Carter’s Second Term — Stagflation May Be Coming Back
Here comes more comparisons of Obama to Carter. From The Daily Capitalist:
There was a huge internal fight at the Fed between the anti-deflationists and the anti-inflationists, and the anti-deflationists won. The Fed decided they would fight deflation through “quantitative easing” or “QE.”
With QE, another tool the Fed has to increase money supply, the Fed buys Treasury debt (bills, notes, and bonds) from its primary dealers and prints money to pay for it. This puts money directly into the economy.
It’s not as if this is something new. From last year through April of this year, the Fed bought $1.25 trillion of debt issued by Fannie Mae and Freddie Mac. They also bought about $700 billion of Treasury debt. This put $2 trillion of new money into the economy. This apparently wasn’t enough.
The second important thing they announced is that they will replace their Fannie/Freddie paper with Treasury debt. This seems harmless at first because the Fed is not increasing its total debt holdings—yet.
They announced this with a seemingly innocuous statement: that they would keep their current level of debt at about $2 trillion. In Fed-speak this means they are clearly worried about the sinking economy, and that they will print as much fiat money as they think is necessary to increase the money supply to induce inflation.
In economic terms, buying Treasury debt is called “monetizing” debt. In plain English it means that the government prints money to pay for its debts. This policy has been the downfall of many governments who destroy their currency through hyperinflation.
As soon as unemployment starts to go up again, and I believe it will, the politicians will be all over the Fed to “do something.” That something will be massive QE. I am quite sure that the Fed has not figured out how much QE they will need and that they are unsure of its impact on the economy.
I have a pretty good idea of where it will all end up. Since they are not dealing with the underlying problems, this papering over of the problems will lead to inflation and economic stagnation, a phenomenon we saw in the 1970s called “stagflation.”
With the current Administration and Congress talking about higher taxes on small businesses (by letting the Bush tax cuts expire) and greater regulation (Obamacare), it sure doesn’t seem that businesses are going to be eager to hire; therefore, unemployment isn’t looking like it’s gonna get any better in the near future, and may in fact get worse, especially as businesses start to fail at a greater rate. The logic is simple: if businesses go under, their employees become unemployed, thereby increasing unemployment.
In other words, Welcome Back, Carter!