Catastrophe - Dick Morris [18]
The man behind it was Paul Volcker, who was appointed chairman of the Federal Reserve by President Jimmy Carter (to Carter’s credit). It was after Volcker raised interest rates to close to 20 percent that inflation finally stopped. But of course Volcker had to nearly kill the economy to do it. The recession of 1980–1982 was one for the history books: unemployment rose rapidly, and bankruptcies soared. It took three years to tame the inflation beast, during which the nation endured a recession almost as bad as our current one.
This is the pleasant prospect Obama has in store for us. And it’s totally unnecessary!
The cause of this coming calamity is Obama’s excess spending binge and the skyrocketing deficits his plan will cause. This “cure” is certain to cause both inflation and a future recession—while doing little or nothing to stimulate an early end to the recession we’re in right now. It’s all an excuse to allow Obama to pursue his big-government dreams. And what a catastrophe it’s going to cause!
THE WILD CARD: DOUBTS ABOUT CURRENCY
So far, we’ve been talking about conventional economics: things Obama should have foreseen but didn’t. But there is an added, and even scarier, dimension: in the unfolding economic disaster, people may lose faith in the world’s currencies.
During the Great Depression, the currencies of the world were tied to the price of gold. Standing behind every national Treasury department was a commitment to buy the local currency back, at a fixed price, in exchange for gold. Nobody needed to worry about the currency losing its value as long as they could take away as much gold as their currency could buy (and they could carry) whenever they wanted.
But as the depression deepened, Great Britain went off the gold standard. With British currency the strongest in the world, London decided it wanted flexibility to inflate the currency to fight the deflation of the depression, even if it didn’t have enough gold to cover the extra money.
Its action led investors around the world to fear that their currency might also go off the gold standard. It was his desire to reassure the markets on this point that led Herbert Hoover to the disastrous tax increases and interest rate hikes of 1931 that deepened the depression.
When he took office, Franklin D. Roosevelt followed Britain’s lead and abandoned the gold standard. Whereas dollar bills used to bear the legend “Silver Certificate,” marking them as redeemable in silver or gold, now they simply read “Federal Reserve Note.” But the credibility of the United States and the United Kingdom were such that nobody minded.
After the United States abandoned the gold standard, the rest of the world followed suit. But in the current recession, the United States is borrowing money at a pace surpassed only by the World War II deficits—and once again the rest of the world is following in our footsteps. China, Rus-sia, the United Kingdom, Japan, and the European Union are all borrowing money like mad to stimulate their own economies.
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SPENDING THEIR WAY TO INFLATION
(Percentage of GDP Spent on Stimulus)
Source: “How No 3 China Is Gaining on US and Japan,” LookingForWords.com, http://lookingforwords.com/2009/04/01/current-affairs/how-no-3-china-is-gaining-on-us-and-japan/.
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Some estimates suggest that global borrowing to pay for government and corporate spending will total $10 trillion this year. But the rest of the world doesn’t have $10 trillion to invest. In fact, it doesn’t have much to lend us at all.
China, the leading lender to the United States, is finding that its exports are down by more than one-third as the recession stops Americans from buying Chinese products. Without foreign currency coming in at a rapid pace, China has slowed its purchases of Treasury bills. And China needs to spend its extra cash on stimulating its own economy. Economists estimate that the total amount Chinese businesses will borrow this year will come to more than $2 trillion on its own.
So what happens when everyone wants