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May 31, 2009

Obama Led the US Economy Into a Fiscal Trap Containing a Monetary Time Bomb
by Gerard Jackson

The majority of Americans elected an arrogant and bumbling ideologue to the presidency and so the rest of the world -- little Israel in particular -- will have to pay the price. However, Economics is what invariably brings the Obama's of this world undone. The reason being that if there were no economic laws there would be no need for free markets. Conceited self-preening politicians could, for instance, simply legislate for higher real wages without worrying about investment or rising unemployment, not that Obama is worrying at the moment about these things.

Despite the bitter lessons of history -- a subject that Obama is as deeply ignorant of as he is of economics -- he does not really believe in the existence of economic laws. Let us not forget that this is the same man who thinks he can regulate bubbles out of existence, even though he and his cronies are totally ignorant as to the origin and nature of this economic phenomenon. (On this issue he is being advised by Austin Goolsbee, a vulgar Keynesian who believes rich people cause bubbles. No wonder the world is nervous).

Obama has two playbooks. The first one is Alinsky's Rules for Radicals which is a nasty little book by an extremely nasty little man. It really amounts to how destroy opponents without engaging in debate. It is a wholly negative work. The other playbook is FDR's rules for buying elections and corrupting the electoral process. Unfortunately for Obama and fortunately for America FDR's playbook has very limited applications in the current economic situation.

Whereas Roosevelt had enormous room to increase borrowing, extend political patronage and buy elections and politicians Obama finds himself thoroughly hedged in by the present level of spending, borrowing and international nervousness over the state of the dollar. And as he himself said: "Well, we are out of money now". Naturally he blamed Bush. As the most dangerous spendthrift president in US history Obama is not about to start taking responsibility for his own economic decisions -- and certainly not while the utterly corrupt mainstream media continue to fall over themselves to cover for him.

Obama and his brilliant economic advisors have driven the US economy into a fiscal trap containing a monetary time bomb. And the markets are taking notice. There were two occurrences in May that eluded the media mavens: the dollar index slid below its 200 day moving average and the dollar fell below JPY94, from which it has recovered somewhat. So how does what should be called the Obama-Bernanke monetary partnership destabilise the dollar? There is a very old economic theory that states exchange rates as being ultimately determined by purchasing power and not the so-called wealth of a country. Professor Ludwig von Mises once recalled how in 1919 a banker told him that the Polish mark should never have dropped to 5 francs

Poland is a rich country. It has a profitable agricultural economy, forests, coal, petroleum. So the rate of exchange should be considerably higher. (On the Manipulation of Money and Credit, Free Market Books, 1978, p. 20. The article was first published in 1923).

Mises response was to explain that the value of a country's currency is determined by the supply of and the demand for money so that "even the richest country can have a bad currency and the poorest country a good one". (Ibid. p. 21). Therefore monetary expansion is the fundamental cause of a falling exchange rate. And it is this monetary expansion that generates speculation. All that speculators do is try to anticipate values.

Furthermore, severe exchange rate fluctuations and currency depreciations will always emerge in a world governed by fiat moneys. In such a world, the one in which we live, the dollar can still rise against other currencies even as its purchasing power dives. All this means is that America's trading partners are now inflating at a faster rate than she is. (See Chi-Yuen Wu's An Outline of International Price Theories, George Routledge & Sons LTD, 1939, pp. 250-254). The following chart shows how reckless Bernanke's monetary policy is.

Austrian money supply definition: Cash plus demanddeposits with commercial banks and thrift institutions plus government deposits with banks and the central bank plus demand deposit at foreign commercial banks and foreign official institutions plus sweeps. Monetary base: currency and coins held by individuals, firms, depository institutions and at the central bank. Sweeps: Demand deposits that have been reclassified as savings deposits.

Since last September AMS has grown by nearly 25 per cent which gives an annual average of over 30 per cent. (Once the sweep figures for the last two months are released I think they will show that the current figures underestimate the expansion). It should be noted that at present there is little difference between the monetary base and AMS. As the monetary base expanded over the decades the absolute difference between it and AMS grew.

The reason for this is that the money base consists of paper and coins. As it expands more paper (high-powered money) enters the banking system and so expands the money supply by a far greater amount than the expansion of monetary base. This means that if the monetary trend from 1960 had been continued AMS would now stand at about $4 trillion instead of $2.7 trillion. This is a monetary time bomb, unless Bernanke thinks that none of these newly created dollars will find their way into the banking system. In which case one would have to ask why he printed them in the first place.

There is absolutely no way the exchange rate can be protected from a monetary expansion of this magnitude, let alone prices. What we have here is a recipe for massive inflation and a rapidly sinking dollar. It's because of Bernanke and Obama that America is now facing the loss of her AAA rating. Tie these facts in with Obama's massive and totally unjustified deficits, his reckless spending and his direct meddling in business and one can easily see why the markets are taking greater notice of his economic shenanigans.

It's a pretty state of affairs when China feels impelled to lecture the US on the need for exercising greater fiscal and monetary responsibility. Nevertheless Bernanke and the Obama administration appear to be completely oblivious to the situation. So much so that the Fed was authorised to print $1.75 trillion in new money so as to buy Treasury bonds. It's almost as if they were deliberately thumbing their noses at the rest of world.

For some reason Uruguay was once called the Switzerland of South America. In a fit of God knows what the country's good citizens elected politicians whose monetary and fiscal policies bear a striking resemblance to Obama's. Uruguay was quickly turned into an economic slag heap, its currency destroyed and its economy in ruins.

Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes economics editor.

Copyright © 2005-2010 Gerard Jackson

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