ObamaNomics: More Bubble & Bust

First in a series analyzing President Obama’s Tuesday Evening Press Conference

During his prepared remarks President Obama said:

…the most critical part of our strategy is to ensure that we do not return to an economic cycle of bubble and bust in this country. We know that an economy built on reckless speculation, inflated home prices, and maxed-out credit cards does not create lasting wealth. It creates the illusion of prosperity, and it’s endangered us all.

Here the President is knocking down a straw-man.  He argues against “reckless speculation, inflated home prices and maxed-out credit cards,” as if they were the ideas of his adversaries.  He skipped over the real arguments against his ideas, including:

  • The massive government borrowing he proposes will have to be funded largely by the Federal Reserve printing new money.  This will launch another era of 1970s style inflation.  From 1971 to 1981 the Dollar lost 53% of it’s value. Or put another way what cost $100 in 1971 cost $225 in 1980.  Those were the days when the common cliche was, “in this economy it’s better to owe a Dollar than to own one.”
  • High inflation discourages saving and encourages borrowing as consumers rush to purchase goods as soon as possible before prices rise even more, and expect to repay their debts with future Dollars that will be worth less than current Dollars.
  • One of the causes of the recent housing bubble was the Federal Reserve encouraging mortgage borrowers and lenders by holding interest rates too low for several years.  As soon as the rates started to go up, mortgage lending went down and the bubble burst.   Yet, the Federal Reserve has just announced its intention to create a Trillion in new money, specifically for mortgage borrowing for home purchases and home refinancing.  Mortgage rates are lower today than ever before.  The predictable result will be another housing bubble.

The Bottom Line:

President Obama’s latest slogan is  “we don’t want another bubble and bust cycle.”  But his policies, higher taxes, easy money from the Federal Reserve, and massive government borrowing and spending are textbook bubble-bust prescriptions.

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