September 2009

Here’s another sharp rebuke to all the yo-yos who think inflation is just around the corner.  The essay amplifies Hummel’s thoughts – published here recently – on seigniorage, explaining why hyperinflations can occur only in currency-driven systems (such as Zimbabwe’s), and not in nations like the U.S., where money has effectively been replaced by credit. Click here to read the full essay.  Here’s an excerpt:

“I agree with Pento on every point, except for one – a devastating bout of inflation is unlikely.  In the United States, two camps of thought dominate the marketplace.  The bullish camp believes that government interventions can be fine-tuned to hold inflation in-check, while allowing the economy to expand.  The bearish camp believes that government interventions will eventually unleash uncontrollable inflation that will send the price of gold, oil, and other commodities soaring to sky-high levels – while sending the economy into a prolonged tailspin due to reduced purchasing power.

“But more than likely, both camps are wrong.  And the hyperinflation expected by the bearish comp is even more unlikely than the bullish viewpoint.  Why?  Throughout the world’s financial history, there has never been a case of hyperinflation in a country using a monetary-system based on credit.  Hyperinflations only occur in countries that use currency for money.  That’s an important distinction that cannot be overlooked.

“A credit-based monetary system prevents severe inflation in two ways.  (1) During times of rising inflation, investors avoid bonds in favor of hard assets.  As a result, bond prices deflate, causing great losses for existing debt holders.  (2) During times of financial stress, bonds backed by questionable assets deflate in value.”

Click here for a fine rant from Roger Mason on the true state of the economy.

Writing at Politico.com, here’s Jeremy Lott on the increasingly likely collapse of the Obama presidency:

When he ran for president, George W. Bush promised to be a modest reformer at home and a humble representative of the United States on the world stage. The Al Qaeda-organized-and-funded terrorist attacks of eight years ago changed all that. During his presidency, Bush created massive new government bureaucracies, sent troops into two wars and threatened more as part of America’s war on terror.

Barack Obama’s initial approach to the office of the presidency has been as grandiose as Bush’s was restrained. It’s not hard to recall that he ran as a transformative candidate, promising sweeping, though somewhat fuzzy, “change” during the campaign.

For the first several months of his presidency, Obama has labored to deliver on that pledge. He pushed a controversial stimulus bill through Congress to help rev up the economy, turned Bush’s reluctant bailout of Chrysler and General Motors into a giant government auto buyout and appointed a record number of “czars” to help regulate bureaucracies in both public and formerly private sectors.

Then, Step 2. Obama is trying to fundamentally alter the American economy by backing sweeping environmental, labor and health care legislation. He wants to change the way Americans consume energy, unionize and see their doctors.

So far, he’s failing miserably. Consider the following:

• Cap-and-trade legislation had to limp over the finish line in the House of Representatives with the help of a few moderate Republicans, who then caught holy unshirted hell from their constituents. Environmental legislation generally has taken a drubbing in public opinion polls when people consider how costly it is.

• The Employee Free Choice Act may be stripped of its “card check” provision in the Senate, which would effectively do away with secret ballots for unionization elections. Even in its watered-down form — which still includes highly objectionable, mandatory, binding so-called gunpoint arbitration and makes no concessions to employers who don’t want to have to prop up teetering union pensions — it might not pass the Senate. And the leadership of the House has refused to touch it until the other chamber has made up its mind.

• On health care, forget the rage set off by private citizen Sarah Palin tweeting about “death panels.” Forget the misleading talk about whether there will be a “public option.” (The ever-evolving plan is one giant public option, folks.) Forget the angry voters who crowded into the town halls during the August recess. Forget that a number of Democratic senators and Sen. Joe Lieberman (I-Conn.) are still not willing to sign on to a bill. Right now, even after Obama’s address to the joint session of Congress last week, it’s possible Democrats don’t even have the votes in the House — where they currently enjoy a 77-seat majority.

It’s entirely possible — nay, likely — that Obama will lose on all three big issues. He’ll probably take that personally. As he has pushed for the passage of his reforms, his public approval ratings have taken a beating, and voters have started to trust the Republicans more than his party on a host of issues.

The question that most political handicappers are considering right now is not “Will Republicans make gains at the midterm elections?” but “How large will those gains be?”

What all this means is, barring some unforeseeable world event, Obama’s will probably not be a historic presidency. He will have some successes and a lot of failures. His opposition won’t roll over, and his party will refuse to go along with his more costly, and thus risky, schemes. He won’t coast to reelection.

So Obama now has the chance to be the sort of president Bush would have been if the World Trade Center towers had not come down. Here’s hoping he makes the best of it.