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President Obama's Nightmare Economy

Sometimes it pays to keep flogging a dead horse. In this instance the horse is Obama's destructive economic policies. Before he was even elected I predicted that as president he would prove to a disaster. In December 2008 I warned that Americans would have to fasten their "seatbelts" and in July last year I alerted readers to the dangers of economic stagnation that his policies would produce.

Americans need to wake up to the fact that Obama is a profoundly ignorant man, a committed leftwing ideologue with absolutely no understanding of how economies work and no desire to find out. What Americans need to do right now is pray that he does not succeed in doing to their country what General Peron did to Argentina. Right now the signs are definitely not good.

Obama would not have been able to get away with any of his economic garbage if it had not been for the dominance of Keynesian thinking. It is this that gave him and his fellow leftists the cover and the excuse they needed to greatly expand government and let loose with a tidal wave of borrowing and spending. However, as I have said elsewhere, I do not believe it was ever Obama's intention to create a massive pool of unemployed. Even this economic illiterate and his fellow travellers know what a political albatross that would be.

He believed his Keynesian advisors when they told him that his spend-and-borrow program would halt unemployment at 8 per cent, after which it would fall. Convinced of this fact (after all, had it not been proved mathematically?) he concluded that the American people would assume that his program of massive interventionism had indeed been successful and that free market economics had failed them, leaving capitalism thoroughly discredited. Instead, it is Obama's presidency and his neo-socialist program that are in tatters.

The Obama presidency inadvertently exposed Keynesianism as a total fraud: a bundle of mercantilist fallacies dressed up in fancy new garb and decorated with meaningless equations, ancient errors and invalid concepts that has degenerated into a cult.

The previous criminally loose monetary policy had been largely rationalised by Keynesian thinking. The result was a boom followed by a bust. Rather than allow the malinvestments created by the monetary expansion to be wrung out of the system the Obama administration -- with the enthusiastic support of Ben 'Helicopter' Bernanke -- has kept these malinvestments on life support, much as the Japanese did with their malinvestments and with basically the same results.

So what we have is massive government support for an economically unsustainable pattern of production. What this means is that there are economic activities that can no longer justify their existence. When this happens Keynesians always refer to it as a case of demand deficiency. (There is no place in their scheme of things for the concept of disproportionalities.) Now it is true that under certain circumstance a monetary expansion can appear to resolve the situation.

What happens is that an expanding money supply raises the monetary demand for the products of these malinvestments and so makes them profitable again. We call this inflation. It continues until the central bank has to once again apply the monetary brakes, after which the cycle once again resumes, at least for the survivors. (The state of the housing market is an excellent example of how an unchecked credit expansion instigated by a central bank can create unsustainable pattern of economic activity.)

What went wrong? Bernanke engineered the most rapid increase in the monetary base in US history and still the economy did not move. Right now he is busy monetising Obama's disastrous borrowing program. You're just going to love this. Central banks bought agency bonds which they are now selling to the Fed in order to buy treasuries. Innocent enough on the surface. In fact, it is a case of outright fraud.

The Fed creates the money to buy the agency bonds: the sellers then use the money to buy government bonds. This is like Obama giving General Motors the authority to print dollars so that it can buy old bombs at outrageous prices in order that the sellers can buy GM volts. (From bombs to lemons, so to speak.) GM then uses the same dollars to pay its debts, suppliers and workforce.

Literally hundreds of billions of dollars have been created by this deceitful procedure -- and it is still continuing. The effect has been to keep bond prices higher then they would otherwise be thereby helping keep rates low. (Last Friday 10-year notes were trading at 2.68 per cent.) Nevertheless, this strategy cannot continue indefinitely. But what is really striking is its total failure to stimulate recovery, despite the expectations of Bernanke and the rest of the Keynesian cult.

No amount of borrowing can reduce the rate of unemployment. There is no way that taking money from Joe Sixpack to spend on a Democrat's favourite constituents can increase the demand for labour. All that happens is that purchasing power is transferred from one group to another, leaving total purchasing power unchanged. Monetary expansion is another matter, even when disguised as borrowing. And this is where we must look. Keynesians have forgotten the old the wisdom about horses and water. Professor Robertson was far from being alone at the time he pointed out that

while there is always some rate of money interest which will check an eager borrower, there may be no rate of money interest in excess of zero which will stimulate an unwilling one. (D. H. Robertson, Banking Policy and the Price Level, Augustus M. Kelley, 1989, p. 81, first published 1926).

It doesn't matter how low interest rates are, if there is too much political uncertainty about making profits then investment and spending will be severely curbed. Unfortunately the dismal expectations of business regarding Obama's policies are founded entirely on reality. There is no escaping the fact that the Democrats are about to strike the US economy with a blizzard of costly regulations and a barrage of high taxes. It is the prospect of this onslaught that is causing business to batten down the hatches.

And the moronic Axelrod still cannot figure out why non-farm payrolls fell 131,000 last month and payrolls had to be revised down by 97,000 for May and June.


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