Will Obamnomics Destroy The US Economy?

"Will the economy get better soon?" every household and businessman is urgently wondering. People's fears and hopes are emotionally invested, and people need to plan for whatever lays ahead.

Short-term, the U.S. economy will continue its natural cycle of recovery over the next 18 months. Had Bush and Obama left things alone, the inevitable business cycle would have rebounded on its own. It would have been painful, but the economy inevitably ebbs and flows like the tides. Nothing can hold back the moon-driven tides and nothing can prevent the ripples of unavoidable ups and downs in the economy.

As Frederick Hayek and other scholars have shown us, there is only one thing that the government can do about this repeating "business cycle": Make things worse. Attempts to prevent the economy from rising and falling are always doomed to fail for fundamental reasons. (Fully explored in Hayek's books.)

However, soon America will plunge into the worst recession since the stag-flation of Jimmy Carter, after about 18 months. Indeed, there is a real possibility of a Great Depression or even the complete destruction of the American nation.

This prediction may seem overly bold. Sadly, though, it is based on iron laws of economics that cannot be escaped. This is no more prophetic than predicting that a cannonball dropped out a window will fall to the ground.

Since last September, the Federal Reserve has expanded the money supply more in six months than all of the growth of the U.S. money supply from the founding of the nation in 1789 until 2008. Yet that does not even begin to tell the full story.

The nation has been flooded with so much newly-created money in just six months that it defies description. A dramatic graph released by the US Treasury is shown by Glenn Beck in this Fox News video (click here). The staggering explosion in the money supply by the Treasury and the Federal Reserve requires seeing the graph.

Every American should understand: This has never happened in the 220 year history of the United States. Not on such a gigantic scale, with the astonishing amount of money flooding the system.

However, we have seen real-world, historical experience on a much smaller scale. The crippling stag-flation of the late 1970's and early 1980's was caused by a much smaller expansion of the money supply. Double-digit inflation ravaged the economy. The interest rate (which responds to inflation) soared to 21%. Persistent unemployment resulted.

And we have seen such examples in other countries, such as Argentina, Peru, Brazil, Bolivia, Ecuador, and Zimbawbe. In 2009, Zimbawbe has issued a $100 trillion dollar bill (Zimbawbe dollars) due to its hyperinflation. Inflation there reached 624% in 2004, and 1,730% in 2006. By 2008, Zimbawbe's inflation rate was the inflation rate was 516,000,000,000,000,000,000%.

In 1993,
Yugoslavia printed a 500 BILLION dinar bill because of hyperinflation. Jovan Jovanovic Zmaj was 'honored' (disgraced?) on the banknote. After WW II, Japan printed a 75 billion Yen bill, because of hyperinflation.

The most famous example was in the Weimar Republic of Germany. The collapse of German society led to the rise of Adolf Hitler. The German Deutschmark became so worthless that people needed a wheelbarrow full of money to buy a loaf of bread. The Germans became so desperate that they were willing to turn to anyone who offered them basic survival.

Such "monetary" changes always take roughly 18 months to work their way through the economy, from one sector to another. The result is a short-term boost, like a bad energy drink, followed by a crash. The economy is stimulated at first. But because the effect is artificial, like a ponzi scheme, it cannot be sustained. As it works its way through the system, inflation begins to erase the short-term gains. (It is true that with weak demand, prices will remain low until the economy rebounds. Prices will then soar.)

Consider this: Suppose there is $100 billion worth of U.S. currency in circulation. Now, the Fed doubles the amount of currency in circulation to $200 billion. Nothing else has changed. The value of a dollar must then fall by 1/2. If the same economy suddenly has twice as much currency in circulation, the currency must become worth 1/2 as much. So, $1.00 suddenly becomes worth 50 cents. Or more precisely, prices must double to cause the currency to come back into balance.

Of course, the creation of new money by the Federal Reserve is mostly electronic, not primarily paper money. Such new electronic money is not "printed" strictly speaking. However, when the government "prints" money, the value of all U.S. currency most fall.

