10 March 2008

Vindicated on Inflation Worries

I've gone off on a tangent a few times telling everyone how inflation was the far greater worry for the economy as a whole than the subprime crisis. Indeed, I've had my fair share of intellectual arguments on this subject. I've maintained that the Fed should not be slashing interest rates at a time when the American dollar has been drastically weakened as it would simply lead to an even weaker dollar, increased inflation, and have a far more wide ranging negative impact on the economy. Indeed, this is what is happening. Oil hit another high today, briefly hitting $108 on a "weakened dollar" among other geo-political factors. The irresponsibility of lenders and borrowers with regard to the subprime mess has been appalling, but a government bail out is equally irresponsible as the burden should not shift to the people who responsible enough to do the right thing when acquiring a home.

Well, I was reading some articles on Bloomberg today, and the one headline I came across was a great highlight of some of the things I've been saying with regard to the worries I've expressed on inflation, "TIPS' Yield Shows Fed Has Lost Control of Inflation." One of the most worrisome parts of this article:

The last time investors were so worried about faster inflation amid slowing growth, Paul A. Volcker presided over a Fed that would raise rates as high as 20 percent to end the stagflation crisis of the 1970s, according to Seth Plunkett, a bond fund manager at American Century Investment Management in Mountain View, California. The firm manages $20 billion.

That's scary bad, Jimmy Carter bad. Rapid inflation will harm far more people in far more ways than just the subprime crisis. An editorial by Caroline Baum, also from Bloomberg's website, does a great job of presenting a great deal of how I feel, and probably more effectively, here's the takeaway:

You probably can sense where I'm going. Today's economic and financial crisis would resolve itself more quickly and efficiently if the government got out of the way. Yes, there would be pain. Some banks would fail. Others would clamp down on credit to atone for the years of lax lending standards. Homeowners-in-name-only would become renters. Housing prices would fall until speculators found value.

That's not going to happen. The bigger the mess, the more urgent the calls for a government solution, the more willing government is to oblige.

We want laissez-faire capitalism in good times and a government backstop against losses in bad times. It's a tough way to run an economy.

That's quite an effective take on the situation from a number of aspects. The real problem we face is that everyone wants the quick fix, but throwing a band aid on a major flesh wound isn't going to do the trick. If you need major surgery, you need major surgery, but that's better than bleeding out. With the possibility that the Democrats let the tax cuts expire, which will cut off a great deal of foreign investment, lower overall investment rates, stifle small businesses, and decrease overall cash outflows from every citizen of our nation from every tax rate in 2010, we may face an extremely difficult situation thanks to the government's handling of the situation and our politicians looking to secure votes rather than secure the nation's financial health.


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