Tag Archives: inflation

ECONOMIC PROSPECTS NOT BRIGHT

John McLaughlin

PBS’s “McLaughlin Group” (www.mclaughlin.com) remains the best political discussion of the week. John McLaughlin has the chair, with three regular guests and one visitor. This week’s program was particularly good.

The first item discussed was the US economy.   The program began with President Obama lauding the accomplishments of his Administration in this area. Economist Robert Gordon of Northwestern University was then quoted.

Whereas the CBO (Congressional Budget Office) predicts an average growth rate of 2.1% over the next ten years (down from the 3.5% averaged since World War II), Professor Gordon predicts 1.6%. The reasons he gives are that the baby boomers are leaving the work force; new hires will not fully replace them, so less will be produced. He also predicts the national debt will increase to 87% of GDP by 2024, 9% higher than the government’s estimate.

Robert Samuelson of the Washington Post wrote:

“If he’s right, this could be our next nasty economic surprise . . . the prospect now is for years of modest to, in Europe, non-existent growth.  How will political systems cope?  Will class warfare intensify as groups battle harder for bigger shares of a stagnant pie?  Without an expanding economy as a shock absorber, will racial, ethnic, generational and ideological conflicts worsen?   . . . prolonged sluggishness would turn the economy into a zero-sum game, where one group’s gain is another’s loss.  This is no formula for social peace.”  (Washington Post, 9/22/14).

This all led to an interesting discussion. “Are we in for a decade of political and social unrest?” asked host John McLaughlin. Conservative Pat Buchanan’s response was: “More than a decade . . . the share of the labor force that is working is dwindling . . . the baby boomers were the best skilled and best educated generation ever . . . Millions of folks are coming in from the Third World who lack the skills, education, and abilities that are needed.”

Liberal Eleanor Clift predictably felt that the exact opposite was the case and that the economy is all set for a wonderful decade. She added that “the dollar is the indispensable currency” – on this last point, she was correct.

Journalist Tom Rogan (National Review and The Daily Telegraph) felt that “the biggest issue is the national debt.” Rising debt threatens social security and Medicare.

Pat Buchanan pointed out that “real wages have been stagnant since 1974.”   Mort Zuckerman (publisher of US News and World Report) added: “In the last half a dozen years, real wages have gone down by about $4,500 per year.” Buchanan felt that “neither party will deal with social security, Medicare and Medicaid,” government programs whose costs keep rising way above the annual rate of growth in the economy.

Zuckerman mentioned a recent poll that showed that “78% of Americans have no confidence that Washington can ride to their rescue.”

Host John McLaughlin quoted a recent poll that showed 58% of Americans feel the need for a third party. Eleanor Clift quoted Shakespeare to sum up the attitude of most Americans: “A pox on both their houses,” a condemnation of both political parties. Pat Buchanan observed: “Our system is breaking down.” Mort Zuckerman added that ‘we’ve had five years of low growth.”

This is clearly not a rosy picture of America’s future.

The same day the McLaughlin Group was recorded, The Economist was working on a leader warning of the danger of deflation, the worst thing that can happen to an economy.

Western countries have had low inflation rates for over a decade now.

Falling prices at first seem benign but can soon turn deadly. At the time of writing, gas prices in the US are falling, which is making everybody happy. But a fall in gas prices means that demand for oil is dropping and this means that economies are slowing down. This will increase unemployment, which will mean a further drop in demand, which will lead to more unemployment, etc. And so it goes on in a downward spiral.

Some countries are already showing the first signs of deflation. Italy, Spain, Greece, Sweden and Israel are five western countries where inflation is below zero. Deflation can easily follow, warns The Economist in “The Dangers of Deflation” (10/25). A twisting of the title of Edgar Allen Poe’s famous 1842 short horror story, “The Pit and the Pendulum,” The Economist’s sub-title is “the pendulum swings closely to the pit.”

The world is dangerously close to a deflationary downward spiral.

 

LESSONS FROM WEIMAR

Weimar_Republic_1919-1933-300x225

At the birth of the euro, The Economist magazine reminded readers that one of the great lessons of history is that paper money eventually always fails.

That doesn’t just go for the euro – it applies to dollars and pounds, too.

One way it fails is through hyperinflation.

We tend to think that hyperinflation only happens in banana republics like Zimbabwe, Ghana, and Argentina, forgetting that we also like bananas.  It can happen here, too.

It happened in Germany.

After fighting and losing World War One, Germany entered a period known as the Weimar Republic.  Its constitution was written in Weimar, a city 50 miles from Leipzig.

