The G20 Conundrum - Let 10,000 Bloggers Flower

The Blogosphere at large is abuzz with comments and paroxysms over the closing declaration from the recent G20 meeting. Real economists, such as Paul Krugman, and many simple hand wringers, are adamant in stating that the United States must continue to stimulate its economy. President Obama, and his Treasury Secretary, say yes, so I guess the answer must be yes. For most of the other G20 attendees, the answer is no (for now). So except for the U.S., those running large budget deficits will tame those deficits, and do so in the near term. Dr. Krugman is nearly apoplectic at this. He writes in the June 28 New York Times that such a policy will ensure a "third depression." I'm not sure whether Dr. Krugman is a Keynesian or not, but he sure isn't afraid of deficits, or a rapidly growing U.S. sovereign debt.

Obama, Geithner, Krugman, and company don't seem to get a fundamental truth, to wit: the greatest impediment to continued economic stimulation, i.e., continuing to print money, and taking on government debt, is the EXISTING government debt. It's true that Keynesian theory calls for using government debt to stimulate economies, but it also calls for accumulating budget surpluses in prosperous years in order to have funds available to support those lean year deficits. We forgot that the necessary accompaniment to the lean year deficit is the fat year surplus. It's as old as the Book of Exodus.

At this point, stimulation means wholesale printing of money, which typically leads to inflation. We think that, because we haven't experienced inflation since the Vietnam era, we cannot do so again. I've actually heard supposedly credible journalists suggest that inflation has been permanently tamed, as if it were a living thing, instead of a phenomenon based on mathematical and physical factors. Tamed? According to David Einhorn, of Greenlight Capital, "government statistics are about the last place one should look to find inflation, as they are designed to not show much. Over the last 35 years, the government has changed the way it calculates inflation several times. According to the web site Shadow Government Statistics, using the pre-1980 method, the Consumer Price Index would be over 9 percent, compared with about 2 percent in the official statistics today." Inflating the money supply leads to inflation. No matter how you cook the books, eventually it will happen. The only thing holding it back right now may be our hollowed out industrial infrastructure, and the fake figures.

Mr. President, your counterparts in the G20 are telling their people that they aren't going to be able to have cake and ice cream every night anymore. On the other hand, Mr. Obama, and his acolyte, Treasury Secretary Geithner, are saying "yes, yes, we know, no more cake and ice cream, but we can't stop quite yet. In fact, we're not sure when it's safe to stop. We'll get back to you. Trust us." It's quite true that it was George W. Bush and Company that jacked up the deficit over a trillion dollars, insisting that anything less would bring the country to its knees, but Bush is gone, and suddenly we're projecting trillion dollar deficits out as far as there are meaningful budget figures. How did that happen? Was this a "Bush did it, so we should be able to do it too" moment? How did a one year stimulus turn into a permanent expansion of government? More frightening yet is the fact that all this debt doesn't include the coming unfunded Social Security bomb. It's Armageddon, and the bill is no longer going to our kids, it's coming due in OUR lifetimes.

I hear tell that there's an economist at the Federal Reserve Bank of Richmond who is tired of non-economist bloggers writing about economics. OK. Here's the deal. I'll stop writing this stuff as soon as the Fed cleans up its act. Fair is fair.

Peace and love...