Inflation stood at a staggering 13%. Interest rates rose to 21%. Unemployment rose to nearly 9%.
For these reasons I have been adamant in my assertion that our current financial crisis is clearly NOT 'the worst since the Great Depression,' as the mainstream media is fond of saying.
For example, interest rates have been amazingly low for the past 16 years. Unemployment has also been historically low despite a spike in the last 2 quarters of 2008. And inflation has been nearly non-existent, except for the rise in gasoline prices in 2008, which led to a hike in food prices.
But even then, inflation has rarely topped 6% in all of the years since Jimmy Carter.
That is about to end. And the government's 'fix' for the current problem is the root cause.
The U.S. is heavily in debt. There is no money to give to the various entities the government insists we must bail out. The only way this can be done is to borrow more money or print more 'money.'
Our good graces with our creditors are quickly coming to an end. Thus, Washington will be forced to print more money out of thin air. Barack Obama has stated that he is willing to do exactly that.
The problem is that these courses of action are a prescription for stunning spikes in inflation. That is the price the market forces us to pay when we engage in activity that is foreign to sound financial practice.
As Robert Romano states in the article linked above:
The laws of supply and demand apply to dollars just as any other good, service, or commodity. Put simply, the more there is of something, the less it is worth in value. Taken together—the monetary base expansion, the national debt expansion, the bailout mania, the deficit-spending—and that is a whole lot more money than there was previously in circulation.
In short, if your money is increasingly worthless because there is more and more of it in circulation, then it will be more and more difficult to purchase goods.
4 comments:
For some reason I thought we hit double digit unemployment under Carter? Guess I was mistaken.
You may be right. I will check my figures again. It seems at one point umeployment hit 10% during the late 70s.
The solution being promoted by the President, President-elect and the Congress is to cause financial distress for a large number of people to curb severe financial distress for a small amount of people.
Think of the recent demise of Circuit City. Command economy types stir the pot by speaking out against lay-offs, lack of health maintenance plans, and low wages. Which is better: to suddenly fire all 30,000 employees (which is happening), or to freeze wages and lay off a minority of employees?
It's not going to work. Sucking huge amounts of wealth out of the States through a capitation tax, and then holding on to it--and then raising taxes--is going to trigger another wave of loan defaults. States and towns raise taxes to make up for the lack of federal touch-money. The taxpayer's property, sales and use tax and income tax will go up at the same time.
There was a collapse of the credit industry because so much bad debt was floating around. Some of it was due to novel economic hypotheses of certain government employees and pressure groups. A lot of it was bad business decisions. A government has about as much power over the forces of economics as it does over gravity. Who says it could have been prevented? One has to make stupid mistakes to learn from them.
Some folks forget that the Constitution wasn't amended to give Congress the power to directly tax individuals--which they already had. Certain restrictions were removed that limited the growth of government. When I hear politicians making dire predictions of economic collapse, it as if they're telling us what they plan to by overspending.
The fundamentals of getting out of debt are no different for the fe'ral gov't than they are for a household. Any government employee who is truly interested in shortening the duration of the economic downturn would be easily recognizable, because he would propose the following:
* Suspend creation of any new positions and all wage increases for the next five years (at least);
* Suspension of funding for new legislation
* Maintain staff counts only for those agencies which have a Constitutional mandate; all other agencies give up a few percent of their workforce, and jobs left open by retirements are immediately eliminated;
* Reduction of government "carbon footprint"; heat no more than 68 degrees in winter; employees pay fee to use government vehicles as general purpose passenger transport; idle electronic equipment turned off;
* Savings are applied to debts;
How is this any different than what any of us would do to get out of debt? You stop buying stuff on credit, you do more with what you already own, you reduce your consumption, and you pay down your debts.
Great post!
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