The long and short of it
By Thomas E. Brewton
Asked about long-term inflationary effects of government deficit spending that he recommended to combat the Depression, economist John Maynard Keynes's flippant dismissal was, "In the long run we are all dead."
Keynes's irresponsible mode of thinking has become Congress's accepted way of dealing with any problem having more than a six-month horizon. Exhibit A is the refusal of Democrat/Socialists to face up to the looming unfunded liabilities of the Social Security, Medicare, and Medicaid funds. Exhibit B is the near-trillion dollar stimulus bill, to be funded largely by the Fed's bookkeeping entries creating fictitious, fiat money out of thin air.
We are now on the threshold of the harrowing conditions of the 1970s stagflation, when bond investors pushed interest rates into high double digits. Knowing that the purchasing power of future principal repayments would be only a modest fraction of the purchasing power they were giving borrowers when the loans were made, bond investors in the 70s kept shortening maturities and ratcheting interest rates upward to compensate.
Then, it took several years for producers and lenders to accept the fact that inflation would keep driving prices, including interest rates, upward, with no end in sight. Today, in the short run, awareness of coming inflation is rapidly growing.
In a Wall Street Journal article titled "Treasurys Falter Amid Supply Fears," reporter Min Zeng writes:
"Crowding out," a term not much heard since the 1970 and early 80s, is starting to return to common parlance. What it means is that heavy government borrowing in the Treasury market takes money that otherwise would be available to finance private businesses and expand employment. The effect is to dampen the normal cyclical forces of economic recovery.
Moreover, as will all government intervention in the markets, massive Treasury borrowing to fund the stimulus bill distorts real investment away from long-term projects to fund expansion or increased efficiency and into short-term, often tax-sheltered, speculative projects.
Private corporations need a stable currency (absence of inflation) to make rational analyses of potential return on investment for building or expanding new production facilities. Long-term financing, because of inflation and crowding-out by the Treasury, becomes very scarce. Even when financing can be obtained for such long-payback period investments, the interest cost of funding makes them unfeasible. Projections of other cost elements and sales revenues become sheer speculation in a period of significant inflation.
The result was distressingly displayed in the 1970s stagflation. The Federal government spent ever more on welfare programs; the Federal Reserve continued to expand the money supply; inflation soared; and business went flat, while unemployment remained intractably high. Prosperity returned only after President Ronald Reagan reduced levels of government spending and Fed chairman Paul Volcker squeezed the money supply down to non-inflationary levels in the early 80s.
Thomas E. Brewton is a staff writer for the New Media Alliance, Inc. The New Media Alliance is a non-profit (501c3) national coalition of writers, journalists and grass-roots media outlets. His weblog is The View From 1776. Email comments to email@example.com.