Obama’s Inflation

Only God can create something out of nothingness. Genesis

Since the beginning of the financial crisis, the Federal Reserve has been printing money nonstop to fund their various “stimulus” schemes. The Treasury has been monetizing the debt (buying back our own bond issues). Yet Americans don’t seem overly concerned about inflation, perhaps because housing and consumer goods are as yet selling at discounted prices. But massive increases in the quantity of money and debt such as we’ve seen over the last fifteen months without associated increases in wealth are, by definition, inflationary. Make no mistake; we will see higher price levels for goods and services. It’s just a matter of when.

The main reason that prices (aside from oil, which has doubled in the past year), haven’t risen dramatically thus far is that much of the newly-created money is sitting in commercial bank reserves, not being loaned. When the banks finally decide to make loans (isn’t that what the TARP was for?) rather than hoard cash, watch out!

How will inflation affect you personally? First, inflation hurts all creditors. And chances are, you’re a creditor. If you have any legal claim to payments over time – - a pension plan, insurance policy, annuity, savings account, or Social Security – - you’re a creditor. The higher price levels rise, the lower the purchasing power of the payments you to which you’re legally entitled. Second, in order to protect themselves from the effects of inflation, creditors will demand much higher interest rates on any new loans. So if you need a mortgage, a college loan, a line of credit for your business, or a refinance of any sort, you’ll be paying much higher rates. Get the picture?

Who benefits from inflation? Mainly the government. The Obama administration is spending and borrowing at unprecedented levels. If passed, Obama’s proposed $3.8 trillion budget for fiscal year 2011 will add nearly $1.3 trillion in deficit spending to the current year’s projected $1.6 trillion deficit. To repay these massive debts, I can think of only three options: 1) huge tax increases; 2) drastic spending cuts; or 3) devaluation of the dollar. The economy cannot withstand massive tax increases, which would derail housing and business recoveries. And spending is in the Democrats’ DNA. Forget cuts. That leaves devaluation of the currency. High inflation will allow the government to repay this massive debt at a deep discount.

But the government’s gain is our loss. Lenin is said to have declared, “through a process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” Is that Obama’s plan?

Amy H Laff

Scottsdale, AZ