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.

-Caomhin

Sam Zell Blasts Doomsayer Democrats

He came out swinging on his appearance on Squawk Box, specifically calling out Obama and Hillary for their nonsensical apocolyptic view of the economy:

Speaking on "Squawk Box" this morning, Zell attributed much of the current economic troubles to fear-mongering and politicking by Democratic presidential contenders Hillary Rodham Clinton and Barack Obama.

"Obviously what we have going on is an attempt to create a self-fulfilling prophecy," said Zell, chairman of Equity Investments Group and owner of the Chicago Cubs, Chicago Tribune, Los Angeles Times and other companies. "We have two Democratic candidates who are vying with each other to describe the economic situation worse.

"The reality is that if you live on Wall Street and you're in the credit markets the world couldn't be worse. If you're a farmer and you're getting $25 for your wheat, you're having a great time. If you're a CEO and you've got a balance sheet that's bullet-proof, you're in a great position. This whole thing is way out of control, way out of hand."

What he's saying is very true. The Democrats desperately need for the economy to take a hard slide, much in the same way they need Iraq to take a slide, but unfortunately for the Democrats, neither is going to occur. Much as Iraq is becoming stronger on its own feet, it has now become apparent (as I have posted on before) that the economy is not going to go into a recession, so they need to drum up as much negativity and fear that they can as they always do during election season. Their rhetoric revolves around, "if you don't vote for us, you will lose everything you own," and it's down right irresponsible and reprehensible behavior. Oh, and lest I need to remind you, the MSM, which is the propaganda wing of the Democratic party will do all they can to try and capitalize on this fear and do the dirty work for the Democrats. Today's evidence? How about this article from the Chicago Sun-Times, "Clinton Holds Roundtable With Economy Victims." Victims? What, did the economy come up from behind them and bludgeon them with a tire iron? What's even funnier about this headline besides the ultra-bias is that by using the term "victim," connotatively it implies that the economy is a criminal thug of some sort. Well, that's further proof that the Democrat's philosophy is that the pesky economy hasn't plunged into recession and is hurting their chances in November, therefore it must be villainized.

While Zell and many others see Bernake's signals toward making another rate cut, on this point I will admit I'm skeptical. I think the Fed may be pursuing the wrong policy here. I think the real danger with regard to our economy right now is the surging inflation rate. I understand that in the current situation where capital should be freed a bit more in order to help financial institutions gain a bit more capital, but tinkering with the inflation rate will only help so much. Many financial institutions and those who took loans both made mistakes by either not correctly filling out their information, lying on forms, doing a poor job of background checks, or other factors. Making it easier to obtain credit keeps this risk, while lowered heavily due to heightened awareness and unfolding of the current situation, in play. However, a prolonged period with low interest rates could very realistically drive inflation even higher which would have an extremely negative impact on the economy felt my many more people than even the credit crisis has affected. I do not believe that that will happen as the Fed has done a very solid job thus far (talk about baptism by fire), but the situation will have to monitored with extreme care.

-Caomhin

Don't Do It President Bush

News broke today that President George W. Bush is considering an economic stimulus package. It's irresponsible of President Bush to implement such a plan. President Bush has been a far superior President than Clinton ever was, in every way. To do such a thing would tarnish his record. He inherited a recession from Clinton due to tax rates that were too high and over speculations in the market. To date, he has done a pretty solid job of letting the free market reign, and his tax cuts are a major reason why a recession has not started since he took office. It's basic economics that when a tax increase is implemented against what Liberals declare as their enemies, that being corporations and high income earners, the impact is directly passes onto the middle and lower classes as they simply will not absorb a tax increase. This is an inflation tax. As the cost of production rises prices rise. The rich do not feel the impact of this, the middle and lower classes, however, most certainly do feel this impact. This basic logic is lost on the Left.

Among some of the problems with the economy today is the sub-prime market, in which irresponsible lenders, and irresponsible borrowers, have cost the economy dearly. There should be no bail out, there should be no hand-out, the market should be allowed to self correct. By providing these groups with tax funds taken from every individuals' earning, all people are learning is that irresponsible behavior will be rewarded. That's not to say some hardworking, honest people are getting beaten down, but the great majority of those in this market knew exactly what they were getting into. Another reason given is that of rising gas prices. See my previous post for my take on that.

On Wednesday, the Club for Growth release a study that proves that the market under performs when Congress is in session. A so called "stimulus" package that President Bush would put forth would do far more damage than good. First, our deficit is entirely too high, a "stimulus" package would result in a larger deficit. President Bush has done a good job of shrinking the deficit since our government began to run one due to discretionary spending due to the War on Terror. Second, government spending has a very, very, very poor record on actually being effective on what it is used for. Third, Americans need more empowerment to control their own destinies rather than less.

Unless this "stimulus" package would be a drastic reduction in government spending, coupled with a slash in tax rates, it will do far more harm than good. By reducing government spending and cutting taxes, two positives will be achieved. The first positive will be a reduction in deficit spending which will strengthen our dollar. The second positive, by cutting taxes, will be positive for the American tax payer, who is grossly overburdened, and who will have more disposable income and help offset the increase in gas prices. By restoring American citizens to a higher level of income, reducing the inflation tax, and strengthening our dollar, every one will be better off. It is completely mind boggling that President Bush would even consider for a microcosm of a second to follow a plan that would pursue the exact opposite positions and more than likely plunge us into a recession, one the media, and of course, the Liberals have been hoping for just as much as they have been hoping for Iraq to be a failure (old article, as it has long been their sick hope). Hopefully, with the same resolve that President Bush resisted the Liberal love-fest for defeat in Iraq, the Economic lunacy they are seeking will be avoided and turned into a great victory for America.

-Caomhin