George Bush is greatly to blame for (a) spreading panic and fear last Fall, and (b) kicking off this disaster with a $700 billion bailout of his own. Presidents know that anything they say about the economy can scare the markets to death. The stock markets used to rise or fall depending on whether Alan Greenspan looked happy or grim heading into Federal Reserve Board meetings. And yet Bush went on national television and announced the end of the world, the Apocalypse, total and complete disaster, that we were staring into the abyss. Bush scared the living daylights out of the markets and the business world. And amazingly, all the leaders of the world -- each of whom knows better -- followed suit, shrieking that it was Armageddon, the Earth was falling into an economic black hole. (Most Americans still opposed the bailouts. Conservatives burned up the Congressional phone lines screaming no.)

When businesses and investors believe the economy is in trouble, they stop spending money and pull back their investments. Thus declaring a catastrophe in the economy can actually create one.. Bush and then Obama have spent most of the time since September giving the business world massive heart attacks, day after day. One of the main reasons that such titanic sums of government money had to be poured into the economy is that the world's leaders have been busy frightening the markets half to death.

There was a chance to avoid this, however slim. If the Treasury and Federal Reserve loans had been paid back relatively quickly, the inflation of the money supply might have been reversed. However, Obama is headed in the wrong direction, away from the only exit. We have stepped off the cliff. And all feels fine for the moment. It's not the falling that hurts. It's when you reach the bottom of the canyon that the trouble starts.

Yet inflation is only part of the damage the economy will suffer. The Democrats' wild spending spree will result in the largest annual budget deficit in American history: $1.8 TRILLION. That is 13.1% of the entire national economy. The government is currently borrowing 46 cents for every dollar it spends. Obama's budget projects will increase the national debt by $7.1 trillion from 2010 through 2019.

This massive debt overhang will require enormous increases in taxes and will suck capital out of the private economy. Even more alarming, the recession is world-wide. Very soon, there may simply be no one left to borrow from. Who is willing to put their own $1.8 trillion at risk to loan to Obama this year? And then again next year?

What will happen when the Treasury floats a bond auction, and no one shows up to buy? Even if the Treasury can find enough suckers to borrow $1.8 trillion from this year, what happens when next year the government needs to borrow another $1 trillion or so -- and can't? We could literally be facing national bankruptcy in 2010 or 2011. And of course most State governments are running equally bad debt loads at the same time, competing with the borrowing of the U.S. Treasury.

But the private sector is also under attack by increased regulation and government interference. The President of the United States is "firing" the CEO's of private companies. The Congress plans on regulating how much private workers and executives can get paid by private employers. This creates massive uncertainty, risk, and fear among businesses and investors.

Then there is the myth of global warming. Obama's Environmental Protection Agency recnetly ruled that carbon dioxide is a dangerous pollutant that must be regulated. Carbon dioxide is what plants breathe. All life on Earth depends upon CO2 as the building block of life. Almost all forms of energy produce CO2 into the atmosphere (which is then breathed by plants, and the plants convert it back into oxygen and growing plants).

However, this new regulation triggers staggering consequences. Many types of businesses such as your local dry cleaner and any office building of any size now come under drastic regulatory burdens. Simply the construction of an office building or other large structure would require an environmental impact statement and burdensome compliance. These emit CO2 simply to heat the building. Worse, environmentalists could sue to stop construction of new factories, businesses, and buildings. Lawsuits could expand the regulatory burden even further, often with the award of large attorneys' fees.

Who wants to invest in an industry or a business if the rules of the game might change next month? This is the same reason that FDR's New Deal prolonged and worsened the Great Depression. When government meddles and interferes with the private economy, especially in such an aggressive manner, no one knows what will happen next. Uncertainty is one of investors' greatest fears. Fear of the unknown is the "kryptonite" of the business world. Businesses and investors freeze and pull back, not only because of what government is actually doing but out of fear of whatever the government might do next month.

Therefore, even while the U.S. economy struggles to regain altitude over the next 18 months or so, it will be pulled back down again by massive weights. The economy will be unable to sustain the short-term growth, and will fall apart again over the next 2-3 years. I wish it were not so. But prudent families should be planning for rough waters ahead.