From the March 27, 2009 Boston Herald
March 27, 2009
by Irwin Stelzer
If you think you have reason to worry about this recession, consider poor Chinese premier Wen Jiabao, who’s sitting on $1.2 trillion of our government’s IOUs. Wen said a few weeks ago that he’s “a little bit worried” that America might cheapen the dollar so much that he will end up cashing in those Treasury bills and notes for dollars that won’t buy very much.
If he was a little bit worried a few weeks ago, he must be very worried now. The Fed plans to buy at least $300 billion of Treasury IOUs in the next six months, pour $1.45 trillion into the mortgage market and keep interest rates near zero. And there’s more in the Fed’s “do whatever it takes” arsenal - all of which means the presses will be working overtime turning out pictures of U.S. presidents printed on green paper.
The Fed’s decision to pump trillions into the money markets comes on top of President Barack Obama’s proposal to drive the federal deficit to an astonishing 13 percent of GDP, quadruple what it was in the last Bush budget. He needs to borrow trillions to fund his so-called stimulus, universal health care, green energy and the rest of his wish list.
Not to worry, says Obama: America will never default on its debt. But it now costs seven times as much to buy insurance against such a U.S. government default as it did only a year ago.
And a default isn’t the only risk: America can always inflate its way out of its obligations.
Obama claims the economy will soon be racking up growth rate of around 4 percent a year. Along with the tax hikes he’d impose on the top 2 percent of earners, the billions he’d charge for carbon-pollution permits and his reductions in age-related entitlements, he sees that growth driving the deficit down to a sustainable level.
Unfortunately, 2 percent of earners can’t or won’t carry the entire burden, the carbon-permit program might not produce the predicted revenues after Democratic congressmen from coal states chop away at it and Congress has told the president that any proposal to reduce the massive entitlement payments due the aging baby boomers will be DOA - dead on arrival.
The nonpartisan Congressional Budget Office shook up everyone, including congressional Democrats, with a study showing that even if the economy grows as Obama predicts, his budget will pile up deficits of $9.3 trillion over the next decade, with the deficit coming to 13.1 percent of GDP this next fiscal year and remaining at unsustainable levels right through 2019.
That is a lot more red ink than Obama is predicting.
Democrats know that if the widely respected Congressional Budget Office is right, we’re in for an inflationary binge of the sort that sent Jimmy Carter back to his peanut farm.
Beijing will still buy some of our IOUs, because it has to do something with all the dollars it gets for the stuff you see on Wal-Mart shelves. But, at the first whiff of runaway inflation, Wen will press hard to get us to sign onto his new plan: We give up the dollar for some international currency.
China’s patience with Obama’s borrow-and-spend is plainly running short. If Wen decides that he’ll continue lending to us only if we pay a higher interest rate, he will drive up rates here on mortgages, car loans and the like. That would nip our recovery in the bud.
Obamanomics, in short, might prove to be the worst thing to happen to us since Jimmy Carter.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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