Will our economy go into a greater great depression than we had in the 1930's? I'm not sure. We've never been closer though. What does our future hold if we continue down the path set by the liberals running our government?
There are definitely several things pulling our economy in different directions. Generally those directions aren't good directions. This has left the economy stalled out, with no hiring and virtually no growth.
I've heard Bob Beckel on Fox News say that he doesn't see any problem with the big deficits. He is apparently a faithful follower of John Maynard Keynes. Liberals like Mr. Beckel believe that government spending not only leads to economic growth and jobs, but apparently it is the only source of these desirable outcomes. The problem is that they are woefully mistaken.
Excessive government spending in excess of revenues requires one of two things: either the government must borrow money by issuing bonds or they must print money in the treasury. It is widely believed that printing money will devalue the currency and lead to inflation. I personally believe that it does create inflation by increasing the money supply and thus increasing demand. Issuing more and more bonds consumes investment dollars that could be placed in banks or used to purchase stocks and other investments, including starting businesses.
The only way investors can be enticed into investing more and more in bonds is to offer better returns. If the stock market is flat or moving down, bonds might look pretty good with relatively low interest rates. The interest expense in the federal budget is consequently low with low interest rates. However, when the economy and the stock market do begin to take off, returns in investments that compete with government backed securities start to look pretty good. That forces new bonds to be issued at increasingly higher interest rates. Today, bond interest rates are historically low, around 1%. If the interest rates just rose to the normal range, the cost of bond interest would triple or more. In FY2012, the interest on the national debt was $360B. That's not chicken feed, but if the interest rates were to triple, we would be spending over $1 trillion here. If the interest rates rise to high levels to develop the needed demand for riskier bonds, then the annual cost of the debt could rise to $2 trillion or more.
If the interest rates for bonds rise up and successfully take money from other investment options, then those options don't have the capital needed to keep operating or to start new businesses. If the businesses are started, they must make more earnings to get a return on investment that is commensurate with the level of risk incurred. Yet the amount of profits is tougher to achieve because the cost of borrowing money is higher. When consumers go out to buy big ticket items like homes and cars and boats and motor homes, the cost of borrowing will drive the costs of those items up and reduce the demand. That tends to slow down the economy, put a lid on hiring, and hold the stock market back.
If the economy is slow, unemployment is high, profits are low, sales commissions are low, dividend are non-existent, capital gains are non-existent, etc., then the government collects fewer tax dollars. They also have to pay out more for unemployment, welfare, food stamps, etc. at the same time. This is the description of a death spiral. Another description might be a serious MessAPolitico. Why can't the American voter see this coming?
I believe that inflation will eventually happen. Eventually will arrive as soon as the economy finally, really gets out of this recession. No, I don't believe the recession ever ended. We haven't had much growth in the GDP, but by definition, a recession ends when any growth occurs for a certain number of consecutive quarters (I can't remember how many). The thing to remember is that oil prices have doubled over the past four years. Has the economy as a whole grown that much in four years? No, not even close. I believe that the energy sector has grown more than the economy as whole, therefore most, if not all, other sectors have contracted. The growth in energy has not been caused by growing demand either. That growth has been caused by the "bone heads" running our government limiting the supply of energy. With the limited supply, every time the economy tries to take off, the cost of energy rises, and that sucks the life out of the economy.
How will we ever get out of this MessAPolitico? It can be done. Come back for my next post on Monday to find some answers.
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