Economic Danger Ahead

By: Craig Chamberlain

We all know the tough times that the nation already faces economically. We have 9.6% unemployment, a 13 trillion dollar debt, a trillion dollar deficit, homes are being foreclosed on across the country, and an administration that seems to either be malicious or clueless when it comes to economics. The problem is that it looks like it’s going to get worse. The Federal Reserve, a monstrosity that never should have been created in the first place and has been allowed to exist for far too long, is poised to take a weak economy and plunge it into an abyss of total collapse.

Our current situation is bad enough. Now the Fed wants to buy up treasury bond, 600 billion dollars worth, in order to devalue the dollar. This is not good news, and it makes no economic sense. There is not a single instance where printing money or devaluing a currency has actually worked. Germany, after world war one, decided that it would simply print all of the money it needed to pay off its debt. The result was hyperinflation that crippled the German economy. The famous example being a wheelbarrow full of money to buy a single loaf of bread. Hyperinflation is where prices don’t go up by the week, or the month, they go up by the hour. There is no guarantee that it will happen in the U.S. but to even go down this road is to flirt with disaster.

The economy is already weak. Businessmen are worried about the future, and are holding off on new hires as a result. The new health care law is only going to add to the economic misery which will only force prices higher. Uncontrollable inflation will be the proverbial stake through the heart. The Dollar has already lost much of its value over the last few years, and the Fed’s actions could weaken the dollar even more. This would result in a nightmarish situation for consumers, who are the heart of the American economy. A little inflation is normal and no cause for concern. The hope here is that a weakening dollar, and higher prices, will get consumers to go out and spend before the prices go up again. This line of thinking could backfire. If the inflation gets too out of control, and the currency becomes worthless, the consumers won’t be able to afford anything. They’ll be struggling to afford the necessities in life. If inflation gets out of control it will be a struggle to pay the grocery bill, forget buying a new car or a plasma TV.

The Fed’s plan is an overreaction to a fear of deflation. Yes, deflation can be a problem. If prices continue to fall consumers are more likely to save their money and wait for the prices to get lower, this means little buying gets done, and in a consumer economy like ours that is a very bad thing. Deflation also makes imports cheaper and our exports more expensive. This is another reason why the Fed is trying to devalue the dollar. There is a goal, started in the Bush administration and continued in the Obama administration, to increase the amount we export as a nation. If the dollar is too strong, then American exports are more expensive than the goods from other nations. We already export over one trillion dollars worth of goods every year, mostly in capital goods, and we are the fourth largest exporter on the planet. So it’s not as if American exports are weak.

The problem with the Fed’s plan to devalue to dollar, by buying up debt, is that it never works. Japan has, for the last 20 years, tried to get back on economic track by devaluing the yen and encouraging an export based economy. It hasn’t worked. While Japan still has one of the largest economies in the world, its pace of growth has been anemic ever since the early 1990′s. A weak currency, printing money to encourage inflation, and Keynesian spending sprees are not formulas for economic success, yet that is what the Obama administration is intent on doing.

Another real threat, though not as pressing as the specter of out of control inflation, is the threat of a trade war. The other major economic powers of the world don’t approve of our new monetary plans. They make money by exporting goods to the United States, and our new policies will make that more expensive. Now the economic nationalists among us might say:” who cares? It’s no one’s business what we do, and we should be trying to discourage imports to America in the first place to protect American jobs.” It’s true that it’s really none of their business, except in the sense that it effects their business.

Manipulating our currency could result in retaliatory measures from other countries. We make importing more difficult, and countries like China, Germany, or Japan make it more difficult for us to send exports to them. And on and on it could go, with each new round of protectionist measures we keep stifling trade. The Obama administration would be wiser to pursue a policy of economic liberalization, by seeking the removal of trade barriers. The fewer barriers there are, the more trade there is, the more trade there is, the more work there is, and the more work there is the more people get put back to work and start contributing economically again.

Instead of robbing the dollar of what value it has left, Washington should ratify the free trade agreements with South Korea and Colombia. This would be a small, but important step, in showing that Washington is serious in solving the economic problems that plague us. However, Washington doesn’t seem to inclined to listen, and might very likely take us to hyperinflation, and make our current economic troubles look positively harmless by comparison.

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