The victorious powers made the great mistake of forcing Germany to pay reparations after the war.  The French, in particular, insisted on their neighbor paying for everything – even invading the German industrial heartland, with assistance from Belgium, in 1922.  If the Germans wouldn’t hand over their wealth, they were simply going to take it!

All the main participants in the war suffered greatly.  This does not include the United States, as America was only a factor in the closing months of the conflict.  The established order in Russia, Germany and Austria-Hungary was overthrown, replaced by chaos and confusion.  Serious financial problems also developed as somebody had to pay for the war.

In most countries it was the working class that had to foot the bill.  In Germany, it was more the middle class.  Successive Weimar administrations – and none of them lasted very long – gave in to the workers’ demands rather than try to enforce fiscal discipline.   Additionally, Germany had the most generous welfare benefits in the world at the time, introduced by Otto von Bismarck in the 1880’s.  Together with reparations, the result was a high rate of inflation.

Hyperinflation is when inflation gets out of control and prices are increasing at more than 50% a month.  Very quickly, that becomes 50% per week, then 75% and 100%.   Eventually, workers have to be paid hourly in wheelbarrows full of money, which then has to be spent quickly before prices go up even further.

Weimar-MArk

The fixed-income middle class, professionals on salaries or pensions, soon suffers.   Skilled workers can often barter their skills for food.  In an attempt to control inflation, mistakes are made – freezing rents, for example, with resultant negative effects.

This was Germany in the early 1920’s.  By 1923, the situation was out of control.

The Downfall of Money explains all this very well.  The book is written by an Englishman named Frederick Taylor.  It shows clearly how World War One led inevitably to World War Two, via hyperinflation and the rise of right-wing parties, culminating in the Nazis coming to power.

When economies collapse, people look for simple solutions – jobs and food are far more important than constitutional niceties and democracy. 

The parallels in the United States and Great Britain today are disturbing.

Our governments are recklessly over-spending, borrowing to excess.  The US is printing an extra $85 billion per month, “quantitative easing” as it’s called.  This is enabling some to take advantage and make a lot of money, while the vast majority is finding it harder and harder to make ends meet.

Part of the justification involved in QE was the fear of deflation after the financial crash of 2008.  The value of homes dropped dramatically in the crash; some commodities have been dropping as the global economy enters a slump.  Deflation is the worst thing that can happen to an economy.  It’s almost impossible to stop the downward spiral.

Hyperinflation is the second worst thing that can happen.  One can lead to the other.  As central banks print money to avoid the one, it can inadvertently get out of control and hyperinflation can take over.

The end result is that almost everybody loses everything!  Those that gain by taking advantage of the situation also lose as the people will turn on them as they did in Germany.

“The Germany of the inflation was paradise for anyone who owed money.”  (The Downfall of Money, by Frederick Taylor, page 206)  A high rate of inflation reduces the amount of debt people owe.  “By the same token, this was a very bad time for creditors of all kinds, for savers, and for investors depending on a fixed return.  That meant large numbers of the old German middle and upper middle classes suffered a drastic, even catastrophic, fall in their standard of living.” Appropriately, chapter 21 of the book is titled:  “The Starving Billionaires.”

Inflation is not something new.  The prophet Haggai wrote about it 2,500 years ago.

“You have sown much, and bring in little; you eat, but you have not enough; you drink, but you are not filled with drink; you clothe yourselves, but no one is warm; and he that earns wages earns wages to put it into a bag with holes.”  (Haggai 1:6)

We all hope that hyperinflation is not the consequence of over-spending by the US, UK and other governments.  But it’s difficult to see how it can be avoided.  It seems as if the only way we can create greater wealth today is by printing more money – a recipe for inflation.  In turn, inflation can quickly get out of control, soon turning into hyperinflation.

It can all happen very quickly as it did in Zimbabwe a few years ago and in Germany in the 1920’s.

A spiritual lesson we should remember in these turbulent times is found in Matthew 6:19-21:  “Lay not up for yourselves treasures upon earth, where moth and rust does corrupt, and where thieves break through and steal.  But lay up for yourselves treasures in heaven, where neither moth nor rust does corrupt, and where thieves do not break through nor steal.  For where your treasure is, there will your heart be also.”

The Economist was correct with its warning of all currencies eventually collapsing.  It’s only a matter of time.  The accumulation of wealth may seem important, but clearly we need to be prepared for losing it all as did millions in Germany.  As Jesus Christ pointed out, treasures in heaven are more important and more reliable than treasures on earth!