
exceeding the World War II historical record soon thereafter. With
America already so deeply in debt, if we have to fight an extended,
serious military conflict in the near future, beyond the limited
actions we are already fighting, who will lend us the money to do
it? China? Japan? The extra financial burden of military spending
will cause federal deficits to soar further. If we have to borrow
that much domestically, what will happen to our economy? Does this
obvious financial weakness effectively invite war, if not directly
against America, against our allies, from Israel to South Korea to
Taiwan, even Japan?
Yet, at this moment, serious war drums are beating, even
while our media and political establishments so thoroughly ignore
them. President Obama got elected in part laughing over how he
would solve the Iranian nuclear problem with his brilliant insight
of just talking to Iran. Now in the third year of his
Administration, none of that has amounted to anything. Obama said
himself during the 2008 campaign that nuclear arms in the hands of
such madmen would be “unacceptable,” but that just turned out to be
more boob bait for bubbas, as so much else of Obama’s 2008
rhetoric.
Indeed, Mideast developments only further encourage the
Iranian march to war. Regime change in Egypt has already allowed
Iranian warships through the Suez Canal for the first time. Iranian
infiltrators foment revolution among the Shiite majority in
Bahrain, where the U.S. Navy maintains its top regional base. With
the world distracted by Libya, Iran accelerates arming Hamas in
Gaza and Hezbollah in Lebanon, both committed to mass murder of our
Jewish allies in Israel.
What this all adds up to is that America faces an
existential crisis today as grave as World War II, the Civil War,
and, indeed, the original American Revolution itself. The year 2012
may well be the last chance to save our nation from
ruin.
